Introduction to Lloyd's: basic concepts and terms: coverholders, Lloyd's brokers and placing risk at Lloyd's
A managing agent may delegate to another company, including to a Lloyd’s broker, its authority to enter into contracts of insurance on behalf of a syndicate it manages. The recipient of the authority is known as a ‘coverholder’. The document setting out the terms of the coverholder’s delegated authority is known as a ‘binding authority’. Coverholders act as agent of the Lloyd’s managing agent (rather than as agent of the policyholder).
Generally, Lloyd’s underwriters do business only in ‘the Room’ in the Lloyd’s building in One Lime Street, and only with accredited Lloyd’s brokers. Lloyd’s underwriters do not deal direct with policyholders. Brokers who want to place business with a Lloyd’s syndicate generally come to the building to do so.
UK brokers must be authorised as a general insurance intermediary by the Financial Services Authority, and foreign brokers must be authorised by their equivalent regulatory authority. In addition, Lloyd’s brokers must meet certain accreditation requirements (covering such things as financial standing, management controls, and knowledge of the Lloyd’s market) set out in the Lloyd’s Brokers Byelaw. A Lloyd’s broker is not permitted also to be a managing agent or to be associated with a managing agent.
Coverholder arrangements and binding authorities may be arranged and administered with or without the involvement of a Lloyd’s broker. Some managing agencies also run direct sales companies, which do not use brokers.
Placing risk at Lloyd’s
The following is a brief synopsis of how risk is placed at Lloyd’s.
- A customer approaches a Lloyd’s broker (either directly or via an intermediary) with the details of a risk to be insured.
- The Lloyd’s broker approaches an underwriter to discuss premium, terms and conditions. If both parties remain interested, a proposal will be made to accept a percentage of the total risk. A number of underwriters may accept portions of one risk (either within Lloyd’s or outside).
- The Lloyd’s broker feeds back the proposal to the customer.
- If the customer wants to proceed, the Lloyd’s broker prepares a ‘slip’ with the details of the insurance, which is signed by each of the underwriters that have agreed to accept part of the risk (“subscription”).
- The Lloyd’s broker deducts its fee from the premium paid by the customer and pays the net amount to Lloyd’s which then allocates it to the syndicates.