Peer & Independent review Feedback and additional guidance paper august 2009
2 Disclaimer This paper is intended to provide up to date feedback and additional guidance to that contained within Lloyd s Franchise Standards for Underwriting Management, available via lloyds.com. Whilst all care has been taken to ensure the accuracy of the information herein, Lloyd's does not accept any responsibility for any errors or omissions. Lloyd's does not accept any responsibility or liability for any loss to any person acting or refraining from action as the result of, but not limited to, any statement, fact, figure, expression of opinion or belief contained in this paper.
4 Executive Summary Lloyd s u/w Standards* The franchisee has effective systems and controls over each managed syndicate s underwriting: underwriting decisions are the subject of an appropriate peer review process a representative range of risks underwritten by the syndicate is reviewed and assessed regularly by an appropriately qualified individual who is independent of the underwriter of those risks * as set out on lloyds.com Background & conclusions Lloyd s requires all managing agents to meet the Franchise Standards for the management of underwriting. The implementation of effective peer and independent review processes, as addressed by the underwriting controls section of the Underwriting Standards, are generally regarded as valuable features of Lloyd s market practice. During Q2 2009 Lloyd s Risk Management and Underwriting Performance Teams conducted structured interviews with a large sample of managing agents to confirm how review activity is being undertaken, with particular focus on the review of slips. This document conveys the results of that review and provides further clarity regarding Lloyd s expectations of effective peer and independent review. In summary, the findings from this review demonstrated that many managing agents adopt robust approaches to peer and independent reviews, taking account of the nature of their businesses. However, a number of agents fell short of Lloyd s minimum standards with regard to peer and independent review and Lloyd s will follow up with those agents individually. All managing agents need to ensure that their processes remain effective and it is hoped that the notes below regarding the main findings and comments on good practices seen in the market will be of assistance. Main findings peer review peer review was regarded as a crucial element in the management of underwriting risk. half the sample adopted a risk-based overall approach to peer review, with most of the balance featuring more extensive or random coverage of risks reviewed. Agents should be able to demonstrate a documented approach to sample selection, and where pre defined criteria are used to select the sample, this should be supplemented by a random element. the approaches to risks selected for review, focus of the review, timing of review, recording of review comments and the sharing of information collected varied by managing agent. Variation in process is expected as there can be no one size fits all approach. However, agents should ensure that their processes are properly documented. there is a general recognition that peer reviewers need to have equivalent or higher levels of experience and authority than the original underwriter. majority of managing agents enforce the same peer review disciplines in their service companies. Where agents do not apply the same standards of peer review in their service companies that decision must be based on a clear rationale. Good practice peer review Lloyd s considers the following to be indicators of good practice in a sound peer review process, and expects agents to be able to meet these benchmarks: the peer review process should be owned and supported by underwriting leaders.
5 the review should consider whether the syndicate s pricing/ underwriting policies and other procedures are applied correctly and consistently, and where they are not, issues should be recorded and resolved. if a risk based approach to peer review is applied, prescribed criteria should be used for selecting the risks for peer review, which is preferably automated. A random element should also be included to ensure that any risks and all underwriters may be part of the selection. in setting the criteria for targeting peer review, managing agents should particularly consider more focus on newer classes or historically under performing classes. peer reviewers need to have appropriate experience in the classes that they are reviewing and sufficient time to complete the process effectively, taking account of business volumes and absences. for each risk reviewed the findings should be recorded to a consistent standard and in a means that enables easy reference. It is important that any comments raised during the peer review will be readily available and utilised should the risk be renewed. the timing of peer review should reflect risk and may precede lines being put down, or ideally within 7 days post bind. the process of peer review should contribute to the development of skills of underwriters. the underwriting management team should receive regular written reports on the status of peer review activity and material findings. material findings should be escalated to senior management where appropriate and actions taken and evidenced where necessary. Main findings independent review independent review is generally being undertaken although the degree of value added is variable. Lloyd s expects that all classes of business and underwriters will be subject to the scrutiny of independent review. the majority of managing agents allow the independent reviewer to make risk selections for review activity (reviewers will usually adopt a risk-based overall approach to sampling risks, while ensuring coverage of all classes and individual underwriters). Managing agents should ensure that they have a defined sampling strategy for independent review of risks. most, but not all, independent reviewers examine slips as part of their review process. Lloyd s expects that an appropriate sample of slips should be reviewed by the independent reviewer in order to provide an effective challenge to the underwriters. the independent review process varied regarding timing of review, recording of review and the extent to which findings were distributed. there is a general recognition that independent reviewers need to have high levels of relevant underwriting experience. Lloyd s expects that in order to be able to provide effective challenge to the underwriters, the individuals carrying out independent review will have relevant underwriting experience. where internal reviewers (or reviewers previously employed by the firm) are used the degree of independence is hard to judge. Lloyd s expects that the reviewer must be independent of day to day underwriting. For example. this could be the Director of Underwriting (or equivalent) if that individual is not underwriting themselves. a significant minority of reviewers do not formally report their findings. Much of the value of the independent review process is lost where there
6 is no record of the findings. Lloyd s expects that there is a regular documented output from the independent review process summarising work performed and findings. a number of managing agents boards are not seeing the conclusions and recommendations made by independent reviewers. The report should be made available to the Underwriting Committee or equivalent and the Board. Good practice independent review Lloyd s considers the following to be indicators of good practice in a sound independent expert review process: the independent review process should be owned and directed by the active underwriter or Director of Underwriting, with full engagement from the agency board. the independent reviewer should have a terms of reference which specify review criteria, review scope, review frequency, access to information and reporting requirements. the review should identify whether the syndicate s strategies and pricing/ underwriting policies are applied correctly and consistently. the selection of risks to be reviewed should take account of risk and includes a random element ensuring that any risks, all classes, and all underwriters are covered within the process. the independent reviewer should have access to all underwriting records, the underwriting staff involved and the leadership of the agency. for each risk reviewed the findings should be recorded to a consistent standard and any outstanding issues followed up. independent review and reporting should be completed in a timely manner and reports should be produced at least quarterly. managing agents should ensure that independent reviewers have adequate time and access to complete the required process. the findings from independent review should used by the active underwriter to assess the extent to which underwriting is in line with the managing agent s strategies and plans. the independent reviewer s reported findings should be shared with the managing agent s board, with issues recorded in minutes and actions taken as necessary. To ensure that the background and nature of issues is understood, it would be good practice for the independent reviewer to meet with the agency board, or relevant board committee, periodically. The Good Practice notes above will be added to the Underwriting Standards section within lloyds.com for easy access. Any enquiries relating to Lloyd s Underwriting Standards should be directed to Kieran Flynn, Franchise Performance, Lloyd s (020 7327 5739)