Managing agent s code of practice for delegated underwriting. February 2006

Managing agent s cde f practice fr delegated underwriting February 2006

Cde f practice 2 Imprtant nte This cde f practice is prvided fr the purpses as set ut n page 11, What is the purpse f this cde f practice?. Hwever, it is nt a substitute fr the Delegated Underwriting Byelaw r the relevant sectins f the Underwriting Requirements. This cde f practice cmes int frce n 1 March 2004. The fllwing n lnger apply frm that date. Cde fr Managing Agents: Managing and Cntrlling Binding Authrity Arrangements UK Persnal Lines Business Cnduct and Other Guidance: Service Cmpanies Cnsrtium Underwriting Arrangements Line Slips and Open Carg Cvers Managing Agent Cntrls Over Syndicates Dealing Directly with Cverhlders July 2004

Cde f practice 3 Cntents Intrductin 5 What is delegated underwriting? 5 What is a cverhlder? 5 What is a binding authrity? 5 What are the different types f cverhlder and binding authrities? 5 What are apprved cverhlders and registered binding authrities? 5 What are restricted cverhlders and restricted binding authrities? 6 Are there ther ways f delegating authrity? 7 Other arrangements which are nt delegated underwriting 8 What is the legal psitin f the parties invlved in an arrangement t delegate authrity? 9 Applying this cde f practice 11 What is the purpse f this cde f practice? 11 What des Llyd s expect f managing agents? 11 Assessing new cverhlders 13 Main cnsideratins 13 Cverhlder suitability 13 Underwriting plan 15 Licensing issues 16 Binding authrities arranged with the invlvement f a Llyd s brker 16 Binding authrities arranged withut the invlvement f a Llyd s brker 16 Prducing the cntract f delegatin 17 Cntractual certainty 17 The rle f Xchanging in cntracts f delegatin 17 Mdel cntracts f delegatin 17 Main prvisins f a cntract f delegatin 18 Prudent underwriting 18 Authrised peple 18 Duratin 18 Cntracts f insurance 18 Selling arrangements 19 Renewing cntracts f insurance 19 Limits n premium incmes 19 Cllecting premiums 20 Insurance mnies 20 Insurance dcuments 20

Cde f practice 4 Handling claims 21 Agreeing claims 21 Claims funds 21 Reprting respnsibilities 22 Sub-cntracted claims handling 22 Cmplaints 23 Lawful instructins 23 Cancellatin 23 Using Llyd s name 24 Inspectin and wnership f recrds 24 Jurisdictin and chice f law 24 Mnitring cntracts f delegatin 25 Mnitring 25 Reprting 25 Visits and audits 25 Renewing cntracts f delegatin 26 Serius irregularities 27 Recrd keeping 27 Cancelling r nt renewing cntracts f delegatin 28 Nn-renewal 28 Cancellatin 28 Transferring run-ff respnsibilities frm a cverhlder 30 Appendix 1: Criteria fr cverhlder suitability 31 Appendix 2: Requirements fr cntracts f delegatin 33 Appendix 3: Jint certificates 35 Appendix 4: Managing agents dealing directly with cverhlders 36 Appendix 5: Delegated underwriting risks and cntrls 38

Cde f practice 5 Intrductin What is delegated underwriting? Delegated underwriting is an arrangement under which yu, as managing agent, delegate yur authrity t anther cmpany r partnership (knwn as a cverhlder ) t enter int cntracts f insurance n behalf f a Llyd s syndicate yu manage. What is a cverhlder? A cverhlder is a cmpany r partnership authrised t enter int a cntract f insurance that will be underwritten by Llyd s syndicates under the terms f a binding authrity. A cverhlder may als have authrity t issue insurance dcuments n behalf f Llyd s syndicates. Insurance dcuments include certificates f insurance, temprary cver ntes and ther dcuments acting as evidence f cntracts f insurance. What is a binding authrity? A binding authrity is an agreement under which yu delegate yur authrity t enter int cntracts f insurance t a cverhlder. Yu may als use a binding authrity t delegate authrity t issue insurance dcuments. The binding authrity will set ut the cverhlder s ther respnsibilities, including any authrity t cllect premiums r t agree claims. What are the different types f cverhlder and binding authrities? There are tw types f cverhlder at Llyd s. Apprved cverhlders will be authrised t enter int cntracts f insurance under registered binding authrities. Restricted cverhlders will be authrised t enter int cntracts f insurance under restricted binding authrities. What are apprved cverhlders and registered binding authrities? a. An apprved cverhlder: may be dmiciled (permanently based) anywhere in the wrld;

Cde f practice 6 must be apprved by Llyd s; and is usually authrised t enter int cntracts f insurance under a registered binding authrity. b. A registered binding authrity is an agreement under which yu delegate yur authrity t an apprved cverhlder t enter int cntracts f insurance n behalf f a Llyd s syndicate yu manage. The registered binding authrity will set ut the scpe and extent f the apprved cverhlder s authrity. Yu may als delegate authrity t the apprved cverhlder t issue insurance dcuments as evidence f the cntracts f insurance entered int. What are restricted cverhlders and restricted binding authrities? a. A restricted cverhlder: must be either a cmpany whse registered ffice is in the UK r a partnership based in the UK; and can be authrised nly under a restricted binding authrity. Frm 14 January 2005, restricted cverhlders must have the Financial Services Authrity s permissin t act as an insurance intermediary. This permissin may be either as an authrised cmpany r as an appinted representative. b. A definitin f a restricted binding authrity is given in the definitins byelaw. Basically a restricted binding authrity is ne which des the fllwing. Prescribes the terms and cnditins t be included in each cntract f insurance t be entered int by the cverhlder under the binding authrity. Cntains cmprehensive arrangements fr the agreement f the premium t be charged fr each cntract f insurance t be entered int under the binding authrity. Thse arrangements must nt give the cverhlder r any third party any significant discretin in calculating f the premium r making any adjustment t it. Only authrises the cverhlder t enter int cntracts f insurance where: the cntract will be cncluded in the United Kingdm and the prperty t be insured is a mtr vehicle which is registered in the United Kingdm; r the risk t be insured is a travel r hliday risk and the cntract is fr a duratin f 4 mnths r less; r the risk t be insured is a liability risk. c. In practice, there are tw main ways t make sure a restricted cverhlder cannt exercise any discretin when calculating premiums. These are: t give the restricted cverhlder a rating schedule, basis r guide; r t require the restricted cverhlder t send each prpsed cntract f insurance t yu s that yu can set the premium t be charged. (This is smetimes called a prir submit arrangement.)

Cde f practice 7 d. A restricted cverhlder must enter int a cntract directly with the insured r issue the insurance dcuments t the insured. This des nt prevent a restricted cverhlder frm using an intrducer t refer business t them r t send n insurance dcuments n their behalf. T avid any dubt, if a cverhlder des nt deal directly with the insured it is nt a restricted cverhlder and s must be apprved by Llyd s. If a cverhlder meets the criteria t be a restricted cverhlder, it will nt need Llyd s apprval. Hwever, yu must recrd its details n the register f restricted cverhlders. Yu shuld keep cmplete and up-t-date recrds f all restricted cverhlders yu have delegated authrity t. (Llyd s des nt register restricted binding authrities.) Are there ther ways f delegating authrity? Paragraph 1 f the Delegated Underwriting Byelaw sets ut ther ways by which yu can delegate yur authrity t enter int cntracts f insurance. The main methd, apart frm under a binding authrity, is t delegate authrity under a lineslip. A lineslip is an arrangement where yu delegate authrity t anther managing agent, r t an authrised insurance cmpany (fr business intrduced by a named Llyd s brker). A lineslip will usually apply t specific types f business. Once the authrised managing agent r insurance cmpany has entered int a cntract f insurance with the insured, the relevant Llyd s brker will issue evidence f the insurance (fr example, a cver nte supprted by a full plicy r slip plicy). The lineslip may als allw the authrised managing agent r insurance cmpany t agree claims. Authrised managing agents and insurance cmpanies d nt need apprval frm Llyd s t perate a lineslip. There are tw ther main ways yu can delegate yur authrity cnsrtiums and services cmpanies. Under these arrangements, the bdies authrity is delegated t, are treated by Llyd s as cverhlders. Cnsrtiums A cnsrtium is an arrangement where yu delegate authrity t anther Llyd s managing agent t enter int cntracts f insurance n yur behalf. A cnsrtium will usually perate in specified classes f business prduced frm mre than ne surce (which is the main difference t a lineslip). Cnsrtiums have t be registered with Llyd s each year. Aside frm this, managing agents d nt need apprval frm Llyd s t perate a cnsrtium where a managing agent acts as cverhlder. If a cnsrtium delegates authrity t a cmpany r partnership ther than a managing agent, that cmpany r partnership will need t be apprved as a cverhlder by Llyd s. Service cmpanies A service cmpany is a cmpany within the same grup as, r wned by, the Llyd s managing agent t whm the managing agent delegates authrity t enter int cntracts f insurance r t issue insurance dcuments as evidence f cntracts f insurance. All service cmpanies must be apprved as cverhlders by Llyd s.

Cde f practice 8 Other arrangements which are nt delegated underwriting There are three ther types f cntract yu may enter int with third parties. Althugh the cntracts d nt invlve delegating authrity, they nevertheless have similar features and, in the past, they have been cnfused with delegated underwriting arrangements. Marine Open Carg Cvers A marine pen carg cver is an arrangement under which a Llyd's syndicate (r syndicates) prvides the insured with a general grant f marine carg insurance relevant t their business activities. (The Marine Insurance Act 1906 refers t the term assured. Hwever, the term insured is used thrughut this sectin and has the same meaning.) That insurance cvers the insured s wn prperty, r prperty which the insured has had, r is expected t gain, an insurable interest in. (An insurable interest is defined as an interest which, under the law f England and Wales, wuld exist if the insured were dmiciled r present in England r Wales.) Typically, the insured makes separate declaratins under the marine pen carg cver during the year, using agreed rates, terms and cnditins. The term marine carg pen cver includes insurance cntracts issued t freight frwarders, shipping agents, carriers r ther parties acting n behalf f their principals r as bailees. (A bailee is the party the insured has entrusted the gds t and has instructed t arrange marine carg insurance.) If yu grant a marine pen carg cver yu must make sure yu knw abut and cmply with lcal licensing and regulatry requirements. The insured des nt need apprval frm Llyd's t perate a marine pen carg cver as defined abve. T avid any dubt, if the arrangement is nt fr the insured s wn prperty, r prperty in which the insured has had, r is expected t gain, an insurable interest, Llyd s views that arrangement as a binding authrity. Grup plicies A grup plicy is a single insurance plicy issued t a cmpany r grup which is the plicyhlder, but nt the insured. Insurance is cmpulsry fr all members r emplyees (if the cmpany r grup is an emplyer) belnging t that cmpany r grup while they remain members r emplyees. Premiums are paid n a grup basis (nt a member r emplyee basis). Under a grup plicy a single underwriting decisin is made fr the whle plicy and all terms and cnditins are set in advance. The ffer f insurance is made t the entire grup at the start f cver (inceptin) and t new members r emplyees when they jin the cmpany r grup. There is n variatin in the cver given t any individual emplyee r member, and n discretin as t which emplyees r members are insured. In thse US territries where Llyd s perates under a surplus lines licence, insurance cver under a grup plicy must nt be cmpulsry fr all members r emplyees and must be ffered separately t each member r emplyee f the grup. A separate premium must be identified. Each member r emplyee has the right t accept r decline the ffer f insurance. Under a grup plicy, a single plicy which cnstitutes the insuring dcument is issued t the plicyhlder (that is, the cmpany r grup). Members r emplyees f the grup are given details f the cver as evidence f the insurance. Any dcuments given t members and emplyees must state clearly that it is nt a plicy f insurance, merely evidence f cver granted t the cmpany r grup. If yu issue grup plicies, yu must make sure yu knw abut and cmply with lcal licensing and regulatry requirements. Llyd s des nt cnsider grup plicies t be binding authrities and plicyhlders are nt cnsidered t be cverhlders. Grup plicies d nt need Llyd s apprval except in the United States, where grup plicies and ther frms f mass merchandising prgramme cannt be bund

Cde f practice 9 by a cverhlder r underwritten at Llyd s withut first cnsulting with Llyd s US General Cunsel. Master plicies A master plicy is a cntract f insurance issued t an assciatin, rganisatin r club s that they can grant insurance cver t its individual members. These entities issue their members with a dcument (knwn as an evidence f cver) which sets ut full details f the insurance r includes a full cpy f the plicy wrding. In the USA, a full cpy f the plicy wrding must be prvided t each individual member. These dcuments must state that the nly insuring dcument is the master plicy held by the assciatin, rganisatin r club and that the individual member has the right t inspect the master plicy at that entity s ffices. If yu issue master plicies yu must make sure yu knw abut and cmply with lcal licensing and regulatry requirements. Llyd s des nt cnsider master plicies t be binding authrities, and the relevant assciatins, rganisatins r clubs are nt cnsidered t be cverhlders. Master plicies d nt need Llyd s apprval except in: the United States, where master plicies and ther frms f mass merchandising prgramme cannt be bund by a cverhlder r underwritten at Llyd s withut first cnsulting with Llyd s US General Cunsel; and Australia, where master plicies cannt be underwritten at Llyd s withut apprval frm the Llyd s General Representative in Australia. Examples f business which must nt be accepted under master plicies include, but are nt limited t, extended warranties, guarantees and travel insurance, as well as arrangements where a manufacturer r supplier prvides free insurance with its prduct r service. What is the legal psitin f the parties invlved in an arrangement t delegate authrity? It is imprtant that yu understand all relevant parties legal bligatins in an arrangement t delegate yur authrity. S the fllwing sectin prvides a simple verview under English law. Hwever, the relatinship between the relevant parties will depend n the individual circumstances f the cntract f delegatin. Fr all Llyd s business, risks are insured by Llyd s members wh prvide the supprting underwriting capital. Members can either be individuals (ften knwn as Names ) r crprate entities. Members f Llyd s underwrite insurance by frming grups f members knwn as syndicates. Syndicates perate as independent business units within the Llyd s market and are managed by managing agents. Syndicates are frmed fr ne year and are re-frmed each year. Managing agents have authrity t accept risks n behalf f the members f the syndicate and appint the underwriting team. Each member f Llyd s gives this authrity under a standard agency agreement. If yu delegate yur authrity t a cverhlder, the general principle is that the cverhlder acts as yur agent, rather than the plicyhlder s agent. S when a cverhlder, acting under the terms f a binding authrity with yu, enters int cntracts f insurance t be underwritten by members f a Llyd s syndicate, r issues insurance dcuments, they are acting as yur agent.

Cde f practice 10 The cverhlder may als act as yur agent t cllect premiums r handle claims. Yu will set ut the cverhlder s authrity in a cntract f delegatin. In the cntext f binding authrities, a Llyd s brker usually acts as the agent f the cverhlder and als acts as the pint f cntact between yu and the cverhlder. Hwever, in certain circumstances, a Llyd s brker can als be appinted t act as a cverhlder and enter int cntracts f insurance with plicyhlders n yur behalf. When a Llyd s brker is acting as a cverhlder n yur behalf, it will be acting as yur agent. When a Llyd s brker acts as a cverhlder, there is a ptential cnflict f interest between its duties t yu (as managing agent) and t plicyhlders. In such circumstances, it is vital fr yu t make sure the Llyd s brker manages this cnflict f interest prperly.

Cde f practice 11 Applying this cde f practice What is the purpse f this cde f practice? This cde highlights the main risks assciated with delegating authrity and gives yu practical guidance t help yu manage thse risks. The cde cvers: assessing new cverhlders; prducing the cntract t delegate authrity (cntracts f delegatin); the main prvisins that will be in the cntract f delegatin; mnitring cntracts f delegatin; and cancelling r nt renewing cntracts f delegatin. The cde applies t all arrangements where yu delegate authrity t enter int cntracts f insurance. It als cvers arrangements delegating authrity t issue insurance dcuments. The cde is aimed mainly at managing agents whse syndicates lead binding authrities. Thrughut this cde, these managing agents are referred t as managing agents f the lead syndicate. The lead syndicate has the main respnsibility fr assessing the cverhlder setting up the cntract f delegatin setting any limits n the cverhlder s authrity and mnitring the cntract f delegatin. Similarly, managing agents whse syndicates prvide fllwing supprt n binding authrities are referred t as managing agents f fllwing syndicates. Fllwing syndicates agree t underwrite a prprtin f the cntract f delegatin in supprt f a lead syndicate. What des Llyd s expect f managing agents? As a managing agent, yu set the underwriting plicy f the syndicate (r syndicates) yu manage. If yu delegate authrity t enter int cntracts f insurance, yu are respnsible fr setting bth the strategy and the cntrl envirnment yur underwriting staff are expected t perate in. Llyd s expects yu t have clear, written prcedures fr delegating authrity fr each f the syndicates yu manage. These prcedures shuld be agreed by the bard, cnsistently fllwed by all syndicates yu manage and be reviewed regularly. The cmpetencies yu need t lead a delegated underwriting arrangement are different t thse yu need fr underwriting. S it is imprtant that yu are satisfied that yu have the resurces (bth peple and systems) needed t lead delegated underwriting arrangements and t successfully manage such cntracts. This will usually be reflected in the underwriting authrities yu give t individual underwriters n the syndicates yu manage. If yu are the managing agent f the lead syndicate delegating authrity t a cverhlder under a binding authrity, Llyd s expects yu t assess the cverhlder, set up the cntract f delegatin, set any limits n the cverhlder s authrity, and mnitr the cntract f delegatin. If yu are the managing agent f a fllwing syndicate, yu shuld feel free t ask the managing agent f the lead syndicate r Llyd s brker fr any extra infrmatin yu need. If authrity has

Cde f practice 12 been delegated t a cverhlder under a binding authrity, all managing agents f fllwing syndicates n the relevant binding authrity must cnsider: whether the managing agent f the lead syndicate has sufficient experience in the class f business t lead the binding authrity; the experience f the Llyd's brker and the cverhlder; the type and class f the prpsed business and whether the terms and cnditins f the cntract f delegatin are suitable and adequate; and the arrangements fr mnitring binding authrities entered int during the year.

Cde f practice 13 Assessing new cverhlders Main cnsideratins It is vital that managing agents f lead syndicates thrughly assess new cverhlders. If yu are a managing agent f a lead syndicate, this sectin highlights sme f the imprtant areas that yu shuld cnsider when assessing a new cverhlder. Assessing a new cverhlder will nrmally include visiting their ffices and meeting relevant staff. It may als invlve hiring cverhlder review specialists t carry ut an audit f the new cverhlder. T help managing agents f lead syndicates assess new cverhlders, Llyd s has develped a Cverhlder Applicatin Frm which can be used t gather imprtant infrmatin. This frm cntains mst f the infrmatin yu and managing agents f fllwing syndicates shuld need. The Llyd s brker will usually c-rdinate the filling in f this frm. Als, in a number f territries arund the wrld Llyd s has ffices that can give yu lcal infrmatin abut new cverhlders. Once yu and the Llyd s brker are satisfied that the new cverhlder is suitable, the filled-in Cverhlder Applicatin Frm shuld be sent t the Llyd s Cverhlders Department fr cnsideratin and apprval. If yu want t lead a binding authrity t a cverhlder which has already been apprved and is already perating a binding authrity with anther managing agent, it is imprtant that yu als thrughly reassess the cverhlder, frm the perspective f the new binding authrity cntract t be granted. Cverhlder suitability When assessing whether a cverhlder is suitable yu shuld always cnsider the criteria fr cverhlder suitability as set ut at paragraph 6 f Chapter 2 f the Underwriting Requirements. These criteria are als set ut in appendix 1. Belw is guidance n specific areas that yu shuld cnsider when assessing a cverhlder s suitability. Peple authrised t enter int cntracts f insurance and agree claims The main cnsideratins when assessing the cverhlder s suitability include the fllwing. The quality and adequacy f the cverhlder s underwriting functin, including the extent f the cverhlder s knwledge and experience in each type and class f business fr which they will be given authrity t enter int cntracts f insurance and issue insurance dcuments. The quality and adequacy f the cverhlder s cntrl ver underwriting, particularly if a number f peple are authrised t enter int cntracts f insurance r issue insurance dcuments. The limits f the cverhlder s authrity. If a new cverhlder is given full underwriting authrity, yu will need t mnitr clsely their activities because they may have respnsibility nt nly fr accepting risks, but als fr setting premiums. Even when a cverhlder uses pre-determined rates, terms and cnditins, yu will still need t pay clse attentin t the risks the cverhlder accepts. If nly ne named persn can accept risks r agree claims, yu will need t cnsider what alternative prcedures will be used if that persn is nt available, fr any reasn.

Cde f practice 14 The quality and adequacy f the cverhlder s claims functin, including the resurces dedicated t handling claims and their knwledge and experience. The cverhlder s reputatin and standing The main pints t cnsider when assessing whether r nt a cverhlder has an apprpriate reputatin and standing include the fllwing. Their regulatry status and current licences. Their membership f recgnised prfessinal bdies. Their standing in the insurance industry. Their assciatin with any prblems r disputes (fr example, with ther Llyd s managing agents, ther insurers r regulatrs). Other types and classes f business they handle. Binding authrities they have with ther insurers and the cverhlder s perfrmance under them. Their current wners r sharehlders. Any ptential cnflicts f interest the cverhlder may have. The cverhlder s ability t perate a binding authrity The main pints t cnsider when assessing whether a cverhlder is capable f perating a binding authrity include the fllwing. Hw cmpetent the cverhlder s management is and hw they prpse t manage the binding authrity. This will include their ability t mnitr premium incme and aggregate expsure limits (where apprpriate). Whether the cverhlder's IT and accunting systems can recrd and prcess insurance transactins and prduce necessary reprts and dcuments, including reprts t lcal regulatrs. The quality and adequacy f the cverhlder s human resurces (staff). The strength f the cverhlder s financial management, including credit cntrl. The cverhlder s ther business activities and the extent t which they might divert the cverhlder s attentin frm the binding authrity. The cverhlder s understanding f Llyd s and the Llyd s market. The cverhlder s financial standing The main pints t cnsider when assessing the financial standing f the cverhlder include the fllwing. The cverhlder s assets and liabilities, as well as hw prfitable they are. The cverhlder s invlvement in any current litigatin r any significant cntingent liabilities which may affect their ability t cntinue t perate (fr example, a claim n their errrs and missins insurance). The adequacy f the cverhlder s errrs and missins r prfessinal indemnity insurance.

Cde f practice 15 Underwriting plan It is gd practice t ask a new cverhlder t prepare an underwriting plan fr the prpsed binding authrity. Yu shuld specify the precise cntent f the plan. The plan allws yu t mnitr the cverhlder s perfrmance during the cntract and gives yu a better verall understanding f the cverhlder s prpsals. The cverhlder s underwriting plan shuld include the fllwing. Where their business cmes frm. Their target prfitability and histric prfitability, including the reasns fr any previus insurer declining t renew. Details f ther cntracts f delegatin they manage. An analysis f the market place (including pprtunities fr and threats t successful underwriting). Their basis fr selecting risks. Their basis fr pricing (where apprpriate). Infrmatin abut their perfrmance against mnthly targets. Details f hw the binding authrity will fit with the cverhlder s ther areas f business. The aim f the Llyd s Franchise is t prduce cnsistent prfits ver the insurance cycle. Yu will need t use suitable tls (fr example, prfit cmmissin) t fcus the cverhlder n underwriting prfit.

Cde f practice 16 Licensing issues Within a jurisdictin, Llyd s is nrmally authrised t perate as a single entity, with a single cllective licence. Any failing by a cverhlder in that jurisdictin culd have adverse cnsequences fr the entire Llyd s market in that jurisdictin. S it is essential that yu pay particular attentin t licensing requirements when delegating yur authrity t a cverhlder. Yu must take reasnable steps t make sure that the cverhlder knws abut all relevant insurance, financial and taxatin laws and requirements in the jurisdictin where the cverhlder is dmiciled, trades, prvides services r des business under the binding authrity. If Llyd s has a lcal representative in the relevant territry, yu r the Llyd s brker shuld discuss the prpsed binding authrity with them. If a cverhlder will perate in mre than ne territry where Llyd s is licensed, they need Llyd s apprval fr each territry they are intending t perate in. In territries where Llyd s des nt hld a licence (as well as thse territries where Llyd s is licensed), yu will need t be satisfied that the cverhlder will meet all relevant lcal regulatry requirements. Binding authrities arranged with the invlvement f a Llyd s brker If yu intend t enter int a binding authrity that is arranged r brkered by a Llyd s brker, yu shuld cnsider the Llyd s brker s: experience f perating and administering binding authrities; knwledge and experience in the jurisdictins where the cverhlder will perate; and ability t administer and service the binding authrity. An experienced Llyd s brker will usually help yu t assess a new cverhlder. This help may invlve visiting the cverhlder, sharing their assessment and prviding expert knwledge f the territry where the cverhlder perates. Hwever, yu are ultimately respnsible fr assessing a new cverhlder. Binding authrities arranged withut the invlvement f a Llyd s brker Althugh many managing agents will use a Llyd s brker t arrange r brke a binding authrity, managing agents can deal directly with a cverhlder and administer all frms f delegated underwriting, cvering any type and class f business, withut the invlvement f a Llyd s brker. If yu are thinking abut dealing directly with an existing cverhlder which is currently brkered, arranged and administered by a Llyd s brker, yu will need t cnsider carefully any legal risks which may arise frm dealing direct. If yu wish t deal direct with a cverhlder, yu must tell Llyd s abut this intentin befre entering int any cntract f delegatin. Yu will nt need t tell Llyd s abut any subsequent arrangements fr direct dealing. Mre detailed guidance n this area is given in appendix 4.

Cde f practice 17 Prducing the cntract f delegatin The managing agent f the lead syndicate must make sure there is a cntract f delegatin in place fr all delegated underwriting arrangements. If yu are a lead managing agent, page 17, Prducing the cntract f delegatin and page 18, Main prvisins f a cntract f delegatin highlight sme f the imprtant areas yu shuld cnsider. Cntractual certainty The binding authrity yu and the cverhlder enter int will set ut bth yur and their bligatins. Yu and the cverhlder must bth be certain abut the terms f the cntract f delegatin under which yu are delegating authrity t the cverhlder. Befre a cverhlder is authrised t act n behalf f a managing agent f Llyd s syndicate (r syndicates), whether n new binding authrities r renewed nes, the managing agent f the lead syndicate must have received written cnfirmatin frm the cverhlder agreeing t the terms and cnditins f the binding authrity. The binding authrity cannt be registered at Llyd s until this cnfirmatin has been received. The need t be certain abut the cntract delegating authrity extends t all third parties t which authrity is sub-delegated (fr example, ther cverhlders r claims administratrs). If a cverhlder s authrity will be sub-delegated t a third party, it is essential that yu enter int a cntract directly with the third party. This will make sure that yu can exercise apprpriate direct cntrl ver all aspects f the cntract f delegatin. If yu expect a third party t play an immediate rle under the cntract yu must be certain f and happy with the cntract befre yu authrise the cverhlder t perate the binding authrity. It is particularly imprtant fr yu t define clearly all f a new cverhlder s respnsibilities and fr the cverhlder t understand them fully. If the new cverhlder is clear abut their respnsibilities and the way yu intend the binding authrity t perate, there is less rm fr misunderstanding. The rle f Xchanging in cntracts f delegatin Histrically, Xchanging has checked cntracts f delegatin. This review usually tk place after the cverhlder had been given authrity t act. In future, Xchanging will nt prcess a cntract f delegatin unless there is clear evidence that the managing agent and cverhlder have bth agreed the cntract f delegatin befre the cverhlder is authrised. Als, Xchanging will nt check cntracts f delegatin after they have been agreed between the cverhlder and the managing agent f the lead syndicate. Yu are respnsible fr agreeing the cntract with the cverhlder befre it cmes int frce. Yu can use any service prvider (including Xchanging) t review the cntract befre yu agree it with the cverhlder. Mdel cntracts f delegatin The Llyd s Market Assciatin (LMA) has develped a series f mdel cntracts f delegatin. Hwever yu can, f curse, agree different terms and cnditins fr cntracts f delegatin.

Cde f practice 18 Main prvisins f a cntract f delegatin The cntract f delegatin must include thse prvisins included at paragraph 10 f chapter 2 f the Underwriting Requirements. These prvisins are als set ut in appendix 2. This sectin prvides guidance n specific areas yu, as the managing agent f the lead syndicate, shuld cnsider when preparing a cntract f delegatin. Prudent underwriting The binding authrity shuld require the cverhlder t act always in a prudent and prfessinal way with due care and skill. Authrised peple Yu must make clear which f the cverhlder s staff have authrity t enter int cntracts f insurance. These individuals are usually named in the binding authrity. In sme lines f business (fr example, persnal lines where insurance is sld ver the phne) it is nt practical t name every member f staff with this authrity. In these cases, the cntract will need t identify a suitably senir and experienced fficer f the cverhlder wh is respnsible fr the verall peratin and cntrl f the binding authrity. Duratin The cntract f delegatin will usually last fr n mre than 12 mnths and must never exceed 18 mnths in ttal. If a cntract f delegatin is allwed t last fr mre than 12 mnths, it will need t include a prvisin allwing yu t review the cntract after 12 mnths. Cntracts f insurance Yu and the cverhlder must bth be clear which types and classes f insurance can be entered int under the binding authrity. Yu will usually want specifically t exclude certain types and classes f business t reduce the ptential fr any misunderstanding by the cverhlder. The binding authrity will als usually specify the fllwing. Territries and lcatins f acceptable and excluded risks. Maximum limits f indemnity and minimum deductibles. Aggregate limits f expsure (if apprpriate). The maximum term f cntracts f insurance that the cverhlder may enter int (which will usually be n mre than 12 mnths). If the cverhlder uses a rating schedule, basis r guide, yu will need t apprve it befre giving the cverhlder authrity. Als, the binding authrity will need t set ut clear prcedures t amend, update r replace that schedule, basis r guide during the life f the cntract f delegatin. Yu shuld als cnsider stating a maximum perid fr any qutatins which may be issued and make sure that this is cnsistent with the cancellatin prvisins in the cntract f delegatin.

Cde f practice 19 A cntract f delegatin will nt usually authrise the cverhlder t arrange specific reinsurance t prtect Llyd s syndicates. Hwever, in thse exceptinal cases where a cverhlder is authrised t arrange reinsurance, yu will need t apprve the reinsurance befre it is bught. Als, all managing agents f fllwing syndicates shuld be given cpies f reinsurance cver ntes. Special acceptance prvisins are cmmn n lineslips and als appear n sme binding authrities. The prvisins usually give the binding underwriter blanket authrity t accept declaratins utside the defined terms f the cntract f delegatin withut referring them t the managing agents f fllwing syndicates. It is vital that special acceptance prvisins are clearly defined, therwise the binding underwriter may have significantly extended authrity that may expse the managing agents f fllwing syndicates t business they had nt intended t accept. Selling arrangements In mst territries there are requirements gverning hw the insurance shuld be sld t plicyhlders (fr example, in the UK there is FSA and ABI guidance). It is essential that yu are satisfied that the insurance t be sld by the cverhlder n yur behalf cmplies with any lcal requirements. Als, if the cverhlder is intending t ffer insurance ver the internet, yu will need t be satisfied that this is allwed lcally. In this situatin, yu shuld have apprved the relevant aspects f the cverhlder s website befre the cverhlder ffers the insurance n yur behalf. Renewing cntracts f insurance Insurance laws in sme jurisdictins regulate an insurer s prcesses fr renewing r nt renewing an insurance cntract. These regulatins are particularly cmmn fr insurance bught by individual cnsumers rather than businesses. In such cases, an insurer prpsing nt t renew a cntract f insurance may need t prvide a ntice f nn-renewal in a particular frm, giving a specified perid f ntice befre the insurance will end. Failure t d s can mean the cntract f insurance autmatically renews n its previus terms and cnditins. S yu must make sure the cverhlder handles the nn-renewal f such cntracts f insurance in line with lcal requirements. Yu must als cnsider the effect f such prvisins if yu have decided nt t renew the binding authrity. It is imprtant that yu give the Llyd s brker and cverhlder sufficient ntice f any decisin nt t renew the binding authrity. This will give them a reasnable pprtunity t find an alternative market and t handle the nn-renewal f individual cntracts f insurance crrectly. If yu d nt give reasnable ntice f yur decisin nt t renew a binding authrity, r make sure that the cverhlder handles nn-renewal f cntracts f insurance crrectly, the syndicate underwriting the binding authrity may be cmmitted t renewing individual cntracts f insurance. Limits n premium incmes A cntract f delegatin must specify a limit n the grss incme frm premiums. This is an imprtant cntrl and, used effectively, can prevent a cverhlder frm writing mre business than yu want. It is essential that yu set the limit at a realistic level. In sme cases it may als be apprpriate fr yu t specify a premium incme limit by a sub-class f business r by cverhlder (fr example, fr multi-class r multi-cverhlder cntracts with significant premium incme limits).

Cde f practice 20 Yu shuld als make sure the cverhlder tells yu nce the verall written premium incme exceeds a set percentage f the verall grss annual premium limit stated in the binding authrity (fr example, 75% f the agreed grss premium limit). This gives an early warning f any ptential verwriting n the cntract. Lastly, if the cntract f delegatin cntains a prvisin t allw a prtfli transfer at the end f the perid, yu shuld cnsider the premium incme limit and aggregate expsures if the transfer des nt take place. Cllecting premiums In mst binding authrities, the cverhlder is respnsible fr cllecting premiums n yur behalf. It is essential that yu clearly set ut the cverhlder s respnsibilities and set apprpriate service standards in relatin t cllecting premiums. Insurance mnies It is essential that the cverhlder understands that insurance mnies are held n behalf f underwriters. Cverhlders must hld that mney in a separate insurance mnies accunt. In many jurisdictins, that separate accunt must be a trust accunt. Even where this is nt required, the use f trust accunts is strngly recmmended. This is imprtant t prtect plicyhlders funds if the cverhlder became inslvent. Insurance dcuments Yu must be satisfied with the frmat and cntent f the insurance dcuments the cverhlder will issue under the cntract f delegatin. Gd-quality insurance dcuments reflect well n yu and Llyd s. It is als essential that yu clearly set ut the cverhlder s respnsibilities and set apprpriate service standards relating t prducing and issuing insurance dcuments. In particular, yu must make sure that the insurance dcuments cmply with the prvisins in paragraph 15 f chapter 2 f the Underwriting Requirements. These state that the dcuments acting as evidence, cntracts f insurance must include the fllwing. The name and address f the cverhlder. All relevant terms and cnditins that relate t the cntract f insurance, including: relevant wrdings, exclusins and limitatins; the perid r duratin f cver; and the limits f liability. The amunt f the premium and any discunt. Infrmatin abut the prcedures fr handling claims under the cntract f insurance and dealing with cmplaints. The law and jurisdictin that applies t the cntract f insurance. Any ther prvisins required under the laws r requirements f the jurisdictin where the cntract was drawn up and the insured is based, r f any ther relevant jurisdictin and prvisins required by the lcal Llyd s representative.

Cde f practice 21 Yu must nt authrise the cverhlder t issue jint certificates, unless they cmply with the requirements stated in paragraph 16 f chapter 2 f the Underwriting Requirements. These requirements are set ut in appendix 3. Yu must als make sure that each dcument acting as evidence f a cntract f insurance issued by the cverhlder cntains a cntract reference number. The reference number will allw everyne invlved in the cntract t identify the relevant binding authrity under which the cntract has been issued. The insurance dcuments may be in a language ther than English. In sme cuntries this is bligatry. If insurance dcuments are prepared in a language ther than English, yu must make sure the insurance dcuments reflect yur and the plicyhlder s intentins. If yu use a translatin service, yu will need t make sure that the translatin service is cmpetent and prfessinal. Handling claims It is essential that claims under a cntract f delegatin are handled efficiently. A failure t handle claims effectively may cause plicyhlders t cmplain t Llyd s r lcal regulatrs. This may in turn significantly damage the reputatins f yu and Llyd s. Yu must clearly specify the cverhlder s respnsibilities, set apprpriate service standards in relatin t handling claims and identify a suitably senir and experienced fficer f the cverhlder t have verall respnsibility fr handling claims. Agreeing claims Yu may want t give a cverhlder authrity t agree claims arising frm cntracts f insurance entered int under the binding authrity n yur behalf. If this is the case, the main cnsideratins include the fllwing. Setting that authrity at limits which are apprpriate t the type and class f business. The cverhlder s knwledge and experience f handling claims. The resurces the cverhlder dedicates t handling claims. Setting service standards fr the cverhlder. Setting ut hw recveries r salvage will be handled (if apprpriate). Making sure that if any claim might be denied, r be settled ex-gratia r withut prejudice, it is referred back t yu as sn as pssible. It is essential that yu handle such claims. Claims funds In sme cases, yu may wish t advance a sum f mney t the cverhlder t hld as a claims fund. This will allw cverhlders t pay rutine claims prmptly. If a cverhlder hlds a claims fund, it must be held in a separate trust accunt in the name f the trustees f the relevant premium trust fund (unless Llyd s agrees therwise). Yu will need t define the circumstances in which the cverhlder can use the claims fund and specify the signatries t the claims fund accunt. Yu must chse the signatries fr the accunt. Finally, yu shuld make sure that the

Cde f practice 22 cntract f delegatin sets ut the arrangements fr returning the claims fund t Llyd s syndicates when requested. Reprting respnsibilities The cntract f delegatin must require the cverhlder t reprt by type r class, all premiums, paid claims, utstanding claims and expenses in respect f cntracts f insurance it has entered int. The reprting prvisins enable yu t make sure the cntract f delegatin is perfrming as expected. It is essential that yu clearly define the cverhlder s respnsibilities and set apprpriate service standards in relatin t reprting. The reprts yu may use t mnitr a binding authrity include the fllwing. Risk reprts, prviding details f all cntracts f insurance entered int by the cverhlder. Claims reprts, prviding details f all settled and advised claims. Earned t incurred reprts, prviding details f the cverhlder s prfitability. Claims fund reprts, prviding details f all payments made t and frm the claims fund. Aggregate expsure reprts, prviding infrmatin t mnitr the risks in a particular territry r zne. Other reprts t shw the cverhlder is keeping t yur required service standards. Sub-cntracted claims handling Under sme cntracts f delegatin, yu may allw the cverhlder t sub-cntract respnsibility fr handling claims and perfrming certain administrative functins (ther than entering int cntracts f insurance r issuing insurance dcuments) t third parties. If this is the case, it is essential that: yu are a party t the cntract with the sub-cntractr; the sub-cntractr is cmpetent t perfrm its respnsibilities; the terms f the sub-cntract are cnsistent with the cntract f delegatin; the sub-cntractr s respnsibilities are clearly defined and there are apprpriate service standards; the sub-cntract gives managing agents and regulatrs rights t inspect and audit third parties; and the sub-cntract specifies that cmplaints and ptential litigatin are immediately reprted t yu r t the cverhlder.

Cde f practice 23 Cmplaints Yu will need t be satisfied with the cverhlder s prcedures fr handling cmplaints. Plicyhlder cmplaints represent a significant risk t the reputatins f yu and Llyd s. It is vital that under the cntract f delegatin, the cverhlder must immediately tell yu abut any cmplaint, particularly any cmplaints that culd be referred t any regulatry authrity r give rise t litigatin r prceedings against yu r the cverhlder. In many cuntries there are legal and regulatry prvisins gverning the cmplaints prcedures f insurers and thse acting n their behalf. Yu must make sure that the cmplaints prcedures cmply with lcal legal and regulatry requirements. If a cmplaint des result in legal actin, this may start with a lawsuit being served n the cverhlder. Yu must als make sure that the cverhlder understands and is capable f dealing with a lawsuit. Lawful instructins The cntract f delegatin shuld allw yu t give the cverhlder instructins (when apprpriate) in the frm f reasnable requests r requirements relating t the peratin f, risks bund under r claims arising frm the cntract. Cancellatin Yu must carefully cnsider the prvisins fr cancelling the cntract f delegatin. Yu will rely n these prvisins if yu need t cancel the cntract quickly and t make sure the cverhlder des nt abuse the cntract after yu have given ntice f cancellatin. The cancellatin prvisins shuld allw: the cntract t be cancelled immediately upn fraud r dishnesty r if Llyd s has directed that it is cancelled; yu t cancel the cntract, fr any reasn, after giving 30 days ntice (r lnger if necessary under lcal requirements); and extra cntrls t be placed ver the cverhlder during the ntice perid. Fr example, the cntract f delegatin may revert t a mre restricted frm f delegatin (fr example, where the managing agent f the lead syndicate has t agree each risk t be accepted). The cntract f delegatin shuld als set ut the duties f the cverhlder nce yu have given ntice f cancellatin (fr example, returning insurance dcuments and prviding access t underwriting and claims recrds). Yu may als want t include a suspensin prvisin in the cntract f delegatin. This prvisin will allw yu t stp the cverhlder frm entering int cntracts f insurance, issuing insurance dcuments r paying claims. The prvisin is likely t be f mst use when serius irregularities are brught t yur attentin and will allw time fr the matter t be investigated.

Cde f practice 24 Using Llyd s name The cntract f delegatin must make it clear that when the cverhlder refers t Llyd s in any publicity, letterheads, directries r advertising material they must fllw the Llyd s guidelines. These can be fund n the website at www.llyds.cm/cverhlder_branding Inspectin and wnership f recrds The binding authrity must require the cverhlder t keep cmplete recrds f all the business the cverhlder will carry ut n yur behalf under the cntract f delegatin. It shuld als make clear that Llyd s syndicates retain full title t, and wnership f, all f these recrds. Managing agents, their representatives and regulatrs must have the right at any time, withut restrictin r limitatin, t inspect, audit and cpy any recrds relating t cntracts f insurance accepted by the cverhlder. Jurisdictin and chice f law English law and English jurisdictin shuld apply t the cntract f delegatin, wherever pssible.

Cde f practice 25 Mnitring cntracts f delegatin It is vital that yu, as the managing agent f the lead syndicate, mnitr cntracts f delegatin clsely. Yu must als be satisfied that, where a syndicate yu manage leads a cntract f delegatin, yu have sufficient resurces devted t mnitring regularly the cntract f delegatin during the year and apprpriate management infrmatin systems in place t mnitr effectively the cntract f delegatin. Mnitring Effective mnitring can be achieved thrugh a cmbinatin f reprting, visits and audits. Reprting Cverhlders must reprt regularly n the activities delegated t them by yu. Managing agents are increasingly using internet-based management and reprting systems t manage delegated underwriting arrangements. These make it much easier fr yu t enfrce the limits f a cverhlder s authrity and review the cverhlder s perfrmance. Yu will need t specify the reprting requirements, including the frequency f reprts. This will depend n the specific cntract f delegatin. Key cnsideratins when setting the reprting requirements include the fllwing. Prfitability against plan and budget. The quantity and quality f business, including risk selectin. Rating adequacy. Handling claims, reserves and salvage (where apprpriate). Aggregate expsures (where apprpriate). Perfrmance in meeting terms f trade and cllecting premiums. Reinsurance recveries (where apprpriate). The cverhlder s perfrmance against yur service standards. During the first year f a new cntract f delegatin, yu must mnitr the cverhlder extremely clsely. The first year f any cntract f delegatin is higher risk because it will take time fr yu and the cverhlder t wrk tgether effectively. Fr this reasn, we strngly recmmend that during this first year yu visit the cverhlder and that the cverhlder is audited by a cverhlder review specialist. Visits and audits Yu must develp a clear apprach t bth visits and cverhlder audits. Used in cmbinatin, these mnitring tls allw yu t satisfy yurselves that the cverhlder s activities are

Cde f practice 26 effectively reviewed. Visits and audits will need t be c-rdinated with the Llyd s brker and the cverhlder. Key cnsideratins in this area include the fllwing. A clear verall apprach fr syndicate visits and audits f cverhlders shuld be develped. The frequency f visits and audits shuld be based n the lead managing agent s wn risk assessment f the cntract f delegatin. In practice, binding authrities will nrmally be audited at regular intervals by cverhlder review specialists. Visits shuld be perfrmed by staff with adequate experience. Clear cnsideratin shuld be given t the areas t be cvered by any visit r audit. Fr example: underwriting, rating and aggregate expsures (if apprpriate); claims and reserving; management and financial standards; reprting business infrmatin; IT systems; and licensing, taxes and cmpliance. Audits perfrmed by cverhlder review specialists, the cst f which is shared by all managing agents f fllwing syndicates, will need t be prvided t the managing agents f fllwing syndicates and the Llyd s brker in gd time after they are cmpleted. If yu perfrm all the visits and audits, yu will need t agree with the managing agents f fllwing syndicates which reprts will be made available t them. Renewing cntracts f delegatin When deciding whether r nt t renew a cntract f delegatin, all managing agents shuld cnsider the fllwing. Hw prfitable the binding authrity is (and has been in the past). The type, class, quantity and quality f business accepted under the binding authrity in the previus year. Changes in market cnditins and the binding authrity s ptential prfitability in the cming year. The relevant licenses, permits, and errrs and missins insurance held by the cverhlder. The cverhlder s financial standing. Hw the cverhlder has administered and perated the binding authrity (including keeping t yur service standards). Significant changes t the cverhlder s r Llyd's brker s circumstances. Other prblems r ptential issues (fr example, arising frm any audit r underwriting visits, cmplaints r ptential litigatin r regulatry issues).