Professional Negligence and Liability
Chapter 11
UNDERWRITING AGENTS: LLOYD’S AND GENERALLY
UNDERWRITING AGENTS: LLOYD’S AND GENERALLY
GLOSSARY OF TERMS USED IN CHAPTER 11
11.1 Active underwriter—the Name on a syndicate, employed by the syndicate’s managing agency, which has authority to write insurance and reinsurance risks on behalf of the syndicate. Binding authority—an authority typically granted to a broker or sub-broker enabling it to write a well-defined, limited class of business in which that broker has expertise. Combined agent—a member’s agent who also acts as the managing agent for a particular syndicate. Corporate member—an incorporated body permitted (since 1994 only) to write business in the Lloyd’s market. Direct Name (pre-1990)—a Name on a syndicate whose managing agent was also the Name’s member’s agent and with whom the Name was therefore in a direct contractual relationship. Equitas—the group of companies formed to reinsure all 1992 and earlier Lloyd’s syndicates in respect of their non-life business, in order to create a “firebreak” between the loss-making 1992 and prior years, and the 1993 and post years of account. Following underwriters/following market—the syndicates and companies who subscribe to a policy after the leading underwriter. Indirect name (pre-1990)—a Name on a syndicate whose managing agent was not also the Name’s member’s agent. Accordingly in the pre-1990 contractual arrangements at Lloyd’s such a Name would not be in a direct contractual relationship with the managing agent. Leading underwriter—the underwriter on behalf of a syndicate or company which is the first to write a proportion of the insurance or reinsurance business on a particular policy. The leading underwriter will normally be well-known and respected in the market for writing the particular type of business, encouraging the following market also to subscribe to the policy. Lloyd’s broker—the agent who places insurance or reinsurance business in the Lloyd’s market on behalf of the assured or reinsured, and who assists in the making of claims on behalf of the assured/reinsured. Lloyd’s Byelaws—rules created by the Council of Lloyd’s pursuant to the Lloyd’s Act 1982, which are legally binding on all members of Lloyd’s. Lloyd’s Minimum Standards and Principles—these were statements of business conduct, issued by the Council of Lloyd’s, which managing agents were expected to comply with to operate at Lloyd’s. They have been replaced by The Principles for doing business at Lloyd’s with effect from 1 January 2023. Lloyd’s Oversight Framework—is Lloyd’s system of oversight and market regulation. It has three interlinking elements: The Principles for doing business at Lloyd’s; Syndicate Categorisation; Interventions and Incentives. Lloyd’s syndicate—a group of individuals (Names) and/or companies who authorise a managing agent to write insurance and reinsurance business on their behalf for a calendar year. Each member of the syndicate is liable for its pre-agreed percentage of the syndicate’s business only, although in respect of that percentage the member accepts potentially unlimited liability. Managing agent—the agent authorised by each member of a Lloyd’s syndicate to write insurance and reinsurance business on behalf of members of the syndicate. Members’ agent—the agent who provides a Name with advice on his affairs at Lloyd’s generally, including which syndicates to join and the proportion of business to subscribe for on each syndicate, and who monitors and updates the Name on the performance of the syndicates to which he has subscribed. Name—an individual who is a member of Lloyd’s and who writes insurance and reinsurance business in a Lloyd’s syndicate. The Principles for doing business at Lloyd’s—set the fundamental responsibilities expected of all managing agents at Lloyd’s. They are designed to support the market’s overall performance, capital strength and financial and reputational credibility. Probable maximum loss—a percentage applied to a particular risk based on the proportion of loss which is likely to be suffered if a claim is made. Reinsurance to close, or RITC—the reinsurance effected by a syndicate, normally two years after the end of the relevant year of account, by which all of the remaining liabilities of the syndicate are reinsured in exchange for a fixed premium. Run-off—the process of reviewing, investigating and paying claims under policies of insurance and/or reinsurance once the syndicate for that calendar year or company has ceased writing new insurance and reinsurance business. The slip—the document containing the basic terms of the insurance or reinsurance sought, which the Lloyd’s broker takes around the Lloyd’s market obtaining percentage subscriptions to the policy from the leading underwriter and then the following market, until the policy is fully subscribed. Underwriting box—the place in the Lloyd’s underwriting room where the active underwriter receives offers of insurance or reinsurance business to subscribe to from Lloyd’s brokers. Underwriting pool—a group of insurance or reinsurance companies who (like the Names in a Lloyd’s syndicate) accept fixed proportions of insurance or reinsurance business written on behalf of the pool for a given period, normally a calendar year.I. GENERAL INTRODUCTION
1. Insurance underwriting in the London insurance market
11.2 The London insurance market was traditionally dominated by Lloyd’s of London, but today comprises a broad mixture of insurers, from small specialist insurance companies to large multinational companies underwriting both direct insurance and reinsurance business. Lloyd’s still commands a significant role within this structure. This chapter therefore considers the duties of underwriting agents both in the Lloyd’s market and, separately, in the non-Lloyd’s London insurance market. For further detail, see specialist works such as J Burling, Lloyd’s: Law & Practice (London 2013). 11.3 The Society and Corporation of Lloyd’s are not themselves insurance companies, but rather the primary regulators of the insurance business that is underwritten by the members of Lloyd’s who provide the capital base for the underwriting of insurance in the Lloyd’s market.1 Until 1994 these members were all individuals known as “Names”, who underwrote insurance on their own account through Lloyd’s underwriting agents. Such Names undertook personal liability for their individual share in each and every risk underwritten on their behalf by their underwriting agent(s). That personal liability was unlimited. Since 1994, however, Lloyd’s has permitted incorporated bodies to underwrite through Lloyd’s agents and, in contrast to individual Names, such corporate capital providers have limited liability.2 A particular Lloyd’s syndicate may therefore be made up of a combination of individual Names and corporate members. The overall capacity of Lloyd’s is split between personal and corporate underwriters, with approximately ten per cent being provided by individual Names and 90 per cent by corporate members as at 2015.3 However, individuals can no longer be elected to unlimited liability membership, and the number of individual Names is contracting year on year.4 11.4 One of the distinctive features of the London insurance market is that a large proportion of insurance is underwritten on a subscription basis, such that each risk is shared between a number of different insurers, each of whom “subscribes” for a small percentage of the risk. Where one or more of the subscribing insurers is a Lloyd’s syndicate, that syndicate’s share is therefore further divided between the Names and the corporate members that make up the syndicate. 11.5 The London insurance market is also a truly international market. Much of the business underwritten in the market has no direct connection with the UK other than the fact that the risk is placed in London. Many international insurers maintain offices in London and most significant insurers around the world will at some stage participate in the market, either accepting insurance and reinsurance risks or seeking reinsurance from the market. 11.6 These features of the London insurance market have led to the widespread use of underwriting agents. In the case of Lloyd’s such agents are mandatory,5 but in many types of insurance, underwriting agents (and very often also insurance brokers or intermediaries) underwrite the risks on behalf of a number of insurers who have agreed to accept a specified share of all risks underwritten by the agent. These arrangements are extremely common where the risks are large in number but relatively modest in terms of insured value, for example motor insurance and domestic property insurance. A further reason for such arrangements is that often a particular broker or underwriting agent will have an existing client base that the insurers wish to capture. The granting of underwriting authority to such a broker or agent for some or all of the insurance cover that those clients require will enable the broker or agent to offer a fast, efficient and cost-effective service to his clients rather than having to seek the insurers’ agreement to every risk. 11.7 The use of underwriting agents is not confined to the London insurance market. Their use is widespread in the USA where they are often described as managing general agents, or MGAs. London-based insurers also appoint underwriting agents in foreign countries. Disputes concerning underwriting agents appointed in foreign countries can give rise to complex issues as to differences in business practices, conflict of laws and jurisdiction.2. Underwriting agents at Lloyd’s
11.8 Insurance business at Lloyd’s is conducted through groupings of individual Names and corporate members. These groupings are called syndicates. Names and corporate members join a syndicate for a particular year of account, conventionally a full calendar year. Having joined a syndicate for a particular year of account and agreed the proportion of the syndicate’s business to be accepted by it, the Name or corporate member will then be bound by its specified percentage of all risks accepted by that syndicate during that year of account. When that year of account comes to an end the business of the syndicate is run-off (through processing and payment of claims made against the risks accepted during the relevant year) until it is “closed” by means of a “reinsurance to close”.6 Normally that reinsurance will occur at the end of the third year after the commencement of the particular year of account and will conventionally be underwritten by the next year of account of the same syndicate.
Figure 1. The three-year reinsurance to close (RITC) at Lloyd’s.