LM3-2024

London
Market
underwriting
principles
LM3
2024
STUDY
TEXT
Liiba
London &
International
Insurance
Brokers'
Association
London Market
underwriting
principles
LM3: 2024 Study text
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2 LM3/October 2023 London Market underwriting principles
© The Chartered Insurance Institute 2023

All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part
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Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for
any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The
publication has been produced solely for the purpose of examination and should not be taken as definitive of the
legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 849 4
Electronic edition ISBN: 978 1 80002 850 0
This edition published in 2023
Author
Charlotte Warr, LLB (Hons) FCII, Solicitor, Chartered Insurer, Senior Associate of the Association of
Average Adjusters.
Charlotte is a highly experienced claims adjuster with significant knowledge of both the Company and Lloyd’s
Markets as well as both marine and non-marine classes of business.
Charlotte has authored articles for technical journals and has spoken on a variety of insurance, legal and training
subjects around the world.
Reviewer (first edition)

Benjamin Baker, MBA.
Acknowledgements
The author wishes to express thanks to:
• Geraldine Wright (LIIBA);
• Lindsey Davies (Lloyd’s);
• Mark Williams (Lloyd’s);
• Mel Goddard (Lloyd’s Market Association); and
• Nigel Ralph (Lloyd’s).
The CII gratefully acknowledges the authors and reviewers of other CII study texts in respect of any material drawn
upon in the production of this study text.
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
www.handbook.fca.org.uk/handbook) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts
where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for
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possible in every instance and welcome any information that would enable us to do so.
Typesetting, page make-up and editorial services CII Learning Solutions.
Printed and collated in Great Britain.
This paper has been manufactured using raw materials harvested from certified sources or controlled wood
sources.
3
Using this study text

Welcome to the LM3: London Market underwriting principles study text which is designed
to support the LM3 syllabus, a copy of which is included in the next section.
Please note that in order to create a logical and effective study path, the contents of this
study text do not necessarily mirror the order of the syllabus, which forms the basis of the
assessment. To assist you in your learning we have followed the syllabus with a table that
indicates where each syllabus learning outcome is covered in the study text. These are also
listed on the first page of each chapter.
Each chapter also has stated learning objectives to help you further assess your progress
in understanding the topics covered.
Contained within the study text are a number of features which we hope will enhance
your study:
Activities: reinforce learning through Key points: act as a memory jogger at

practical exercises. the end of each chapter.
Be aware: draws attention to important Key terms: introduce the key concepts
points or areas that may need further and specialist terms covered in each
clarification or consideration. chapter.
Case studies: short scenarios that will Refer to: Refer to: extracts from other CII study
test your understanding of what you texts, which provide valuable information
have read in a real life context. on or background to the topic. The
sections referred to are available for you
to view and download on RevisionMate.
Consider this: stimulating thought Reinforce: encourages you to revisit a

around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.
Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.
In-text questions: to test your recall of On the Web: introduce you to other
topics. information sources that help to
supplement the text.
At the end of every chapter there is also a set of self-test questions that you should use to
check your knowledge and understanding of what you have just studied. Compare your
answers with those given at the back of the book.
By referring back to the learning outcomes after you have completed your study of each
chapter and attempting the end of chapter self-test questions, you will be able to assess your
progress and identify any areas that you may need to revisit.
Not all features appear in every study text.
Note
Website references correct at the time of publication.
5
Examination syllabus
London Market
underwriting principles
Purpose
This unit enables a student to build on introductory knowledge of the London Market (typically from
studying units LM1 and LM2) by developing knowledge and understanding of:
• the underwriting disciplines within the London Market;
• key elements of the cycle, including business planning and obtaining capacity, pricing and the
importance of putting together a contract which is both clear and certain;
• the opportunities and challenges posed by using different distribution channels such as delegated
underwriting.
Summary of learning outcomes Number of questions in the

examination*
1. Understand the framework within which business is conducted in the London 5

Market.
2. Understand the role, purpose and implications of policy wording in practice. 16
3. Understand the role and importance of business planning and capital setting 18
in the London Market.
4. Understand the pricing of risk at an individual and at a portfolio level. 12
5. Understand the various methods of writing business and distribution. 24
* The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual
number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within
the range plus or minus 2 of the number indicated.
Important notes
• Method of assessment: 75 multiple choice questions (MCQs). 2 hours are allowed for this
examination.
• This syllabus will be examined from 1 January 2024 to 31 December 2024.
• Candidates will be examined on the basis of English law and practice unless otherwise stated.
• This PDF document is accessible through screen reader attachments to your web browser and has
been designed to be read via the speechify extension available on Chrome. Speechify is an
extension that is available from https://speechify.com/. If for accessibility reasons you require this
document in an alternative format, please contact us on [email protected] to discuss your
needs.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
Published October 2023

©2023 The Chartered Insurance Institute. All rights reserved. LM3
1. Understand the framework within which Reading list

business is conducted in the London
Market. The following list provides details of further
1.1 Explain the framework within which business is reading which may assist you with your
conducted in the London Market. studies.
1.2 Explain the duties of the intermediary during the Note: The examination will test the
creation of a contract. syllabus alone.
2. Understand the role, purpose and The reading list is provided for guidance
only and is not in itself the subject of the
implications of policy wording in practice. examination.
2.1 Explain the importance of knowing the identity of the
contracting parties. The resources listed here will help you
keep up-to-date with developments and
2.2 Explain the importance of policy wording.
provide a wider coverage of syllabus topics.
2.3 Explain the various ways in which policy wordings
can be constructed.
CII study texts
2.4 Explain the importance of viewing the complete London Market underwriting principles.
contract wording.
London: CII. Study text LM3.
3. Understand the role and importance of Books and eBooks
business planning and capital setting in Bird’s modern insurance law. 12th ed. John
the London Market. Birds. Sweet and Maxwell, 2022.
3.1 Explain the purpose and effect of the business
planning process. Drafting insurance contracts: certainty,
3.2 Explain the importance of ongoing monitoring and
clarity, law and practice. Christopher Henley.
reporting on the business plan. London: Leadenhall press, 2010.
3.3 Explain how capital setting supports the writing of ‘Insurance intermediaries: underwriting
business. agents’ in Colinvaux’s law of insurance. 13th
3.4 Explain the technical account. ed. Prof. Robert Merkin. London: Sweet &
Maxwell, 2023.
4. Understand the pricing of risk at an
Insurance theory and practice. Rob Thoyts.
individual and at a portfolio level.
Routledge, 2010.*
4.1 Explain basic statistical theory.
4.2 Explain the principles of constructing an insurance Lloyd’s: law and practice. 1st ed. Julian
rate. Burling. Oxon: Informa Law, 2013.
4.3 Explain the use of realistic disaster scenarios and Pricing in general insurance. Pietro Parodi.
catastrophe models. CRC Press, 2015.*
5. Understand the various methods of The role of agents in insurance business.
writing business and distribution. Chapter – MacGillivray on insurance law:
5.1 Explain the different types of placement. relating to all risks other than marine. 15th
5.2 Explain the different methods of distribution. ed. Sweet & Maxwell, 2022.
5.3 Explain the different types of delegated underwriting. Journals and magazines
5.4 Explain the stakeholders' roles and responsibilities. The Journal. London: CII. Six issues a year.
5.5 Explain the advantages and disadvantages of Post magazine. London: Incisive Financial
various methods of writing business for the Publishing. Monthly. Contents searchable
stakeholders involved.
online at www.postonline.co.uk.
5.6 Explain the management and controls around the
different methods of placement. Reference materials
Concise encyclopedia of insurance terms.
Laurence S. Silver, et al. New York:
Routledge, 2010.*
Dictionary of insurance. C Bennett. 2nd ed.
London: Pearson Education, 2004.
* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).
Published October 2023 2 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
7
Examination guide
If you have a current study text enrolment,
the current examination guide is included
and is accessible via Revisionmate
(ciigroup.org/login). Details of how to access
Revisionmate are on the first page of your
study text. It is recommended that you only
study from the most recent version of the
examination guide.
Exam technique/study skills

There are many modestly priced guides
available in bookshops. You should choose
one which suits your requirements.
Published October 2023 3 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
9
LM3 syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Understand the framework within which business is conducted in the London Market.
1.1 Explain the framework within which business is conducted in the 1A, 1B, 1C
London Market.
1.2 Explain the duties of the intermediary during the creation of a 1D
contract.
2. Understand the role, purpose and implications of policy wording in practice.
2.1 Explain the importance of knowing the identity of the contracting 2A
parties.
2.2 Explain the importance of policy wording. 2B
2.3 Explain the various ways in which policy wordings can be 2A, 2B, 2C
constructed.
2.4 Explain the importance of viewing the complete contract wording. 2C
3. Understand the role and importance of business planning and capital setting in the
London Market.
3.1 Explain the purpose and effect of the business planning process. 3B
3.2 Explain the importance of ongoing monitoring and reporting on 3C
the business plan.
3.3 Explain how capital setting supports the writing of business. 3A
3.4 Explain the technical account. 3D
4. Understand the pricing of risk at an individual and at a portfolio level.
4.1 Explain basic statistical theory. 4A
4.2 Explain the principles of constructing an insurance rate. 4B
4.3 Explain the use of realistic disaster scenarios and catastrophe 4B
models.
5. Understand the various methods of writing business and distribution.
5.1 Explain the different types of placement. 5A
5.2 Explain the different methods of distribution. 5B
5.3 Explain the different types of delegated underwriting. 5B, 5C
5.4 Explain the stakeholders' roles and responsibilities. 5B, 5C
5.5 Explain the advantages and disadvantages of various methods 5B, 5C
of writing business for the stakeholders involved.
5.6 Explain the management and controls around the different 5A
methods of placement.
11
Exam guidance and

accessibility
Before you begin the study text, we would encourage you to read about how to approach
the exam.
Study skills
While the text will give you a foundation of facts and viewpoints, your understanding of the
issues raised will be richer through adopting a range of study skills. They will also make
studying more interesting! We will focus here on the need for active learning in order for you
to get the most out of this core text.
Active learning is experiential, mindful and engaging
• Underline or highlight key words and phrases as you read – many of the key words
have been highlighted in the text for you, so you can easily spot the sections where key
terms arise; boxed text indicates extra or important information that you might want to be
aware of.
• Make notes in the text, attach notes to the pages that you want to go back to – chapter
numbers are clearly marked on the margins.
• Make connections to other CII units – throughout the text you may find ‘refer to’ boxes
that tell you the chapters in other books that provide background to, or further information
on, the area dealt with in that section of the study text.
• Take notice of headings and subheadings.
• Use the clues in the text to engage in some further reading (refer to the syllabus
reading list) to increase your knowledge of a particular area and add to your notes –
be proactive!
• Relate what you’re learning to your own work and organisation.
• Be critical – question what you’re reading and your understanding of it.
Five steps to better reading
• Scan: look at the text quickly – notice the headings (they correlate with the syllabus
learning outcomes), pictures, images and key words to get an overall impression.
• Question: read any questions related to the section you are reading to get a feel for the
subjects tackled.
• Read: in a relaxed way – don’t worry about taking notes first time round, just get a feel for
the topics and the style the book is written in.
• Remember: test your memory by jotting down some notes without looking at the text.
• Review: read the text again, this time in more depth by taking brief notes and
paraphrasing.
On the Web
Visit here for more detail on study skills: www.open.ac.uk/skillsforstudy.
Note: website reference correct at the time of publication.
Exam guidance
Answering multiple-choice questions
When preparing for the examination, candidates should ensure that they are aware of what
typically constitutes each type of product listed in the syllabus and ascertain whether the
products with which they come into contact during the normal course of their work deviate
from the norm, since questions in the examination test generic product knowledge.
Some questions are simply questions of fact, whereas others may be more progressive in
nature, requiring reasoning to determine the correct option or, perhaps, being answerable by
a process of elimination. Whatever the question, read it carefully to identify what it is really
asking. Do not assume that you 'know' what it is asking, even if the question is on a topic
about which you feel very confident; answer the question exactly as it is asked. Also, look
out for the occasional negative question (Which of the following is not …?).
Try to answer all of the questions. While there is no substitute for a good grasp of the subject
matter, and you cannot expect to pass the examination purely on guesswork, you do not lose
marks for giving a wrong answer!
You can find more information on the specific unit in the exam guide (available on the unit
page on the CII website and on RevisionMate).
On the Web
You can find more on preparing for your exam by visiting: https://www.cii.co.uk/learning/
qualifications/assessment-information/before-the-exam/.
Accessibility
The CII has produced a policy and guidance document on accessibility and reasonable/
special adjustments. The purpose of this is to ensure that you have fair access to CII
qualifications and assessments.
On the Web
The ‘Qualifications accessibility and special circumstances policy and guidance’ document
can be found here: https://www.cii.co.uk/media/10129005/cii-qualifications-accessibility-
and-special-circumstances-policy-and-guidance.pdf.
13
Introduction
LM3 London Market underwriting principles builds on knowledge students will typically have
acquired in LM1 London Market insurance essentials and LM2 London Market insurance
principles and practices. When taken with LM1 and LM2, it forms the Certificate in London
Market Insurance.
Refer to
Your LM3 enrolment includes access to the latest editions of the LM1 and LM2 study texts
via RevisionMate
We begin by exploring the London Market and some of the challenges it faces in remaining
competitive. We consider the vital role of brokers and other types of intermediary, and the
various ways business can be written in London to ensure the widest possible access to
risks. We also examine the relative risk involved once authority is delegated.
The importance of the business planning process is discussed in some detail, as well as the
expectations of investors and other stakeholders such as customers, employees, regulators
and tax authorities.
Finally, the deal itself is considered, including the importance of setting the price for the risk
presented, and capturing the agreement between the parties in an unambiguous contract.
The unit intends to equip new joiners with the tools and knowledge to be part of a vibrant,
relevant and meaningful market, which has its place in the international insurance
community for years to come. This means furnishing them with the skills not only to make a
good deal but to understand fully the deal they have made.
15
Contents
1: The framework of business
A Global and domestic markets 1/2
B Sources of capital 1/6
C Market regulation 1/10
D Role of the intermediary 1/27
2: The role of policy wording

A Who’s who in the creation of a contract? 2/2
B Why is the contract so important and how should it be constructed? 2/8
C Contract interpretation 2/20
3: Business planning and capital setting

A Using your capital 3/2
B Creating the business plan 3/7
C Monitoring and reporting on the plan 3/11
D Accounts 3/15
4: Pricing
A Statistical tools for the underwriter 4/2
B Pricing 4/11
5: Distribution
A Different ways of writing business 5/2
B Distribution methods 5/8
C Delegated authority management 5/19
Self-test answers i
Legislation vii
Index ix
Chapter 1
The framework of
1
business
Contents Syllabus learning
outcomes
Introduction
A Global and domestic markets 1.1
B Sources of capital 1.1
C Market regulation 1.1
D Role of the intermediary 1.2
Key points
Question answers
Self-test questions
Learning objectives
After studying this chapter, you should be able to:
• explain the framework within which business is conducted; and
• explain the duties of brokers and other intermediaries during the creation of a contract.
Chapter 1 1/2 LM3/October 2023 London Market underwriting principles
Introduction
This unit is intended to build on the knowledge typically acquired in LM1: London Market
insurance essentials and LM2: London Market insurance principles and practices. Some of
the topics already introduced in LM1 and LM2 will be considered in more detail, particularly
those relating to the success of an underwriting business such as planning, capital setting,
pricing, contract wordings and distribution methods. Additionally, some of the topics form an
introduction to other modules within the CII framework such as M80: Underwriting practice
and M66: Delegated authority.
Students are encouraged to consider businesses they are familiar with in the insurance
market as examples of areas covered in this unit. Various activities and topics for further
research and consideration have been included for students’ use.
This first chapter provides the context in which insurance business is conducted in London,
including both national and international regulation. Before discussing this, however, the size
and scale of the London Market on the world stage is considered.
Key terms
This chapter features explanations of the following terms and concepts:
Byelaws Client money Domestic market Establishment

Financial Conduct Global market ICOBS Intermediaries
Authority
Market regulation Principles for doing Prudential Services business
business at Lloyd's Regulation Authority
Senior Managers Solvency II Sources of capital Trust accounts
and Certification
Regime (SM&CR)
UK Corporate Underwriting
Governance Code platform
A Global and domestic markets

A1 What do the terms ‘global’ and ‘domestic’ mean in an
insurance market?
A domestic market is one that serves customers within its own territory, who present both
large and small risks to be insured. The term ‘domestic market’ should not be confused with
insuring ‘domestic risks’, which can be interpreted as homeowner and household risks.
A global market is one that sources its business not only from the territory in which it is
located but from beyond its borders. A truly global market is one whose customers come
from many countries. However, as we will see, although a market’s appetite might be for
international customers, those customers might not choose or be allowed to choose an
overseas insurer.
So, what is the London Market? Is it a global or domestic market? The London Market Group
and the Boston Consulting Group’s joint report, London Matters, published in 2020 and
updated in 2022 (called the Why London Matters report), shows that London is the largest
global hub for commercial and specialty risk.
Chapter 1 The framework of business 1/3
Chapter 1
Some interesting statistics from Why London Matters 2022 include:
• In 2020, US$121bn of gross written premium (GWP) came into the London Market.
• The nearest competitors identified in the 2020 report had less than half of that amount:
– Bermuda – US$55bn;
– Zurich – US$25bn; and
– Singapore – US$11bn.
• London has maintained its share of the global market overall, with 7.6% of global gross
written premium in 2020.
A1A Geographical sources of business
The Why London Matters report shows a change in the sources of business coming into
London (both Lloyd's and company market) between the years 2010 and 2020.
Region 2010 2020
North America 30% 38%
UK 37% 32%
Central and South America 6% 5%
Australasia 2% 4%
Asia 9% 7%
Europe and Middle East 15% 12%
Africa 1% 2%
The International Underwriting Association of London (IUA) – the trade body for the London
company market – defines 'company market' as 'non-Lloyd's international and wholesale
insurance and reinsurance companies operating in the London Market'.
The IUA’s 2022 report, based on 2021 data, shows that the split of risk location was
as follows:
Location Percentage of 2021 premium
UK/Ireland 55
USA/Canada 20
Latin/South America 4
Europe (not UK/Ireland) 11
Asia 6
Africa 2
Australasia 2
Lloyd’s also provides a geographical split of client locations which is, perhaps surprisingly, on
first glance quite different. The table below shows the figures for 2020, as a clear regional
split was not provided as part of the 2021 or 2022 results:
Location Percentage of 2020 premium
USA/Canada 53
Other Americas 6
UK 12
Rest of Europe 15
Central Asia and Asia-Pacific 10
Rest of the World 4
As can be seen quite easily, the Lloyd’s customer base in the USA and Canada is far higher
than it is for the company market. Some of this is related to distribution networks and will be
discussed later in the study text. Consider what other reasons might be. Might it be because
quite a lot of the companies in the company market are in fact USA-based, so those risks are
written by their US arm and not recorded as London office premium?
Activity
If you work for an insurer or broker, see if you can find out more about the geographical
splits of your clients’ locations. If you work for an organisation that has both a Lloyd’s
syndicate and a company, see if the splits are the same or different across the two
platforms and whether they mirror the market-related statistics.
A2 Why might a client choose a domestic market over a

global market for insurance?
It might be that a client already knows insurers within its own domestic market, feels they
have served it well historically, and wishes to be loyal to them. Additionally, it might be that
the broker advising the client considers the domestic market suitable for the client’s needs. It
might also be possible that the broker does not consider whether another market is more
suitable and does not even offer that option to the client. Local markets can in many cases
also be more responsive to cultural and linguistic needs.
What is seen quite a lot in the London Market is a placement which is partially executed for
the client in the domestic market and then completed in the London Market. This may be
done for a number of reasons, including a desire to show some loyalty to the local market,
but having to recognise that the local/domestic market might not have the appetite or
capacity to handle the whole risk.
Often the domestic insurer will be a leader and the global placement (which might be the
larger share) will be following the decision of the leader in another country.
A3 Why might the client have no choice about using the

domestic market?
In most if not all countries, and in each state in the USA, there are insurance regulators
which will grant permission for insurers to write risks located in that country or state. Some
regulators are only prepared to grant permission to write risks to those insurers which are
local or domestic, rather than located overseas. Also, in some countries there have
historically been state or national insurers or reinsurers with which business, or at least part
of the business, had to be placed. This latter scenario is becoming less common, as
insurance markets open up around the world and as the ability to trade across
borders grows.
The requirement to use state or national insurers has historically stifled competition in certain
markets such as those in Latin America. Yet, as can be seen by the opening up of
marketplaces in Latin American countries, a more competitive marketplace is being
encouraged, and London Market insurers are already taking their place in those areas.
However, the London Matters research highlighted that London continues to see its share of
emerging market business decline, so efforts need to continue to prevent a further slide.
Lloyd’s has set up underwriting platforms in a number of countries such as:
China
Lloyd’s created a wholly owned subsidiary called Lloyd’s Reinsurance Company (China) Ltd,
which was approved to start writing reinsurance business in 2007. Direct insurance (non-life)
was added to the permission, and in 2010 the business name was changed from Lloyd’s
Reinsurance Company (China) Ltd to Lloyd’s Insurance Company (China) Ltd. The revised
permissions came into effect in 2011. Lloyd’s now has branches in both Shanghai and
Beijing. The company operates through a number of underwriting divisions, each of which
relates to one Lloyd’s managing agent.
On the Web
www.lloyds.com/en-cn/lloyds-around-the-world/home.
Singapore
This platform uses a different model and looks like a mini Lloyd’s in that a number of Lloyd’s
syndicates have set up service companies to write business for them in Singapore. There
Chapter 1
are no restrictions imposed by the local regulators about the type of business that can be
written, or whether brokers are used or not, but service companies must be mindful of the
authority they have been given by the syndicate.
Reinforce
A service company is a sister company of the syndicate and managing agency, whose
authority from the syndicate is given via a binding authority.
Dubai
The platform in Dubai is similar in structure to Singapore’s in that service companies operate
on behalf of the syndicates, and have no barriers regarding where they can accept business
from (other than those imposed on their backing syndicates, of course).
Be aware
Some of the Lloyd's markets new 'syndicates in a box' have been set up to operate from
Dubai rather than London.
Activity
Use these links to find out more about what is happening in the Lloyd’s Market.
Lloyd’s having an office in Colombia: www.lloyds.com/en-co/lloyds-around-the-world/
home.
Lloyd’s presence in Mexico: www.lloyds.com/lloyds-around-the-world/americas/mexico.
Lloyd’s obtaining a licence to write business in India, which comes at a time when the
Indian market is becoming more open to foreign investors: www.lloyds.com/en-in/lloyds-
around-the-world/home.
Consider what is happening in your own organisation. Has the location of your head office
changed, maybe because of Brexit? Are new clauses being issued to deal with certain
key topics?
Insurers based in London have to ensure that any overseas risks they accept are within the
terms of the licences they have to trade in those countries. Licensing and regulation were
introduced in LM2 and the following points are provided as a reminder:
• Companies have to obtain their own permissions individually to accept risks in various
territories. This might involve setting up branch offices. They then have to ensure that all
of the requirements relating to the permission are maintained such as reporting, filing of
taxes etc. In contrast, Lloyd’s obtains, manages and monitors the licences and
permissions centrally, and does the vast majority of the reporting and tax filing required to
satisfy those licences. As a result of this central licensing, Lloyd’s is understandably
concerned that nothing is done by one syndicate within the Market that would jeopardise
the existence of a licence for the whole Market.
• There are various types of permission that can be granted by the regulators and, of
course, the option of no permission at all. The permission might be that only reinsurance
may be written by overseas insurers, or that both direct and reinsurance may be written.
In the USA the permission is given on a state-by-state basis and is not always the same.
Permission can be granted as an admitted carrier, which means that the insurer is on a par
with the true domestic market both in terms of opportunities and applicable regulation (e.g.
filing rates and forms with the local regulator).
Be aware
Up until recently Lloyd's had admitted status in Kentucky, Illinois and the US Virgin
Islands, as well as being a surplus lines carrier. However, these statuses have now been
given up as the additional regulatory burden of being an admitted carrier was not
counterbalanced with additional access to business.
Alternatively, a carrier can have excess or surplus status which means that it is operating as
an overseas market in which risks can be placed. If we think about the concept of exporting
as offering something for sale overseas, then London is effectively exporting insurance.
Risks can only be presented to the excess or surplus lines market if they fall within an
exemption, or have been otherwise presented to the admitted market which is, for any
reason, unwilling or unable to write them. The rules are subtly different for each state, but it
is important to understand that it is not only exotic or unusual risks that can fall within the
surplus lines market but quite ordinary risks, which perhaps because of their size or
complexity, are not within the appetite of the local market.
Question 1.1
In what practical way does the Lloyd's market differ from the company market in the
obtaining and management of international trading licences?
a. The licences for companies are managed centrally by the IUA but syndicates have □
to manage their own licences.
b. There is no practical difference. □
c. The licences for syndicates are managed centrally by Lloyd's but companies have □
to manage their own licences.
d. Companies have to report more frequently than syndicates. □
A4 How does the London Market compare to other markets
in terms of the source of its business?
Do the US and Asian markets have a more domestic client base or could they be called truly
global? According to the Insurance Information Institute, the top ten property and casualty
writers in the US market in 2022 were all US companies, although some also have a
presence in the London Market (see: www.iii.org/fact-statistic/facts-statistics-industry-
overview).
If, as the 2020 London Matters report suggested, London continues to grow below the
market average in Asia, Latin America and Africa, then that business is going elsewhere. It
could be to the domestic markets but this does not mean that those markets are global. The
2022 Why London matters publication sought to highlight that the concentration of expertise
in a small area and the breadth of the expertise linked to the appetite for leading new product
development still makes London a compelling choice for customers.
A5 Types of insurer operating in the London Market

The vast majority of the London Market is made up of three types of insurer. The first type is
insurance companies which tend to be limited liability companies (either private or public),
the second is Lloyd’s syndicates, and the third is mutuals. All these forms of insurers were
covered in LM1/LM2, so refer to these modules for a reminder.
B Sources of capital
All organisations need capital to operate and an insurance market is no exception. The
London Market is made up of different types of insurers and their capital bases are also
slightly different.
According to Lloyd’s Annual Report 2020, the capital providers backing the various
syndicates were as follows – although this information is not provided in the 2021/2 reports,
the balance is about the same:
Location Sources of capital by percentage
USA 17.3
Japan 10.2
UK 14.6
Europe 9.6
Chapter 1
Location Sources of capital by percentage
Bermuda 14.9
Private capital, limited and unlimited 9.2
Rest of the world insurance 10.5
Worldwide non-insurance industry 8.3
Middle and Far East 5.4
Be aware
In terms of the London company market, the capacity is generally provided by the
shareholders in those companies.
However, the geographic spread of companies coming into the market can be found by
looking at the IUA’s membership: bit.ly/2nwDqmw.
Ordinary membership is open to all international and wholesale insurance and reinsurance
companies which hold a licence from their own domestic regulator to transact business.
Although not a specific requirement, in practical terms most ordinary members are actually
operating in or via London. Members include insurers from countries all around the world
such as the USA, Australia, Europe, as well as the UK, albeit their shareholders could be
drawn from many other locations as well.
Many insurers in London actually operate over multiple platforms, for example having both
an insurance company and a Lloyd’s syndicate.
Activity
Consider the insurers you are aware of in the London Market (companies and syndicates)
and try and find at least one example where the backing is from a:
• UK insurer;
• Japanese insurer;
• US insurer;
• European insurer;
• Bermudan insurer;
• Middle Eastern/Far Eastern insurer (non-Japanese); and
• an insurer from anywhere else in the world.
The types of capacity coming into the Market continue to evolve as can be seen by the
percentage of Lloyd’s capacity defined as ‘worldwide non-insurance’. One example of this is
insurance-linked securities (ILS), which are now being used to provide capacity for Lloyd’s
syndicates. Normally ILS are used to transfer insurance risk to capital market investors
through products such as catastrophe bonds.
On the Web
Read this article to see how the previous CEO of Lloyd’s supported the use of ILS in the
Market: bit.ly/2pKN5Fq.
Another new innovation (already mentioned in the context of a presence in Dubai) in the
market is the Lloyd's 'syndicate in a box' vehicle, which seeks to bring in new investment by
adjusting the participation and entry criteria, while managing the risk to the rest of the market
by not reducing any standards of performance and oversight.
On the Web
Use this link to find out more about this structure and do some research to find out if any
are linked to your business if you work for an insurer, or whether you are doing business
with any as a broker: www.lloyds.com/join-lloyds-market/underwriter/syndicate-in-a-box.
The use of artificial intelligence is also allowing capital to access the market in a different
way. The Ki syndicate at Lloyd's uses AI to offer an automatic follow line in 36 different
classes, as long as the risk is led by certain nominated leaders. The same terms as the lead
are offered and the brokers can access the platform any time of day or night.
On the Web
Visit this page to find out more: www.ki-insurance.com.
B1 Why invest in the London Market?

For all providers of capacity into an insurance vehicle either as a shareholder in an insurance
company or as a member of Lloyd’s, the desired outcome is generally a return on equity
(which can also be called return on capital or return on investment).
Later in the study text we will look at the role of business planning and pricing in delivering
the hoped for return, but first we will briefly consider what the investors should be thinking
about when deciding to put their money into insurance rather than somewhere else.
The insurers take in premiums and can invest them. They then have to pay out claims
together with other costs of running a business. There is always a risk therefore that the
claims might outweigh the premiums obtained, and that the investments used for the
premiums also fail to perform. The second risk is managed partially by the regulators setting
expectations for the investment strategy to be used by insurers (which should preclude some
of the more volatile investments). The first risk is down to a mixture of underwriting and
pricing discipline and perhaps some luck in terms of the volume and size of claims,
particularly those involving natural catastrophes. Although luck has been mentioned,
sophisticated pricing and actuarial tools should serve to better identify the risks being
presented, including the size and frequency of potential claims.
Another benefit of providing capacity into Lloyd’s is that the investors (potential ‘names’ at
Lloyd’s) can use some of their investment assets twice, in that the collateral they have to put
up to support their underwriting can be provided by means of a bank guarantee, or similarly
secured on part of their investment portfolio. This means that they can hopefully get returns
from their Lloyd’s underwriting but also from their investment portfolio.
Consider this…
What interest rate could you obtain on your savings today? Does a low interest rate
encourage more investors into other things, including the insurance market?
Historically, the selling points that the London Market, and specifically Lloyd’s, could use to
attract investors were:
• double digit returns in a low single-digit interest environment;
• diversification of risk both by product and geography;
• the capital benefit of a mutual fund (i.e. the Central Fund);
• access to the licences;
• access to distribution – brokers and coverholders;
• access to the surplus lines markets in the USA;
• a unique face-to-face environment;
• underwriting and broker expertise, innovative thinkers well-known for breadth of product
offering; and
• a market that appears to be well regulated and governed.
So, what has changed in today’s market which means that investors have to be more
convinced to enter the market?
The various earlier London Matters reports highlighted the following issues as some of the
main challenges to London’s historic position.
Chapter 1
• Capacity and expertise overseas is increasing rapidly, which means that customers who
wish to buy locally can now do so more often. The 2020 report found that the gravitational
pull of business to regional locations has not transpired to the anticipated extent. The
London Market still has a written premium twice the size of its nearest competitor.
• London’s expense ratios are much higher than those of its counterparts because the
market acquisition and transaction costs are so much higher. This is a challenge when
risks are so price sensitive. However, a significant part of ongoing market modernisation
work is targeted at reducing the operational/transactional costs, in particular through
better use of systems.
• The regulatory burden on London Market insurers is relatively high and satisfying it raises
the insurer’s operational cost base. If the value of the regulation to the customer is
actually less than the price of satisfying it, then the price will rarely be competitive.
Historically, regulators outside the UK have been supportive in relation to matters such as
alternative capital. With the passing of the Financial Services and Markets Act 2023,
the UK regulators will have a new objective: to encourage the competitiveness and
growth of the whole UK financial services industry, including but not limited to the
London Market.
On the Web
Visit this page to read the London Market Group press release: lmg.london.
B2 Lloyd’s plans for the future

In May 2019, John Neal the CEO at Lloyd’s, unveiled a new marketwide strategy for the
future at Lloyd’s. It included six proposals which were open for consultation and feedback
and cover the insurance life cycle.
On the Web
To find out more, see The Future at Lloyd’s: bit.ly/2nY69TC.
For Lloyd’s Innovation Lab, see: www.lloyds.com/news-and-insights/lloyds-lab.
The impact of the COVID-19 pandemic led to a review of priorities for 2020–2022.
On 5 November 2020 Blueprint 2 was published, which set out the strategy for delivery of
substantial change in the market through digitalisation (so importantly not just change for the
Lloyd's market).
The key focus areas are:
• Re-engineering the way business is transacted in the market through all the aspects of
placement and processing of premiums and claims.
• Completing the processing of transactions within placement and claims in seconds and
minutes rather than weeks.
• Delivering significant cost savings through digitalisation of the marketplace, avoiding
errors and rework.
The vision for the digital marketplace falls into three areas:
• Open market placements, involving the Core Data Record, the updating of the Market
Reform Contract and the Digital Gateway.
• Delegated authority – through for example data standards, bordereaux management and
better use of technology.
• Claims – through for example data standards, and technology solutions to allow for faster
claims payments.
The second edition of the Interactive Guide was released on 28 January 2022, giving an
update on the solutions identified and including a roadmap for actions to be taken between
2022–2024.
Use this link to find out more: www.lloyds.com/about-lloyds/future-at-lloyds/what-we-will-
deliver.
Question 1.2
What are the three main areas of focus in Future of Lloyd's during 2020/2021?
a. Claims, back office and lead/follow. □
b. Placement, delegated authority and claims. □
c. Delegated authority, lead/follow and data. □
d. Data, delegated authority and back office. □
Activity
Find out what work is happening in your own organisation to prepare for the digital
transformation. For example, see if you can find out more about:
• Core Data Record.
• MRC v3.
• DA claims status tracker.
• Faster Claims Payment.
Make sure you keep up to date with the latest developments.
C Market regulation
The London Market is subject to a variety of different types of regulation.
UK regulation
The Financial Conduct Authority (FCA) has to authorise or regulate any firm or individual
carrying out what it terms a regulated activity in the UK, unless that firm/individual is exempt.
Insurers are in fact dual-regulated in that the FCA will be their regulator for the way they
conduct their business, and a second organisation, the Prudential Regulation Authority
(PRA), will regulate them for all prudential requirements. A new insurer applies for regulation
to the PRA first, as it acts as the lead regulator for all dual-regulated firms.
Brokers are only regulated by the FCA. However, Lloyd’s and the managing agents
operating within Lloyd’s are dual-regulated by the FCA and PRA, as well as by Lloyd’s own
internal market regulation.
Lloyd’s in the new regulatory regime
Bank of England
PRA FCA
Prudential Prudential and
regulation conduct
Conduct regulation
regulation
Society of Managing Members’ Lloyd’s

Lloyd’s agents agents brokers
EU regulation
As the UK has now left the EU, it is not directly regulated by the EU any more. However it is
important to understand that some topics – such as the Insurance Distribution Directive,
which originated from the EU – are actually part of UK law now so leaving the EU does not
render them ineffective.
The most obvious practical impact of the UK leaving the EU is that the UK financial services
sector is outside the various mechanisms within the EU itself such as passporting. The EU
uses the single licence system (also known as the single passport system) based on Home
State financial regulation.
What this means in practice is that if an insurer is granted authorisation by the regulator in
the country where its head office is located (also known as its Home State), the authorisation
Chapter 1
is good for the entire EU. The regulators in all the other EU countries will respect the
decision of the Home State and will not impose additional financial requirements. They may,
however, require insurers doing business in their territory to comply with local policyholder
protection requirements (known as ‘general good’ requirements). If so, they should inform
the insurer what those requirements are.
Authorised insurers may, therefore, carry out insurance business in or from a Member State
other than the one in which their head office is located on either:
• An ‘establishment’ basis – via a branch office or other physical presence (known as an
‘establishment’) in the other Member State; or
• A ‘services’ basis – directly from their Home State, on a cross-border basis.
Insurers doing business in these ways do not need to establish financial resources in the
other Member States where they are doing business, and are only required to comply with
the financial and solvency requirements in their Home State.
If a UK insurer now wishes to conduct insurance business within the EU, it will have to obtain
permission from the regulator of every country involved. Lloyd's obtains these permissions
centrally for the entire Lloyd's Market. Insurance companies must obtain
individual permissions.
When the UK originally left the EU, legislation was enacted to ensure that certain EU
concepts such as Solvency II could continue to apply. However with the passing of the
Financial Services and Markets Act 2023, those pieces of legislation are now revoked as the
UK will now be controlling its own financial services regulation totally independently of
EU influence.
The UK regulators have been given a new objective: to ensure the competitiveness and
growth opportunities for the UK financial services industry.
C1 UK insurers’ reaction to Brexit

C1A Insurance companies
The original date for the UK to leave the EU was 29 March 2019 but, as many policies incept
on 1 January, insurance companies had to decide during 2018 how to proceed to continue to
take advantage of the benefits of being in the EU. This was to avoid the risk of policies falling
out of regulatory control part way through the policy period. Although business might still
have been written by individuals physically based in London, what typically happened was
that the insurers whose ‘paper’ was used were changed to EU-domiciled insurers. Examples
include the following.
On the Web
Royal and Sun Alliance (RSA) chose Luxembourg: bit.ly/2oLmQBx.
C1B Lloyd’s
The situation for Lloyd’s was slightly more complicated as of course Lloyd’s is not an insurer
but a marketplace. However, Lloyd’s obtains all the regulatory approvals centrally.
Lloyd’s set up a Belgian-domiciled insurance company, Lloyd’s Insurance Company SA,
usually shortened to Lloyd’s Brussels or LBS. LBS is authorised to write risks in the EEA (all
EU countries, plus Liechtenstein, Norway and Iceland), as well as in Monaco and the UK.
Although LBS will be the insurer on the risks, there are some important things going on in the
background, including:
• The underwriting and claims activities will still be performed by personnel working for
syndicates/managing agents under an outsourcing agreement with LBS. Certain
managing agent personnel are seconded to the LBS UK branch to accept risks on their
behalf, although they are still physically with the managing agent and can write other risks
for the syndicate in the usual way.
• Every risk written is reinsured 100% back into the syndicates whose underwriters put
down the lines.
If a Lloyd’s underwriter is considering a risk which includes both EEA and non-EEA
exposures, then the MRC/slip should be split into two sections, one for each type. The
underwriter, if writing both parts, should use an LBS underwriting stamp for the EEA risks
and their normal syndicate underwriting stamp for the non-EEA risks.
It is therefore very important that the MRC/slip is clear about the splits between both
elements of the risk, particularly in relation to the regulatory and tax information.
Activity
If you work for a broker, find an EEA or mixed EEA and rest-of-the-world risk and see
which insurers have been used.
If you work for a company has it made any practical difference to what happens day to day
for you and your colleagues?
If you work for a syndicate, find out how many risks are being written using the LBS
stamp, and which underwriters are seconded to LBS. Ask them what that means in
practice. Use this link to find out more about how the secondment process works in
practice: www.lmalloyds.com/lma/News/LMA_bulletins/LMA_Bulletins/LMA22-005-
GD.aspx.
Find out more about Lloyd’s Brussels here: lloydseurope.com/.
Where Lloyd’s syndicates had outsourced underwriting to coverholders/managing general

agent’s under binding authority agreements, and the business being written included EEA
risks, all these parties had to be reauthorised by LBS and new agreements – called
Coverholder Appointment Agreements (CAA) – issued.
Later in this chapter we will consider a key EU Directive, the Insurance Distribution
Directive (IDD), which is part of UK law and so still effective.
Other international regulation
Most countries have systems for regulating their local insurance sector and an insurance
supervisory or regulatory authority. Details of insurance regulation vary from country to
country but, in essence, an insurer or broker will generally need permission from the local
regulator to commence trading in the country where it wishes to do business.
The key objectives of most systems of insurance regulation are the same, i.e. ensuring that:
• insurers have the financial security to meet policyholders’ claims;
• insurers treat policyholders fairly; and
• policyholders have access to an efficient insurance market.
For insurance brokers, also known as intermediaries, key objectives are to ensure a degree
of consumer protection through adequate professional standards and competency on the
one hand, and through ensuring that the broker buys adequate professional indemnity
insurance on the other. In recent years, there has been an increased level of coordination
between insurance regulators around the world through the activities of the International
Association of Insurance Supervisors (IAIS).
The IAIS was established in 1994 and has members in more than 120 countries. It seeks to
promote cooperation among insurance regulators, set guidelines for insurance supervision,
provide training to its members, and coordinate work with regulators in other financial sectors
and international financial institutions. The PRA is a member of the IAIS and Lloyd's is an
IAIS observer.
The UK regulators recognise the licensing that another national regulator gives to its local
insurers, which might then want to come and operate within the London Market, and will not
necessarily be required to undergo a re-registration process.
Lloyd’s specific regulation
Lloyd’s has cooperation agreements in place with both the FCA and PRA which seek to give
Lloyd’s a degree of self-regulation but avoid duplication of effort. The organisations will share
information relating to:
• authorisations;
• supervisions; and
• legal interventions.
Chapter 1
On the Web
Use this link to find the agreements if you want to read them in more detail:
www.lloyds.com/about-lloyds/regulation-of-lloyds.
Question 1.3
For what main reason are pieces of EU legislation such as the IDD still effective in
the UK after Brexit?
a. They stay in force because the UK was in the EU when they were first introduced. □
b. They are no longer in force. □
c. Companies in the UK can choose to comply with them if they want but they are not □
obligatory.
d. It was incorporated into UK law when it was introduced so that law remains in □
effect even after leaving the EU.
C2 UK regulation
C2A FCA/PRA
Both regulators have extensive books within which the detail of the various regulatory
requirements can be found.
Within the FCA Handbook the most important areas for the business of underwriting are:
• PRIN – Principles for Businesses; and
• ICOBS – Insurance Conduct of Business.
FCA PRIN
There are high level principles for businesses within the FCA Handbook which are applicable
to all regulated entities, not just insurers. The following are key words or phrases relating to
these principles:
• integrity;
• skill, care and diligence;
• risk management;
• adequate financial resources;
• market conduct;
• fair treatment of customers;
• information to be shared clearly;
• management of conflicts;
• suitable advice;
• protection of client assets;
• openness with the regulator; and
• delivering good outcomes for retail customers.
Consider this…
Consider these standards in relation to the underwriting process. Which ones definitely
apply and which might be less likely to apply? Consider how an auditor would know that
your organisation (either a broker or an insurer) treated customers fairly.
In later chapters, further reference will be made to these standards when considering
specific activities undertaken as part of the role of underwriter.
On the Web
Read this report of how an insurer spectacularly collapsed because of three directors
hiding the truth:
news.bbc.co.uk/1/hi/business/7059381.stm.
FCA ICOBS – Insurance Conduct of Business

The rules within this section apply to a number of activities related to both the underwriting of
risks and the handling of claims. There are rules concerning:
• distance marketing of products (e.g. over the internet or telephone);
• advising clients clearly to inform their purchasing decisions about which products
are suitable;
• advising clients about their right to cancel, and the effects of cancellation; and
• handling claims.
Alignment of the regulators' expectations with the CII Code of Ethics
The principles set by the FCA reflect the professional and ethical standards that should
guide those who work in insurance as they go about their day-to-day activities. However, it's
vitally important for an industry that relies on trust for customers to have confidence that they
are dealing with people who are putting their interests first; not because they have to, but
because they believe it's the right thing to do.
Organisations with a record of great customer service, treating every customer fairly and with
respect, build themselves a good reputation; those who don't won't be recommended to
other people.
The CII Code of Ethics provides members of the insurance and personal finance profession
with a framework in which to apply their role-specific technical knowledge in delivering
positive consumer outcomes. Under the fifth 'Core duty' within the Code, members are
required to: 'treat people fairly regardless of: age, disability, gender reassignment, marriage
and civil partnership, pregnancy and maternity, race, religion and belief, sex and
sexual orientation'.
Vulnerable customers
One important area that has been highlighted by the pandemic is the concept of vulnerable
customers and the fact that a customer might become temporarily vulnerable at any time
through factors such as illness or the circumstances they find themselves in.
On the Web
Use these links to find out more about the following:
The FCA's February 2021 guidance on the fair treatment of vulnerable customers:
www.fca.org.uk/publications/finalised-guidance/guidance-firms-fair-treatment-vulnerable-
customers.
The Consumer Duty Alliance resource library: consumerduty.org/helpful-resources/guides-
support.
FCA Consumer Duty

In July 2022 the FCA issued its final rules and guidance for the new Consumer Duty, which
relates to firms delivering good outcomes to their retail customers. The rules came into force
at the end of July 2023. The rules have also led to a new duty within the high level Principles
– number 12 on delivering good outcomes for retail customers.
There are four outcomes that are highlighted within the duty, none of which are totally new
but reinforce the regulator's perspective of how important it is to put customers' needs first.
The four outcomes relate to:
• Products and services.
• Price and value.
• Consumer understanding.
• Consumer support.
Chapter 1
From a practical perspective the regulators are looking for impacts that will include
the following:
• Ending inappropriate charges and fees.
• Making it as easy to change or cancel a product as it was to buy it.
• Providing helpful customer support, which is actually accessible.
• Timely, clear and accessible information.
• Products being provided that are fit for purpose for any customer.
• Focus on real needs of customers, including those who are vulnerable at all stages of
the process.
On the Web
For more information use this link: www.fca.org.uk/firms/consumer-duty.
Activity
If you are involved in consumer-type insurances, either as a broker, MGA or insurer, try
and speak to someone in your compliance team to find out more about what steps are
being taken, or will have to be taken to ensure compliance with the new requirements.
PRA Rulebook
Within the PRA Rulebook (Insurance) the most important standards are:
• allocation of responsibilities;
• conduct standards;
• fitness and propriety;
• senior insurance management functions; and
• Lloyd’s – special provisions.
PRA (Insurance) – allocation of prescribed responsibilities
This element of the PRA Rulebook requires firms to allocate each of the responsibilities in
the business, which fall within the Senior Management and Certification Regime (SM&CR)
and are known as prescribed responsibilities, to an appropriate person who satisfies the
regulatory criteria to perform that function.
PRA (Insurance) – conduct standards
The conduct standards set out by the PRA require the following actions to be taken (some of
which bear a strong resemblance to the FCA Principles for Businesses). However, not all
standards apply to all persons within the business.
Persons performing a key function have to:
• act with integrity;
• use skill, care and diligence; and
• be open with the regulator.
Be aware
A key function is defined as relating to risk management, compliance, internal audit,
actuarial, anything concerning the effective running of the firm, or anything else which is of
specific importance to the sound and prudent management of the firm.
If a key function is performed by a person who does not come under the category of a
notified non-executive director, all eight of the following have to be undertaken:
1. act with integrity;
2. use skill, care and diligence;
3. be open with the regulator;
4. control business effectively;
5. ensure business complies with regulation;
6. delegate only where appropriate and with oversight;
7. make appropriate disclosures to the FCA/PRA; and

8. protect the interests of current and future policyholders.
A non-executive director does not have to satisfy the fourth, fifth and sixth requirements.
Additionally, it is important to note that the PRA makes clear within this rule that the
provisions apply separately to both Lloyd’s itself and the individual managing agents.
PRA (Insurance) – fitness and propriety
Under this rule, firms must at all times make sure that persons performing key functions are
‘fit and proper’ – but what does ‘fit and proper’ actually mean?
The Rulebook indicates that firms should take into account whether a person has the
following in order to perform a key function effectively:
• the personal characteristics of good repute and integrity;
• an appropriate level of competence, knowledge and experience;
• the qualifications; and
• has undergone, or is undergoing, training.
Consider this…
What do you consider the key attributes of someone performing an important role within
your organisation? How do you think your professional qualifications will assist you in your
development within the business?
Do you think a criminal record should matter? Does it perhaps depend on the nature and
severity of the crime? The PRA certainly envisages that for certain roles criminal record
checks will be carried out both in the UK and abroad.
The final point to note is that the PRA expects individuals to be replaced should they not
be capable of performing their key function roles to the required standard, and it expects
to be notified in such cases.
C2B Senior Managers and Certification Regime (SM&CR)

SM&CR applies to both insurers and brokers/intermediaries.
The SM&CR has three key parts, each of which is outlined below, the:
• Senior Managers Regime;
• Certification Regime; and
• Conduct Rules.
Senior Managers Regime
Provisions under the regime include:
• Senior managers performing senior management functions (SMFs) need FCA or PRA
approval before taking up their role. (Remember that insurers are dual-regulated by the
FCA and PRA but intermediaries are only regulated by the FCA.)
• Both the FCA Handbook and the PRA Rulebook set out which roles are senior
management functions.
• Every senior manager needs to have a statement of responsibilities setting out which
aspects of the firm’s business they are responsible for managing. A management
responsibilities map shows details of reporting lines, including how SMFs have
been allocated.
• Some responsibilities given to senior managers are known as prescribed responsibilities.
There is a long list of prescribed responsibilities such as compliance with regulatory
requirements and training and professional development.
• Finally, there is a new duty of responsibility that requires senior managers to take
reasonable steps to prevent misconduct. It creates a third ground on which a senior
manager can be disciplined if misconduct occurs.
Chapter 1
Certification Regime
A new aspect under the SM&CR is the Certification Regime which will apply to employees
who are not senior managers but whose role means it is possible for them to cause
‘significant harm’ to the firm or its customers. These roles are called ‘certification functions’.
These people don’t need to be approved by the FCA or PRA but firms will need to check and
confirm (‘certify’), at least once a year, that they are ‘fit and proper’ to perform their role. The
firm will have to consider their honesty, integrity and reputation, as well as whether they have
the necessary qualifications, training, competence and personal characteristics to perform
the role.
The types of role which would fall into this category include those involving contact with
clients or oversight of client monies.
Conduct Rules
The FCA has high-level standards of behaviour that apply to almost all employees who
undertake financial services activities. Some conduct rules apply to all employees, while
others only apply to senior managers.
The conduct rules are intended to drive up standards of individual behaviour in financial
services. They represent a meaningful change in the standards of conduct the FCA expects
from those working in the industry. By applying the conduct rules to a broad range of staff it
aims to improve individual accountability and awareness of conduct issues across firms.
The FCA requires firms to train their staff so they know how the conduct rules apply to them.
Firms must also notify the FCA when they’ve taken formal disciplinary action against a
person for breaching one of the rules.
The conduct rules fall into two tiers, those applicable to everyone and those only applicable
to senior managers.
The individual conduct rules state that individuals must:
• act with integrity, due skill, care and diligence;
• be open and cooperative with the FCA, PRA and other regulators;
• pay due regard to the interests of customers and treat them fairly; and
• observe proper standards of market conduct.
The senior manager conduct rules state that they must take reasonable steps to
ensure that:
• the business for which they are responsible is controlled effectively and complies with
relevant requirements and regulatory standards;
• any delegation of responsibilities is to an appropriate person and overseen effectively;
and
• information about which the FCA or PRA would reasonably expect notice is disclosed
appropriately.
These conduct rules are not new. The FCA and PRA have had them, or something similar, in
place for some time.
Question 1.4
What is the best definition for a certification function under SM&CR?
a. A role that is not senior management but whose holder could cause significant □
harm to the firm or customers.
b. A role that is senior management but not board level. □
c. Any role in the organisation other than reception or ancillary staff. □
d. Any non-executive role. □
Be aware
The passing of the Financial Services and Markets Act 2023 has brought the regulation of
financial services back within UK control again, and the FCA and PRA as regulators will
have a new objective to ensure the competitiveness and growth potential of the whole UK
financial services sector. This will potentially mean changes to the regulatory landscape
over the coming months and years.
C2C Lloyd’s – special provisions

The Rulebook provides that no member of Lloyd’s can carry out business unless they are a
participant in one or more syndicates. It also requires that the Society of Lloyd’s makes sure
that all those participating in the Market understand the requirements of the PRA.
This is particularly relevant in relation to matters such as:
• conflicts of interest;
• any transactions between syndicates, including reinsurance to close;
• related party transactions; and
• any transactions between members and Lloyd’s.
Refer to
If you need a reminder about reinsurance to close see LM2
Additionally, managing agents are obliged to give Lloyd’s information about material risks to
any Lloyd’s assets, including funds at Lloyd’s or the Central Fund.
Reinforce
The Central Fund is the fund into which a small portion of each premium collected in
Lloyd’s is paid. It is there to protect policyholders with valid claims in the event that a
syndicate is unable to pay.
C2D UK Corporate Governance Code

This code is not insurance-specific in any way but aims to facilitate effective and prudent
management of a company that can deliver long-term success without stifling
entrepreneurial behaviour. It seeks to distinguish the process of governance from the day-to-
day management of an organisation by defining governance as concerning what the board of
a company does and how it sets company values.
Before we look at what the code is trying to achieve, given that most regulation comes about
because of prior problems, let us consider what those problems might have been.
In the early 1990s work began with something called the Cadbury Report. This focused on
the financial aspects of corporate governance and provided a code of best practice, which
evolved to include remuneration, risk management, internal controls and audit committees.
Given what then happened, however, it would appear that not many people were reading it!
In 2008, there was a serious crisis in the banking industry which led to a number of banks
being nationalised. The Government at the time called for a review of corporate governance
specifically in UK banks and other financial institutions, as well as a review of corporate
governance more generally. The result of those reviews is the current UK Corporate
Governance Code (the latest edition of which is July 2018).
Chapter 1
The Code has five sections:
Board
leadership and
company
purpose
Division of
Remuneration
responsibilities
Good
corporate
governance
Audit, risk and Composition,

internal control succession and
evaluation
For each section there are several principles. These are quoted below followed by a
summary of the practical provisions associated with each principle.
Board leadership and company purpose
Principles
A. A successful company is led by an effective and entrepreneurial board, whose role is to
promote the long-term sustainable success of the company, generating value for
shareholders and contributing to wider society.
B. The board should establish the company’s purpose, values and strategy, and satisfy
itself that these and its culture are aligned. All directors must act with integrity, lead by
example and promote the desired culture.
C. The board should ensure that the necessary resources are in place for the company to
meet its objectives and measure performance against them. The board should also
establish a framework of prudent and effective controls, which enable risk to be assessed
and managed.
D. In order for the company to meet its responsibilities to shareholders and stakeholders,
the board should ensure effective engagement with, and encourage participation from,
these parties.
E. The board should ensure that workforce policies and practices are consistent with the
company’s values and support its long-term sustainable success. The workforce should
be able to raise any matters of concern.
Provisions
• The board should consider the basis on which the company creates and preserves value
in the long term.
• The board should assess and monitor culture within the business and ensure that
management takes corrective action if required.
• The chair should seek regular engagement with shareholders outside formal
board meetings.
• If more than 20% of the shareholders vote against a board recommendation the company
should explain how it will find out why.
• All key stakeholders should be engaged in including the workforce.
• There should be a robust whistleblowing policy.
• Conflicts of interest should be identified and managed.
• All directors’ concerns that cannot be resolved should be recorded in the board minutes.
Division of responsibilities
Principles
F. The chair leads the board and is responsible for its overall effectiveness in directing the
company. They should demonstrate objective judgement throughout their tenure and
promote a culture of openness and debate. In addition, the chair facilitates constructive
board relations and the effective contribution of all non-executive directors, and ensures
that directors receive accurate, timely and clear information.
G. The board should include an appropriate combination of executive and non-executive
(and, in particular, independent non-executive) directors, such that no one individual or
small group of individuals dominates the board’s decision-making. There should be a clear
division of responsibilities between the leadership of the board and the executive
leadership of the company’s business.
H. Non-executive directors should have sufficient time to meet their board responsibilities.
They should provide constructive challenge, strategic guidance, offer specialist advice and
hold management to account.
I. The board, supported by the company secretary, should ensure that it has the policies,
processes, information, time and resources it needs in order to function effectively
and efficiently.
Provisions
• The chair should be independent and the CEO and chair should not be the same person.
• All non-executive directors who are independent should be identified in the annual report.
• At least half the board should be independent non-executive directors.
• One of the independent non-executive directors should act as the chair’s sounding board.
• Non-executive directors should hold executives and management to account.
• All responsibilities should be set out in writing and made freely available.
• All directors should have sufficient time to do the role properly.
• All directors should have access to the advice of the company secretary.
Composition, succession and evaluation
Principles
J. Appointments to the board should be subject to a formal, rigorous and transparent
procedure, and an effective succession plan should be maintained for board and senior
management. Both appointments and succession plans should be based on merit and
objective criteria and, within this context, should promote diversity of gender, social and
ethnic backgrounds, cognitive and personal strengths.
K. The board and its committees should have a combination of skills, experience and
knowledge. Consideration should be given to the length of service of the board as a whole
and membership regularly refreshed.
L. Annual evaluation of the board should consider its composition, diversity and how
effectively members work together to achieve objectives. Individual evaluation should
demonstrate whether each director continues to contribute effectively.
Chapter 1
Provisions
• A nomination committee should exist to deal with succession planning and should mainly
consist of independent non-executive directors. The annual report should describe
their work.
• All directors should be subject to annual re-election.
• The chair should not stay in post for more than nine years without good reason.
• Open advertising/head hunting should be used to appoint the chair and non-executive
directors.
• The board should be externally evaluated on a regular basis with actions taken as a
result of any findings.
Audit, risk and internal control
Principles
M. The board should establish formal and transparent policies and procedures to ensure
the independence and effectiveness of internal and external audit functions and satisfy
itself on the integrity of financial and narrative statements.
N. The board should present a fair, balanced and understandable assessment of the
company’s position and prospects.
O. The board should establish procedures to manage risk, oversee the internal control
framework, and determine the nature and extent of the principal risks the company is
willing to take in order to achieve its long-term strategic objectives.
Provisions
• The board should have an audit committee of independent non-executive directors.
• The audit committee’s role is to monitor the integrity of the company’s financial
statements, review the internal financial controls and risk management systems, monitor
the internal audit function and conduct the process to appoint external auditors.
• The annual report should set out the audit committee’s work.
• Directors should state in the annual report whether they consider the document to be fair,
balanced and understandable and to provide the necessary information for shareholders.
• The board should assess the current and emerging risks to the company.
• The board should report on the risk management and control systems.
• The board should identify any concerns over the ability to operate as a going concern for
the next twelve months and give any qualifications or caveats necessary.
Remuneration
Principles
P. Remuneration policies and practices should be designed to support strategy and
promote long-term sustainable success. Executive remuneration should be aligned to
company purpose and values, and be clearly linked to the successful delivery of the
company’s long-term strategy.
Q. A formal and transparent procedure for developing policy on executive remuneration
and determining director and senior management remuneration should be established. No
director should be involved in deciding their own remuneration outcome.
R. Directors should exercise independent judgement and discretion when authorising
remuneration outcomes, taking account of company and individual performance, and
wider circumstances.
Provisions
• The board should have a remuneration committee of independent non-executive directors
which sets policy for executive remuneration and reviews workforce remuneration.
• Remuneration for non-executive directors should reflect the time commitment required
and not include share or other performance-related options.
• Only basic salary should be pensionable.
• Contract periods should be one year or less.
• The annual report should set out work of the committee.
Activity
Find a copy of your own company’s annual report and try to identify all the elements
mentioned above within it, in particular:
• Who are the directors, particularly the non-executives?
• Who sits on the various committees?
• Who are the external auditors?
• Find the directors’ statement about the ongoing viability of the company.
• See what you can find about remuneration/pensions/shares etc.
Activity
Read this OECD article on the links between corporate governance lessons and the
financial crisis: www.oecd.org/corporate/ca/corporategovernanceprinciples/43056196.pdf.
Be aware
In May 2023 a consultation was launched about some proposed revisions to the Code.
This consultation ran until September 2023 and – depending on the input – may result in
some changes to the Code in 2024.
C3 European regulation
Prior to Brexit, insurers in the London Market were subject to regulations, treaties or
Directives issued in Europe. One of the most important recent item to come out of the EU
regarding insurance was Solvency II, which came into effect on 1 January 2016.
Solvency II was actually made part of UK law when it was first introduced but Brexit required
the following practical things to be done:
• Creation of a new law to ensure that the UK law (retained law) version of Solvency II still
works as it should outside the wider framework of the EU. This was done by The
Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019, which
came into force on 'exit day' (31 January 2020).
• These regulations have now been revoked by the passing of the Financial Services and
Markets Act 2023, which brings back UK financial services regulation 'in house'. Over
time this means that new provisions in this area will be created and what was originally
EU retained law will be brought within the PRA Handbook and subject to its control.
• Linked to that is the need to convince the EU that the solvency regime within the UK is
'equivalent' in quality to that within the EU itself. This 'equivalence' status is important for
UK financial services business who want to continue working within the EU.
• As at the time of the passing of FSMA 2023 the EU and UK have been talking but have
not achieved agreement on the UK having equivalence, although the UK has confirmed
that it recognises the EU system (i.e the UK has granted the EU equivalence status but
the EU has not yet reciprocated).
Chapter 1
C3A Solvency II
The key concepts related to Solvency II and capital setting are as follows:
Own Risk and Solvency The name given to the entirety of the processes and procedures employed
Assessment (ORSA) by an insurer to identify, assess, monitor, manage and report the short-
and long-term risks it faces or may face, and to determine the capital
necessary to ensure the insurer’s overall solvency needs are met at
all times.
Calculation kernel The central method for quantifying and modelling risk and capital
requirements in the internal model.
Internal model A risk management system developed by an insurer to analyse their

overall risk position, to quantify risks and determine the capital required to
meet those risks. Under Solvency II, an insurer may use its internal model
to calculate its solvency capital requirement with the approval of its
national supervisor.
Minimum Capital The lower of the two capital levels required by Solvency II. It represents
Requirement (MCR) the minimum level of capital required to be held by an insurer before
ultimate regulatory intervention is triggered.
Solvency Capital The higher of the two capital levels required by Solvency II. The SCR is
Requirement (SCR) the prudent amount of assets to be held in excess of liabilities and is an
early warning mechanism if it is breached. The SCR is calculated using
either the standard formula or an approved internal model. Lloyd’s (which
is considered as a single entity), as well as a number of other UK
insurance companies, has obtained approval for its internal models to be
used. Within Lloyd’s, the syndicates’ own internal models are fed into the
overall Lloyd’s model.
If an insurer’s internal model does not obtain approval from, in the UK, the
PRA, then the standard model will have to be used.
Insurers’ assessment of risk and capital requirements

An insurer must consider all the risks to the business and allocate a capital value to them,
not just to the insurance-related ones.
Example 1.1
Which risks can you think of?
Insurance risk: risk of loss from the inherent uncertainties of insurance liabilities.
Credit risk: risk of loss if another party fails to perform its obligations (e.g. if the insured
does not pay the premium).
Market risk: risks from fluctuations in values of, or income from, assets.
Liquidity risk: risk that sufficient financial resources are not maintained to meet liabilities
as they fall due.
Group risk: potential impact of risk events arising for membership of a corporate group.
Operational risk: risk of loss resulting from inadequate or failed internal processes,
people and systems, or from external events.
Solvency II will be mentioned again later in the text when the issue of capital setting
is discussed.
Question 1.5
What is meant by the concept of 'equivalence'?
a. There is the same capacity in the London market as in the European market. □
b. The staff in the London market have the same qualifications as in the European □
market.
c. London market insurers have access to the same risks as European insurers. □
d. The EU recognises the UK solvency regime as being the same as the EU regime. □
Be aware
The PRA-proposed reforms to the Solvency II regime contain the following ideas:
• Simplification and process improvements to certain calculations.
• Streamlined set of rules for internal models linked to capital requirements.
• Greater flexibility for insurance groups in how they calculate group level solvency
requirements.
• Removal of certain requirements for branches of international insurers operating
in the UK.
• Streamlining and removing of unnecessary reporting requirements.
• New regime to facilitate entry and expansion of insurers and to facilitate competition.
• An increase to the size thresholds under which smaller insurers are not obliged to
follow the solvency regime.
C4 Lloyd’s regulation
C4A Byelaws
Byelaws are the primary or highest level rules made within Lloyd’s and are passed by the
Council of Lloyd’s. There are a number of them that concern underwriting within the Lloyd’s
Market, two of which are described in the following.
• Underwriting Byelaw which covers:
– permission to set up as a managing agent, substitute agent or runoff company;
– relationships and service standards;
– business plans and performance monitoring;
– underwriting;
– risk management requirements;
– financial resources, returns and auditors;
– professional standards and development;
– reviews;
– withdrawal of permission; and
– dispute resolution.
• Intermediaries Byelaw which covers:
– delegated underwriting.
C4B Principles for doing business at Lloyd's
The Principles set out the fundamental responsibilities expected of all managing agents.
They set out a clear statement of the outcomes expected by managing agents but are not
prescriptive in how those outcomes are achieved. They are focused on supporting the
markets' overall performance, capital strength, financial and reputational credibility. The
Principles cover a wider spectrum than just underwriting but for the sake of completeness all
are listed here.
Principle Key contents
Underwriting profitability • Business strategy.

• Business plans.
• Underwriting controls.
• Expense controls.
• Portfolio management.
• Pricing frameworks.
• Governance around underwriting decisions.
• Environmental, social and governance (ESG) integration into
underwriting – more about this in chapter 3 – business planning.
Chapter 1
Catastrophe exposure • Manage cat exposure to risk appetite.

• Employ tools appropriate to risk profile.
• Validate methodologies.
• Ensure cat risk reflected in internal models and used within wider
business.
• Risk aggregation governance and oversight.
Outwards reinsurance • Strategies and purchasing plans that reflect risk appetite and are in the
best interests of members.
• Systems and controls over purchase and use.
• Risk management.
• Monitoring, reporting and governance frameworks.
Claims management • Wider sharing of claims information within the business.

• Resourcing.
• Efficient and effective handling.
• Reserving.
• Management of third-party service providers.
• Regular assessment of performance.
Customer outcomes • Conduct culture promoting good customer outcomes.

• Product governance.
• No barriers to fair sales, and post-sales service.
• Fair and prompt claims and complaints service.
• Management of third-party service providers.
• Robust oversight of customer outcomes.
Reserving • Governance and ownership of reserves.

• Appropriate allowances when setting reserves.
• Proper use of assumptions.
• Challenge to reserving processes.
• Setting reserves in accordance with Solvency II principles.
Capital • Maintain an internal model.

• Use realistic assumptions.
• Have strong feedback loops.
• Robust governance and understanding of models.
• Implement changes that are reasonable and justified.
• Objective challenge through independent validation.
Investment • Clear investment objectives and risk appetites.

• Clear parameters and guidelines.
• Integrate stress testing.
• Effective oversight. including any outsourced arrangement.
• Embed a responsible investment policy.
• Have effective governance.
Liquidity • Identify and assess key sources of risk.

• Conduct stress tests.
• Have a clear appetite.
• Assess buffers.
• Have contingency plans.
• Robust governance.
Governance, risk management • Suitable board and committee structure.

and reporting
• Strong risk and control environment.
• Oversight of operational processes.
• Employ and develop people with appropriate skill sets and ensure
adequate resourcing.
• Data-driven decision-making.
• High-quality and timely reporting.
Regulatory and financial crime • Transparent culture of compliance.

• Robust understanding of exposures.
• Appropriate systems and controls.
Operational resilience • Prioritise resilience of the most important services.

• Invest in operational resilience.
• Embed cyber resilience.
Culture • Foster an inclusive high-performance culture.

• Zero tolerance for inappropriate behaviour.
• Encourage speaking up.
• Ensure diverse representation at all levels.
• Understand the employee population and create an inclusive employee
experience.
A number of these Principles will be referenced again later in the study text with their specific
topic, but at this stage it’s helpful to consider how they are constructed and then used by
both the managing agents/syndicates and Lloyd’s.
Lloyd's describes the Oversight Framework as having three interlinking elements, which
work together to support more differentiated and impactful oversight:
• The Principles.
• How syndicates are categorised.
• Interventions and incentives.
The Principles
They set out the fundamental responsibilities of the managing agents. They are outcomes-
based and will allow for more differentiation between syndicates based on their materiality
(i.e impact of failure to meet standards). They replace the previous Minimum Standards.
Categorisation
The categorisation of syndicates will be done by an assessment as against the Principles on
both a qualitative and quantitative basis. There are five different categories, ranging from
outperforming, good, moderate, underperfoming and unacceptable.
Each Principle and sub principal will be measured and the overall category given will be the
lowest awarded.
Interventions and incentives
At the lower end of the scale the interventions performed by Lloyd's will be aimed at
remediating performance and bringing the managing agent back to expected financial and
non-financial performance levels. At the other end of the scale the high performers will
receive incentives to support growth and to help them thrive and develop.
Maturity matrix
The guidance provided by Lloyd's as to expected behaviours is presented in the form of a
maturity matrix showing at a technical level indicative ideas of what a foundation level of
maturity in a particular area would look like, through to an advanced level. In some cases
there may only be one expected set of behaviours, whereas in others there might be four
incremental levels of maturity.
Here is an example of how the maturity matrix works – you read it from left to right, and at
each increasing level of maturity, expectation is added on. Therefore, to reach an advanced
maturity a managing agent must demonstrate all the requirements in foundation,
intermediate and established, as well as advanced.
Sub-principle – have a clear and robust medium- to long-term business strategy with clearly
defined and understood risk appetite.
Chapter 1
Foundation Intermediate Established Advanced
Strategy Underwriting strategy Underwriting strategy Underwriting strategy Regular horizon-

is set collaboratively identifies key outlines a forward- scanning towards
with engagement and elements such as looking plan emerging risks is
feedback loops sub-class, industry concerning the key considered and
between the relevant sector, geography, target contracts to be reflected within the
stakeholders. distribution channel/ won/renewed.
underwriting strategy.
placement strategy.
Underwriting strategy
Underwriting strategy
articulates, at class of
is forward-looking,
business level,
allowing agile
appetite for:
management across
1. Lead versus the underwriting cycle.
follow business.
2. Open market
versus delegated
authority.
3. Line size
deployment.
Activity
Use this link to access the Principles: assets.lloyds.com/media/9cc45b1c-8121-46b1-
ae91-e7a4e24abd04/Principles-for-doing-business-at-Lloyds.pdf.
If you work for a managing agent, speak to colleagues and see if you can find out where
your organisation sits on the maturity matrix for any of the Principles.
D Role of the intermediary

As discussed in LM1 and LM2, there are various types of intermediary in the insurance
market but not all of them operate within or linked to the London Market directly. As a quick
reminder the following types of intermediary exist:
Type Principal Notes
Single-tied agent Insurers Will only be able to offer customers the

products from one insurer (across all
product lines).
Multi-tied agent Insurers Can offer customers different products but

each product will be from only one insurer
(although the insurers for each product can
be different).
Independent broker Insured These intermediaries are not tied to any

insurers and can search the market for the
best option for their client.
Coverholder Insurers and possibly insured These are intermediaries to which authority
depending on who the has been delegated by the insurers, so owe
coverholder is them a duty. However, if the coverholder is
also a broker, they will also owe a duty to
their clients.
Managing general agent Insurers These entities have been delegated

authority by insurers but will only ever view
the insurers as their principal, so will never
be brokers.
Be aware that an MGA could be a wholly
owned subsidiary of a company that also
owns brokers; for example DUAL, which is
part of the Howden group.
Type Principal Notes
Open-market correspondent This category is purely related to Lloyd’s.

They are introducing business to Lloyd’s
either directly or via a Lloyd’s broker for
placement on an open-market basis.
They are not a Lloyd’s approved
coverholder.
The requirement for such status only exists
in certain territories such as: Canada, Israel,
Italy, Namibia, Portugal, South Africa, Spain
and Switzerland.
D1 The regulatory environment for intermediaries

Brokers and coverholders are regulated solely by the FCA in the UK for both prudential and
conduct matters.
Key legislation affecting intermediaries includes the Insurance Distribution Directive (IDD).
Insurance Distribution Directive

The requirements of the Insurance Distribution Directive 2016/97/EC (IDD) have
applied to firms since 1 October 2018. This means that although the UK has now left the
EU, the IDD is still in force in the UK as it is part of UK law.
The IDD sets out consumer protection provisions in insurance and the scope of regulation
includes all firms that sell, advise on, or conclude insurance contracts and those who
assist in administering and performing them, including those that shortlist as part of a
selection process (such as aggregators), or introduce insurance. However, just providing
general information about insurance products, insurers or brokers without collecting such
information has been excluded, as is providing data on potential policyholders to
insurers/brokers.
The key provisions of the Directive are:
• Professionalism. All firms engaged in any of the activities covered by the Directive
must possess appropriate knowledge and ability to complete their tasks and perform
their duties adequately, such as: the insurance market; applicable laws governing
insurance distribution; claims handling; complaints handling; assessing customer
needs and business ethics standards/conflict of interest management. Staff must
complete at least 15 hours of professional training or development per year.
• Commission disclosure. Pre-contractual disclosure of the intermediary and the
nature (not the amount) of their remuneration (whether commission, fee or other type
of arrangement). This could be waived for contracts involving large risks or for
professional customers. The pre-contract disclosure regime extends to insurance
undertakings. Firms must state what type of firm they are (intermediary or insurer) and
whether they provide a personal recommendation. Firms that sell insurance on a
non-advised basis must ensure that the products they are selling fulfil the customers
most fundamental needs.
• New product governance requirements, which are largely in line with the FCA’s
product governance requirements.
• A new category of insurance settler called Ancillary Insurance Intermediaries. This
includes connected travel insurance providers that don’t sell or introduce insurance as
their main business, but still do so and therefore are subject to selling rules.
Chapter 1
• New duties applicable to insurance companies that are selling products through
companies that are not authorised by the FCA.
• A requirement for all general insurance firms in the retail and small corporate market
sector to provide customers with Insurance Product Information Documents. An
IPID is a short, pre-contractual, non-personalised product summary document, the
layout of which is fixed and must follow closely what is prescribed in the IDD. One must
be issued to every retail customer purchasing a general insurance product, regardless
of the channel being used, ahead of closing a sale or renewal. The purpose is to allow
customers at the quotation stage to compare similar products offered by different
insurers in an easy-to-follow consistent way so they can see at-a-glance the
differences between products and make informed decisions. The requirement to
provide an IPID only applies to consumer insurance contracts. This requirement now
forms part of ICOBS 6.
D2 Client money, trust accounts and risk transfer

A key concern of the regulators relates to customers who have paid money to an
intermediary which becomes insolvent. The customer may then be left without cover if the
premium did not reach the insurer.
For this reason, intermediaries should place money received from clients into trust
accounts, which are separate and segregated from other accounts and monies, so that
client money can be clearly identified in the event of a firm becoming insolvent. The trust
arrangement ensures a degree of protection for clients’ money.
There are two kinds of trust accounts:
• A non-statutory trust which allows the intermediaries to hold any relevant client money
(commercial and consumer), provided they have the necessary systems and controls to
manage it. Intermediaries wishing to segregate consumer client money in this type of
trust will also need to hold a minimum of £50,000 regulatory capital.
• Statutory trusts are default trusts for intermediaries unable to meet the requirements of a
non-statutory trust.
The requirement for client money to be placed in trust accounts can be waived where a
scenario known as ‘risk transfer’ operates. This means that an insurer treats premiums
received by an intermediary, which sells its insurance, as having been received by itself and
has a contract to support this arrangement. Firms must retain copies of any agreements for
at least six years from the date they are terminated.
Where a firm holds client money as an agent of the insurer, it must notify affected clients of
this arrangement. Such communication may form part of a Terms of Business (TOBA) letter.
D3 Terminology – wholesale, consumer and commercial

The rules outlined above affect all intermediaries whether they deal in personal lines
business, commercial insurance or reinsurance. Intermediaries placing business in the
London Market are, therefore, subject to these rules.
There are further more detailed rules applicable to those who deal with consumer
insurances. A consumer insurance product is one bought by customers for purposes
unrelated to their trade, business or profession, and typically includes personal, motor,
household, travel and life insurance products. Under the FCA definitions and rules, a buyer
of direct insurance who is not a consumer is a commercial customer. A practical example of
this would be if an insurance company director used the office to display some of his own art
collection and bought insurance for it as a private collector, he would be deemed to be a
consumer by the FCA.
Consumers will be entitled to such things as a policy in their own language and a ‘cooling off’
period, i.e. the right to return the policy within a short timeframe, if a product has been
purchased in error or on the basis of a misunderstanding.
While the distinction between commercial and consumer business is based upon legal
definitions, the London Market also, typically, makes a distinction between retail and
wholesale business. This distinction is based on commonly understood commercial trading
practice under which the retail broker faces the buyer of the insurance product (i.e. the
prospective insured) but uses another, perhaps more specialist, broker (the wholesaler) to
access the insurers in the London Market.
The insurance business traded in the London Market is, typically, commercial in character
and often involves very large values. There is also substantial reinsurance business traded
in London. Both reinsurance and the insurance of most commercial risks traded in London
are outside the scope of the FCA rules on consumer or non-commercial retail business.
Historically, the IMD has stated that insurers authorised by an EU Member State regulator
and operating within the London Market may only trade with brokers authorised by their
respective national regulator, and such brokers may only deal with other brokers who are
similarly authorised. A UK-regulated insurer in the London Market, while no longer directly
impacted by this EU directive, should check that any broker it trades with is of good standing
and their authorisation status in their own country is a good piece of evidence.
The broker should, in turn, also check that any producing broker, which might be the link to
the ultimate client, for example in a country outside the UK, is authorised in that country too.
Although the IMD and FCA do not concern themselves with the regulation of business
produced outside the EU, it is best practice that the status and background of a non-EU
broker be checked by insurers and London brokers alike before a trading relationship
commences.
D4 The role of the broker in the underwriting process

The role of an intermediary in the overall underwriting process can take a number of different
forms. A broker introducing business to an insurer is a key part of obtaining risks and of an
insurer’s overall distribution network. It is as important for an insurer to know and be known
by the brokers in their class of business as by any ultimate insured clients. Brokers will often
play a large part in the selection of the leaders as well as the rest of the insurers.
Reinforce
Leaders are the insurers brokers approach initially to get quotes for their clients. Then,
when the risk is bound, those insurers will be in the position of being decision-makers on
post-inception contract changes and claims, although they might not have the
largest lines.
Brokers can also be involved in product development, working with insurers to create new
products to serve a market, and of course can also be given ‘the pen’ by means of delegated
underwriting authority to market and distribute a product as well.
Whatever the method of acceptance of the risk, in the London Market in particular, brokers
are delegated the task of preparing the documentation to be issued to the client, which can
potentially lead to problems for the insurers if this is not done carefully.
Other intermediaries such as managing general agents (MGAs) will be involved in a chain
with brokers potentially between them and the ultimate insured, and between them and the
insurers (although this is not always the case). The MGAs can also be involved in product
development and can bring products to insurers, or the reverse can be the case where they
just act as a distribution hub for a pure insurer product.
Whatever their role, all types of intermediaries play a large part in the planning, underwriting,
pricing and documentation of risks written in the London Market, and provide both
opportunities and exposure to insurers in the process.
Chapter 1
Key points
The main ideas covered by this chapter can be summarised as follows:
Global and domestic markets
• A global market is one whose clients include those from outside its own territory.
• The London Market is considered a global market.
• The geographical split of business coming into the London Market differs between the
Lloyd’s and company markets.
• Clients might deliberately choose a domestic market for at least part of their insurance
through loyalty or because of regulatory requirements.
• Insurance regulators in various territories will give permission for business to be written
by overseas insurers.
Sources of capital
• The London Market attracts many different types of investors.

• Overseas insurers form a large part of the capital base but there is non-insurance
capital as well.
• Many insurers operating in London use both an insurance company and a
Lloyd’s syndicate.
• Investors are attracted to the Lloyd’s Market as it is well-governed and the potential for
returns is greater than in other forms of investment.
• The London Market faces some challenges to ensure it remains attractive to investors
such as managing expense ratios and responding to competition from
overseas markets.
• The Blueprint 2 project is a cross-market project aiming to create a market fit for
the future.
Market regulation
• Organisations operating in the London Market are subject to the UK regulators.

• Brokers are regulated by the FCA only but insurers are dual-regulated by the FCA
and PRA.
• Now that the UK has left the EU, EU regulation no longer applies and UK insurers no
longer have the benefit of the passporting rights whereby they could work freely in
other EU countries, with those countries recognising the UK regulators.
• A key area of European regulation is the Insurance Distribution Directive (IDD). The
IDD is also part of UK law so still applies even after the UK left the EU.
• Regulation can also apply from any countries in which insurers are seeking to do
business, whether from an office in that country or on a cross-border basis (i.e. from
London). Brexit has resulted in insurers taking different steps to ensure they can still
benefit from the cross-border arrangements of being in the EU.
• Up until mid-2023, there were regulations in place to ease the transition from Solvency
II to a new, UK-specific framework following departure from the EU. The Financial
Services and Markets Act 2023 revokes those regulations to allow for a UK-based
regulation framework to be created.
• Lloyd’s acts as a partial regulator for organisations operating within that market, and
has cooperation agreements in place with both the PRA and FCA to avoid duplication.
• Lloyd’s regulates through byelaws and Principles for doing business at Lloyd's.
• The FCA Handbook and PRA Rulebook set out the detail of the requirements.
• Both regulators have requirements relating to individuals carrying out key roles within
the business.
• The UK Corporate Governance Code will also apply to insurance businesses in the
London Market, although the Code is not insurance-specific.
Key points
• The key concepts in the Code are board leadership and company purpose, division of
responsibilities, composition, succession and evaluation, audit, risk and internal
control, and remuneration.
Role of the intermediary
• There are a number of different types of intermediary but some are rarely seen within
the London Market such as single- and multi-tied agents.
• Independent brokers and coverholders/MGAs are the most common intermediaries in
the London Market.
• Intermediaries are regulated by the FCA only.
• EU regulation is under the Insurance Distribution Directive (IDD), which took effect in
the UK on 1 October 2018 and is now part of UK law so still applies even after the UK
left the EU.
• This replaces the Insurance Mediation Directive and widens its application to include
other organisations defined as insurance distributors, including those assisting in
administration and performance of insurance contracts such as claims
management companies.
• The IDD has strict organisational and professional requirements.
• The IDD requires that all information provided must be clear, fair and not misleading.
• Distributors must always act honestly, fairly and professionally in the best interests of
the customer.
• Client monies must be held in segregated accounts, although an intermediary can hold
funds as the agent of the insurer under a risk transfer arrangement.
• Intermediaries such as brokers and coverholders/MGAs are a key part of an insurer’s
distribution network.
Chapter 1
Question answers
1.1 c. The licences for syndicates are managed centrally by Lloyd's but companies
have to manage their own licences.
1.2 b. Placement, delegated authority and claims.
1.3 d. It was incorporated into UK law when it was introduced so that law remains in
effect even after leaving the EU.
1.4 a. A role that is not senior management but whose holder could cause significant
harm to the firm or customers.
1.5 d. The EU recognises the UK solvency regime as being the same as the EU
regime.
Self-test questions
1. What is the key difference between a domestic market and global market?
a. A domestic market only handles personal lines business and a global market □
handles commercial business.
b. A domestic market charges lower premium than a global market. □
c. A domestic market's clients tend to be only from their territory but a global market □
can have an international client base.
d. A domestic market has lower premium taxes than a global market. □
2. For what practical reason might a broker placing a risk of any type in the London
Market only have a part order?
a. A client might want to show some loyalty to their domestic market for at least □
some of their insurance needs.
b. A broker in London will only ever have a 100% order. □
c. If the placement is reinsurance. □
d. To comply with regulatory requirements. □
3. What key factor in the handling of client money exists if a risk transfer TOBA is in
place between a broker and insurer?
a. Money has to be paid to the insurer by the broker immediately on receipt from the □
client.
b. Money has to be held in a trust account and segregated from other funds. □
c. Money is deemed received by the insurer as soon as the broker receives it. □
d. The broker can keep any interest earned on the funds. □
4. Which other types of (re)insurer can be found in the London Market other than
insurance companies and Lloyd's syndicates?
a. Mutuals. □
b. Captives. □
c. Only syndicates and companies exist in the London Market. □
d. Friendly societies. □
5. Which of these is not a type of capital backer for Lloyd's syndicates?
a. UK insurance companies. □
b. MGAs. □
c. Private capacity. □
d. Japanese insurance companies. □
Chapter 1
6. What is the primary reason that individuals or organisations will invest in insurance?
a. To be able to buy cheaper insurance for themselves. □
b. To obtain a return on investment/equity. □
c. To be part of a big-name brand organisation. □
d. To obtain tax benefits. □
7. Which challenge to the London Market identified by previous London Matters reports
does not appear to have been realised?
a. Losing skilled personnel. □
b. Inability to operate in a non-face-to-face environment. □
c. Overseas markets taking a larger share of premiums. □
d. More clients choosing to retain risk. □
8. Which of these roles is not a key function within an insurance firm?
a. Actuary. □
b. Underwriter. □
c. Compliance officer. □
d. Receptionist/facilities manager. □
9. Name the new category of role introduced by the SM&CR.
a. Approved person. □
b. Regulated individual. □
c. Certification function. □
d. Responsible manager. □
10. Which two concepts are elements within the UK Corporate Governance Code?
a. Division of responsibilities/remuneration. □
b. Audit, risk and internal control/tax. □
c. Remuneration/tax. □
d. Board leadership/international growth. □
You will find the answers at the back of the book
2
Chapter 2
The role of policy wording
outcomes
Introduction
A Who’s who in the creation of a contract? 2.1, 2.3
B Why is the contract so important and how should it be constructed? 2.2, 2.3
C Contract interpretation 2.3, 2.4
Key points
Question answers
Self-test questions
Learning objectives
• explain the importance of knowing the identity of the contracting parties;
• explain the importance of the policy wording;
• explain the various ways in which the policy wording can be compiled;
• explain the importance of clear identification of the contracting parties;
• explain the importance of reviewing a contract wording in its entirety; and
• explain the value to insurers and brokers of having dedicated wording resources.
2/2 LM3/October 2023 London Market underwriting principles
Introduction
In this chapter, we will consider one of the most important elements of the agreement
Chapter 2
entered into between the insurers and their insured, i.e. the way the agreement is drafted
and evidenced through the terms and conditions of the insurance contract. While it is
probably the key document in the broking and underwriting process, as it formally sets out
the terms and conditions of cover, it has historically often been afforded little attention. The
focus has tended to return to the wording only when a dispute occurs over a claim, which
could have reputational or financial implications. This has led to case law arising from the
litigation of such disputes and to the development of insurance legislation, examples of
which will be considered later in this chapter.
While other stakeholders may have an interest in the creation and use of any documents
relating to the insurance agreement, the parties to it (the insured and the insurers) are the
ones who, in the first instance, will be dealing with matters that arise through confusion or
conflict regarding the terms that they believed had been agreed.
As we go through this part of the module, always think about other types of contracts. How
are they evidenced? What difficulties might you face if there is a dispute some time after the
agreement was supposedly made? It is critical to understand that the necessity for clarity
and certainty is not just one that relates to insurance contracts but to all contracts
or agreements.
Finally, when reading this chapter consider the terminology, as there are a number of terms
which can describe the document used to evidence the contract of insurance such as ‘slip’,
‘market reform contract’ (MRC), ‘policy’, ‘contract’ and ‘certificate’. They might exist
separately or together depending on particular requirements.
If necessary, refresh your memory on the creation of contracts and the documentation used
in the London Market by looking at LM1 and LM2.
In this chapter we will consider the creation of a contract of insurance. Exactly the same
points apply if the contract being created is one of reinsurance.
Key terms
Consensus ad idem Consumer wording Contract Contract certainty

Contract Fronting Joint and composite Market Reform
interpretation policies Contract (MRC)
Reverse engineering Side letter Slip Wording
Wordings library Wordings specialist
A Who’s who in the creation of a contract?

In this section we will consider which stakeholders might become involved in the creation of
an insurance contract. A number of different relationships can exist, for example:
1. The State might be instrumental in requiring that some insurances are compulsory such
as types of motor insurance, third party liability and employers’ liability. However, the
State will not get directly involved in the creation of individual contracts of insurance.
2. A company looking to do business with a new partner might require the new partner to
buy insurance against professional liabilities but will then have no further involvement
with the contents of the contract.
3. A bank lending money might require insurance be purchased and have very specific
requirements as to the contract terms.
4. A broker might be involved as a professional adviser.
5. The potential insured client might employ a risk manager.
6. And, of course, insurers will be involved.
Chapter 2 The role of policy wording 2/3
A1 What are the drivers in the purchase of insurance?

In the first example above the State was the driver for the decision to buy insurance, as
some insurances are compulsory in the UK such as motor, employers’ liability, professional
Chapter 2
indemnity for certain professions such as solicitors, and public liability, for example, if you run
a riding school.
Can you remember from your earlier studies some of the reasons that these insurances
were made compulsory? Using the example of motor insurance, the UK’s Road Traffic Act
1988 makes basic motor insurance compulsory, so that a road traffic accident victim should
always be entitled to receive compensation if injured due to the negligence of another person
(the driver).
Be aware
Other jurisdictions will have different rules relating to compulsory insurances.
Taking the second example, why might another party demand that insurance be purchased?
It might, for example, be that in order to do some work for a client, a contractor has to be
able to demonstrate that it has professional liability insurance. Or, to be able to hire out a
venue for an event, the owners must be able to show that they have third party
liability insurance.
The third point above concerning banks is more common and there are a number of
examples of how this can happen. Be aware that the factual situation can appear to be the
same as point 2 above. The difference is how much input the external party (such as a bank)
has with the detail of the insurance being purchased.
Scenario Contract request examples
An oil company will be using a contractor on site and • The oil company is a named insured.
wants to ensure that any injury claims are handled
• The contract provides that contractor’s insurance is
under the contractor’s insurance.
used first for any injury claims.
A bank has lent money to buy property and wants to • The bank can demand that certain types of
protect the security that the property provides for the insurance are purchased and to what financial level.
loan. It therefore wants to receive any insurance
• The bank can become a loss payee – not a named
proceeds in the event of a loss causing damage to
insured but a party to which claims monies may be
the property.
payable directly (i.e. not via the insured).
In both cases, third parties which do not have a ‘direct’ relationship with the insurers are
making demands on the potential insured to see that the insurance contract is set up in the
way that the third party requires. Both the second and third examples above are situations
where, although the obligation is not a state-imposed legal one, failing to comply would have
a business impact, as if the insurance were not set up in the way the bank required, there
would be default under the loan agreement with penalties imposed.
The broker (or other intermediary) in its role as a professional adviser cannot force the
insured to do anything in relation to the creation of the contract and does not have the
leverage that, for example, the bank might have in terms of business-related penalties for
non-compliance with requirements. However, the broker, if used properly, can provide their
client with invaluable assistance; firstly knowing what insurance is actually available, and
secondly by obtaining an insurance agreement that meets the client’s requirements and is as
wide and flexible as possible.
Be aware
Don’t confuse the words flexibility and ambiguity. A contract can be wide and flexible and
yet completely clear and unambiguous. Ambiguity does not naturally create flexibility,
although the reality is that the negotiations around ambiguity often give the false
impression that it does.
Clients may be active or passive partners in the creation of the insurance contract depending
on a number of factors, including:
• the relative sophistication of their insurance knowledge;
Chapter 2
• their use of a broker and if they choose to delegate part of the responsibility to the broker;
and
• whether they have an in-house insurance/risk management/legal function that chooses to
become involved in the creation of the contract to which they will be a party.
Question 2.1
How might a business partner of an insured most likely influence their purchase of
insurance?
a. They might charge lower rates for their work. □
b. They might require confirmation of insurance cover before starting work. □
c. A business partner cannot influence an insured's decision making. □
d. A business partner could offer to contribute to the cost of insurance. □
A2 Who are the parties to the contract of insurance?
It might, at first glance, appear to be a strange point to have to consider. Is it not always
completely obvious who the parties are? Are they not defined in the contract? Surely, they
are the insured and the insurers?
A2A Insured
Let’s consider the insured first. You will see this clause in an insurance contract:
Insured: XYX Co, and all other subsidiary and associated companies.
What does this actually mean, particularly if it is not supported by a list of those companies?
Will the insureds potentially change during the term of the insurance? How does the insurer
know with any clarity who the contractual partner or partners will be?
Activity
Look at some insurance documents in your office, particularly if you work for an insurer or
a broker. How is the insured described in the examples you find?
Can you find an additional insured clause?
Within an insurance contract it is possible to have additional insureds alongside the ‘main’
insured. When considering an additional insured’s status, it is important to consider whether
they share the same rights and obligations as the main insured. For example, could the
insurer chase them for the premium if it was not paid? And, could they make a claim
independently on the insurance without any input from the main insured? If the permission of
the main insured is required before a claim can be made, then the other party does not have
unrestricted access to the contract.
If two or more parties are insured and their interests are the same (e.g. they are co-owners
of a property), then the policy will generally be a ‘joint’ insurance policy. If two or more
parties are insured parties and their interests are not the same (e.g. a landlord and tenant),
then the policy will be described as a ‘composite’ policy.
The importance of this distinction will be explained more in Why is clarity regarding the
identity and status of the parties so important? on page 2/6.
A2B Insurers
Within the London Market, many risks are written on a subscription basis which means that
no one insurer is taking 100% of the risk. The contract therefore needs to specify clearly both
Chapter 2
the insurer participants and also their shares.
Think about documents you might see in your role, for example, if you work for an insurer or
a broker. What do you see that gives information about who the insurers are and their
shares? You might see documents that the insurers have stamped to signify their
participation and share (usually in percentage terms). An example of a stamp follows.
ABC
INSURANCE
COMPANY
0 0 2 2 2 2 2 X 0 0 0 0 0 0
NNNN/NN/N XIS
It is important to remember that electronic trading is becoming more commonplace, so

stamping won’t occur, but the underwriters’ agreement will work in the same way to evidence
their agreement to participate and the share of the risk they are prepared to accept.
Later in this study text we will consider delegated underwriting in all its forms. When using
these types of arrangements is the identity of the insurer always obvious? While the identity
of the insurer should always be available to the ultimate client, will the documents be
primarily branded as those of the insurer or perhaps of a coverholder/MGA? One of the
advantages to the insurer for using delegated underwriting is to benefit from the profile of the
coverholder/MGA.
Reinforce
A coverholder/MGA is the third party to which underwriting authority can be delegated
under a binding authority.
Activity
If you have any insurance of your own (e.g. house, car or travel), do you know the name
of the insurer? Perhaps you bought it from Aviva or perhaps you bought a brand such as
Sheilas’ Wheels or Elephant.
If you have your own insurance, look at the documentation or the website and see if you
can identify who the actual insurer is, rather than the brand (for example,
Sheila's Wheels).
There are other key pieces of information related to the insurers, which should be clear in the
contract if there is a subscription market, such as the identity of the leader and the decision
makers or ‘agreement parties’ involved in both post-bind contract changes and claims. The
latter two points are not directly related to what the insurance contract is covering but more
to the administrative functioning of the contract. Therefore, as we consider the contract
further, we should also think about whether the entire contents of the documents created are
relevant to the client’s agreement with insurers, or whether some elements are particularly
relevant to the functioning of the London (or even just the Lloyd’s) Market.
With Brexit and the use of Lloyd’s Brussels, it is very important that brokers, insurers and in
fact clients remember that the current year’s policies might be with LBS rather than the
syndicate, even though the people involved are the same and the syndicate was the insurer
in previous years.
If necessary, refresh your memory on the market reform contract (MRC) in LM2. Consider
how many elements of the MRC are related to more administrative aspects.
A3 Why is clarity regarding the identity and status of the

parties so important?
Chapter 2
The first consideration is who has rights and obligations under the contract. The primary right
that both parties to the contract have is to complain if the other party breaches its
obligations. From the client/insured’s perspective their main right is to be able to make a
claim, so they won’t be happy if the insurers don’t pay, and it will appear as though they are
breaching their obligations.
If there is no clarity as to who has an obligation, it might be breached unintentionally
through ignorance.
It is important to consider the impact of various behaviours and how these might vary
depending on whether the contract is joint or composite:
• If a policy is a joint policy then the contract is indivisible and so breach of any term (e.g.
the duty of fair presentation) by one of the insureds will lead to the insurer having the right
to invoke one of various legal remedies against all insureds. If the problem is serious
enough, e.g. a deliberate and reckless breach of the duty of fair presentation, it could
lead to the contract being avoided.
• If, however, the policy is composite and one party is entirely innocent of what is
happening, then breach or default by one insured will not invalidate the cover provided for
any other insureds.
A3A Regulatory issues
So far we have just been considering the simple concept of knowing who your contracting
party is. Now we need to consider the importance of knowing whether you can or want to do
business with them.
From an insurer’s standpoint, one of the most important issues is financial crime, both
generally and in particular regarding sanctions (which are trading barriers put in place by
organisations such as the EU, UN, or governments like the UK’s and USA’s). There are a
number of different types of sanction but the key ones for insurers are trade sanctions,
where insurers expose themselves to severe penalties if it is identified that they are trading
with banned individuals, entities, organisations or groups.
All insurers should, therefore, pay particular attention to their contracting parties and carry
out checks to ensure that no banned persons/organisations are involved with the contract in
any way.
Activity
If you work for an insurer, find out what is done to screen for potentially sanctioned
entities. Can you find evidence of a system such as World-Check being used?
Use this link to find out more about what World-Check offers:
www.refinitiv.com/en/products/world-check-kyc-screening.
On the Web
Use these links to find out more about sanctioned entities/individuals/groups:
UK – bit.ly/2G7eK9C.
USA – www.treasury.gov/resource-center/sanctions/Pages/default.aspx.
UN – www.un.org/securitycouncil/content/un-sc-consolidated-list.
A4 How can other parties obtain access to the insurance

contract, if not party to it?
A key part of contract law is the concept of privity, which means in basic terms that only the
parties to the contract have rights and obligations under it. At times there can be issues in
identifying the parties to the contract. What also needs to be considered is whether other
parties, which are not actually parties to the contract, have any rights under it, particularly
those which can be directly enforced.
A4A Third Party (Rights against Insurers) Act 2010

We have already seen how some insurance is compulsory in the UK and that similar
concepts exist in many other countries. The reason for this is mostly to protect the innocent
Chapter 2
party which has been injured or suffered a loss. But, this requires the insured to be legally
still in existence, as liability insurances are contracts of indemnity which, in their purest form,
require the insured to discharge their liabilities before insurers will indemnify them.
So, what happens if the insured is bankrupt as an individual or insolvent as a company? The
injured third party then has to take its place in the queue with all the other creditors.
The common law concept of privity does not allow the injured party to take direct action
against any liability insurance that the insolvent party at fault (the insured) has or had in
place. However, the Third Party (Rights against Insurers) Act 2010 changes the common
law, as it provides that the rights of an insolvent insured to claim on its insurance can be
transferred to the injured third party. It makes the process far easier for a claimant than the
previous version of the law as now the injured third party does not have to prove its claim
against the insured before making the claim against the insurers. Instead, the claim is
wrapped into one legal action which asks the court to consider it against the insolvent
insured and the insurers at the same time.
Remember, however, that the third party will never have a better claim against the insurers
than the insured would have had. If there are applicable exclusions, then the injured third
party might still not receive compensation.
A4B Contracts (Rights of Third Parties) Act 1999
This is another piece of legislation which potentially gives certain rights to outsiders to an
insurance contract, particularly the right to enforce a contractual term. To be eligible the
contract must:
• provide that outsiders may enforce that contractual term; or
• appear to confer a benefit on the third party, unless on construction/interpretation of the
contract it appears the parties did not intend the term to be enforceable by a third party.
Note that this Act does not only refer to insurance contracts. It applies to all types of contract
except those specifically excluded. The list of exclusions does not contain insurance
contracts. However, it is entirely permissible for the parties to an insurance contract to
specifically exclude the operation of this Act.
Here is an example of a typical exclusion used in the London Market.
Contracts (Rights of Third Parties) Act 1999 Exclusion Clause (Cargo)

The Provisions of the Contracts (Rights of Third Parties) Act 1999 do not apply to this
insurance or to any certificate(s) of insurance issued hereunder. Neither this insurance nor
any certificates issued hereunder confer any benefits on any third parties. No third party
may enforce any term of this insurance or of any certificate issued hereunder. This clause
shall not affect the rights of the assured (as assignee or otherwise) or the rights of any
loss payee.
JC2000/002
18 February 2000
Question 2.2
What is the key feature of the Third Party (Rights Against Insurers) Act 2010?
a. It allows third parties to claim directly against insurers if the insured is insolvent. □
b. It allows insurers to refuse to pay claims to third parties if the insured is insolvent. □
c. It allows third parties to claim on the insurance if they are identifiable. □
d. It allows insureds to claim directly on reinsurance if their insurer is insolvent. □
B Why is the contract so important and how

should it be constructed?
Chapter 2
It is important to think again about what is meant by ‘contract’. In the context of this
discussion, we should consider it as the entire contract of insurance which has been agreed.
However, it often means just those provisions which are central to the insurance cover itself,
and does not include the contractual items which are more administrative in nature, such as
the subscription agreement section of the MRC.
Remember our desired end result, which is an agreement that meets the client’s needs and
is clear and unambiguous.
B1 Reminder of the role of consensus ad idem in the

creation of a contract
A valid contract of any type requires some key ingredients in order for it to be valid. One of
these is consensus ad idem or ‘meeting of minds’, where both parties, at the time the
contract was entered into, are in complete agreement. (This is not the same as both thinking
they are in agreement and finding out later that they are not.)
These concepts apply to all types of contracts, so before we consider insurance contracts,
let’s look at some of the implications of issues that might arise in non-insurance contracts.
Type of contract Issue Impact on you
Mobile phone You thought you could upgrade after one Having to carry on using a phone which is
year but it turns out the contract says not as up-to-date as you would like.
two years.
Employment You thought you had 25 days’ holiday a Less holiday time.
year, plus bank holidays, but it turns out that
the 25 days include bank holidays.
Employment You thought your contract had a one-month You have to explain yourself to your new
notice period and you find out, having employer and stick it out in your old job.
accepted a new job, that it is three months.
Holiday You think you have booked a flight to Paris Perhaps not quite such a romantic location!
in France but you turn up and you have
booked a flight to Paris, Texas.
Travel You think you have bought a train ticket for a Enjoy a weekend just outside
weekend in Newcastle upon Tyne but you Birmingham instead.
have actually bought one to Newcastle-
under-Lyme.
B2 The problems that a poorly drafted insurance contract

can cause
Let’s now do the same sort of exercise but using some of the provisions of an
insurance contract.
There are many different examples of what could go wrong but only some are shown in
the following.
Topic Potential problem Mitigation of risk
Insured For insurers, entering into contract with a Get as much detail about the insured and
sanctioned entity. any additional insureds as possible.
Insurers For insured, buying their insurance from Make clear who the ultimate risk bearers
an entity which might not be acceptable to are, even if using delegated authority.
them, for example because its rating
is poor.
Subject matter insured Insurer thinks it has insured a 2015-built Use other distinguishing factors such as
bulk carrier, operating in North West size or registration details for physical
Chapter 2
Europe called Samantha, but in fact it has assets such as ships and similar.
insured a ship with the same name, but
which is a 1995-built oil tanker operating For liability-type risks, the insurer must
in South East Asia. understand how liability can attach to the
insured in the various countries in which it
might be operating and whose legal
systems will not be the same as in
England/Wales.
Location of risk Insurer thinks it has insured buildings in a Insurer must back up addresses with
location which is not exposed to natural unique data such as postcodes or zip
catastrophes. But the insureds think they codes where possible to ensure
have bought insurance for buildings no ambiguity.
located in such an area. This is similar to
the Newcastle example above.
Regulatory breaches Writing a risk in a location/territory for Always check the permission status early
which the insurer does not have the in the consideration of the risk, particularly
correct permissions. as it can be different between Lloyd’s and
company insurers and if an insurer has
both platforms this can be a source of
confusion.
Policy limit Is it each and every loss? Is there an Make it very clear in contract and ensure
aggregate? Are there sublimits? both parties understand the financial
implications.
For the insurer, the risk is paying out more
than expected; for the insured, the risk is
not getting as much cover as expected?
Excess or deductible Which is it? They are both the first Make it clear how the section is intended
amount of the claim which is payable by to operate in terms of what the maximum
the insured but they theoretically operate payout will be.
differently in terms of their impact on the
Check other contracts for stated
stated policy limits, e.g.:
application particularly in cases of total
• Excess – full stated policy limits sit loss. Many clauses provide that no
above it. deductible/excess will be applied for
• Deductible – deducted from the stated total loss.
policy limits.
Costs in addition or In liability policies this sets out whether Make clear in the contract which will apply
costs inclusive legal costs payable by the insurers will and the impact on the stated policy limit.
erode the stated policy limit or not.
If costs are inclusive and erode the limit,
then the funds available to compensate
any injured parties will be reduced,
potentially quite considerably. This can
expose the insureds to having to pay
themselves or expose excess-layer
insurers which were not expecting to
be involved.
Policy period Not being specific as to time of inception/ Be specific as to time, using 24 hour clock
expiry for losses-occurring policy, or ‘both days inclusive’, and state the time
including the time zone. zone to be used.
Insurers not being certain whether they

are on or off risk at the time of a claim.
Double insurance if a policy is renewed
while another policy is still in force.
Gaps in cover if new policy actually
incepts some time after previous
one expired.
Conditions Which specific perils are covered? If market standard clauses are used,
make sure all parties read and understand
Chapter 2
What exactly is excluded?

them, particularly if any amendments
Are there any terms that have the power have been made.
of warranties or conditions precedent
Consider documentation sent to client and
to liability?
how this element can be made as clear
Insurer might find themselves having a as possible.
claim presented for something they were
not expecting, e.g. cyber crime.
Insured might find that they are not
covered for something that they believed
was covered.
Insured might discover that something
they have done or not done has actually
affected whether the policy will respond.
Price Currency not clearly expressed so Never use symbols such as $, which
financial value less or more than one could refer to the Canadian, US, New
party expected. Zealand or other dollar. Instead always
use the ISO codes such as GBP, NZD
and USD.
Taxes Insurers do not collect the tax payable by Check any tax requirements carefully
the insured as part of the premium, but remembering in particular that they will be
still have to pay the tax authorities leaving different for different territories and types
them less money from the risk. of business.
Insurers do not realise how much tax they

have to pay themselves on the risk, which
will have an impact on their financial
position, as it will be deductible from
premium received whether or not they
have accounted for it.
Post-bind decision Following the market in a subscription Read the full agreement carefully before
makers placement and not realising they have signing it.
agreed that the leader can consent to
all changes.
Dispute resolution Not clear where and under what rules any Make clear whether, for example, the
provisions disputes between the insured and agreed method is arbitration or litigation,
insurers might be resolved. what law will apply, and also where the
court/arbitration panel will sit.
If you cannot remember how the General Underwriters Agreement works in the London
Market, see LM2, chapter 8.
B3 Contract certainty
Contract certainty has brought operational improvements across the industry, reducing risk
and improving service. Contract certainty applies to general insurance contracts either
entered into by a regulated insurer, or effected through a regulated intermediary. Contract
certainty is achieved by the complete and final agreement of all terms (which would include
the insurer’s final signed lines) between the insured and insurer at the time that they enter
into the contract, with contract documentation provided promptly thereafter.
Problems have been caused by poor drafting in insurance agreements for many years but
this came to particular prominence following the 9/11 attacks on the World Trade Center
(WTC) in 2001. While there were a number of aspects to the loss, the central element was
two aircraft flying into and destroying the towers of WTC. Many different insurance claims
were filed but the tenants of the buildings filed a claim under the property policy alleging two
separate losses, and thus claiming two policy limits. The insurers argued on occurrence for
only one policy limit.
A key element of contracts is usually how linked ‘happenings’ can and will be grouped
together for presentation under both insurance and reinsurance contracts. The detail of this
is outside the scope of this module but suffice it to say that generally speaking insurers
would intend or prefer the loss to be considered as one event or occurrence. This was
definitely the case with the WTC loss.
Simple you might say, look at the contract between the parties and see what it says on the
topic. In the case of the WTC loss that is where the problem started as, although both
insured and insurers were in perfect agreement that a contract of insurance had been
Chapter 2
created between them two months before the loss, a contract had not been finalised at the
time of the loss, hence there was nothing to help either side verify its position.
The numbers involved were so large that the matter was destined to be argued legally, which
it was at length (both in the direct and the reinsurance market), thus meaning that perhaps
the only winners were the lawyers involved.
The UK regulator had changed just before the WTC loss with the creation in 2000 of the
Financial Services Authority (FSA), which has since been replaced (from 1 April 2013) by the
Financial Conduct Authority and the Prudential Regulation Authority.
In December 2004, the FSA issued a challenge to the UK insurance industry (not just the
London Market) to end the ‘deal now detail later’ culture. The industry took steps to improve
the way it develops and agrees contracts, ensuring that the insured has greater certainty
over what has been purchased and giving the insurer greater certainty over the coverage
in place.
The Contract Certainty Code of Practice (last edition September 2018) which was entered
into with the support of the London Market trade bodies (LMA/IUA/LIIBA) has the following
principles:
Principle A When entering into the contract The insurer and broker (where applicable)
must ensure that all terms are clear and
unambiguous by the time the offer is made
to enter into the contract or the offer is
accepted. All terms must be clearly
expressed, including any conditions or
subjectivities.
Principle B After entering into the contract Contract documentation must be provided
to the insured promptly.
Principle C Demonstration of performance The insurers and brokers (where

applicable) must be able to demonstrate
their achievement of principles A and B.
Principle D In respect of contract changes Contract changes need to be certain and

documented promptly.
Where there is more than one participating insurer:
Principle E When entering into the contract The contract must include an agreed basis
on which each insurer’s final participation
will be determined.
The practice of post-inception over-placing
compromises contract certainty and must
be avoided.
Principle F After entering into the contract The final participation must be provided to
each insurer promptly.
Principle G Where the contract has not met the The insurer and broker (where applicable)
principles have a responsibility to resolve exceptions
to any of the above principles as soon as
practicable and without undue delay.
As we continue, we will consider what should be done, and how tools that are used will help
satisfy these requirements and prove that efforts are being made. What is vital is that
contract certainty is treated seriously and not just as a tick-box exercise.
On the Web
The full Contract Certainty Code of Practice can be found here: lmg.london/wp-content/
uploads/2019/07/CC-COP-Sept-2018.pdf.
Activity
Consider how the concept of contract certainty has been central to the disputes arising
from business interruption claims linked to the pandemic. Was your organisation involved
Chapter 2
in any way?
Go to the FCA website to read more about the test case brought against certain insurers
by the FCA: www.fca.org.uk/news/press-releases/supreme-court-judgment-business-
interruption-insurance-test-case.
B4 Role of the Market Reform Contract (MRC)

Earlier in this chapter we considered the various documents that could be used to evidence
the contract of insurance between the insurer and insured. For your own personal
insurances you might receive a hard copy or emailed document which is a policy contract,
supported by a schedule or certificate which has the personal details of your insurance such
as the policy period, names, subject matter insured etc. When buying your car or home
insurance you may have entered details into an online proposal form which was then
considered by the insurers when making their decision.
In the London Market, proposal forms are used for some classes of business such as
personal lines of all types, professional indemnity, directors and officers, financial institutions,
jeweller’s block and yachts. Instead of using a proposal form, the broker, acting as the agent
of the potential insured, will summarise the client’s risk on a document called an MRC but
more often referred to by its historical name ‘slip’.
MRCs (slips) have been used in the London Market for over 100 years but while the
documents all appeared the same, vast differences in detail and content existed between
different broking companies, and even between different teams within one broking company.
The drive by the regulator to make the agreements contract-certain took place alongside
other work, already under way in the London Market, to update and standardise the MRC
(slip) formats used in London. From 1 November 2007 standard templates have been
in existence.
There are three sets of standards all supported by guidelines for completion, one for the
open market, one for lineslip and one for binding authority. The structure of the MRC was
discussed in LM2, chapter 8, so will not be covered again. However, what needs to be
considered is the role and benefits of a standardised template for both parties to the
contract, as set out in the following:
• Mandatory headings ensure that key data is not omitted.
• Guidance exists as to what should go into each field, recognising class of
business variation.
• Flexibility exists to add extra fields to the templates for class of business specifics, e.g.
original insured and reinsured for a facultative reinsurance contract.
• A standard format means that data should always be in the same place or section in the
document irrespective of class of business or broking house, thus providing consistency.
• Data being in the same place means that there is less chance of it being overlooked and
should help reduce the risk of disputes in the future.
• A document can be used as the evidence of insurance to the client, meaning that a
formal policy document does not need to be created. However, the downside with this is
that the client gets a document which is not perhaps the easiest to read as an ‘outsider’ to
the market.
The question of what should go to the client and who drives that process will be considered
later in this chapter in Wider business risks on page 2/23.
Be aware
There is now a standard template available for consortium agreements but it is not part of
the suite of templates managed by the London Market Group.
As part of the wider Blueprint 2 project, work has been ongoing to create the framework for
what will ultimately be fully computable contracts (i.e ones that are held primarily digitally,
with the ability to download documents if required).
Chapter 2
The first part of that work has been on creating a Core Data Record, which – using ACORD
standards – identified the critical data needed at the point of bind to drive four key
downstream processes being:
• Premium validation and settlement.
• Claims matching at first notification of loss.
• Tax validation and reporting.
• Regulatory validation and core reporting.
The first two benefits impact both Lloyd's and company markets, with the latter two being
only for the Lloyd's market where tax and regulatory reporting are managed centrally.
Agreement was reached on the CDR for direct insurance and facultative reinsurance in
March 2022. The CDR is not the totality of the data required for the entire contract, just the
items needed to complete those processes automatically.
Work is ongoing to extend the scope of the CDR to more complex placements, including
treaty reinsurance, contracts of delegation and claims.
As part of this project a new MRC v3 was launched at the end of March 2023. This will
support the use of the CDR and create (with the CDR) the record of the contract being
entered into.
Activity
Use these links to find out more about this element of the project and discuss with
colleagues what it means for your business: www.lloyds.com/conducting-business/
requirements-and-standards/core-data-record and lmg.london/document-library for a copy
of the MRC v3 guidance and some sample completed ones.
B5 The value of wordings libraries

As we have already seen, the contract of insurance must contain quite a lot of different
pieces of information and be in clear terms. So, if you are doing something new for a client to
provide cover that best meets their needs and which must be clear and unambiguous, where
should you start?
One place to start is with a blank piece of paper so you create what is known as a
manuscript or bespoke contract. This is very difficult but can have substantial rewards, as
the end result can act as a differentiator from your competitors, both insurers and brokers.
There is no reason why a client cannot be involved in the drafting of manuscript contracts,
however, it will be necessary to consider who the drafter is should any ambiguities
arise later.
If the thought of a blank piece of paper is a bit daunting, perhaps a better option might be to
see whether something general already exists, which can then be amended or added to
as required.
Within the London Market the various underwriting committees, in particular, work very hard
both creating new wordings and updating current wordings, for example, to take account of
new legislation such as the Insurance Act 2015 or Enterprise Act 2016. Look out for
wordings which have been created by these underwriting committees or clauses groups (e.g.
the Aviation Insurance Clauses Group) using the following links.
On the Web
To find out more about centrally created wordings, either generally or in your specific class
of business, see:
bit.ly/2nGsTpr.
www.aicg.co.uk.
If as a broker, you are using some model clauses in the slip you present to the insurers, you
do not have to put the text of such model clauses into the document in full, you only have to
make reference to the clause by its central ‘library code’ which might, for example, start
Chapter 2
LSW/CL, LMA or similar.

This practice means that both broker and insurer need to know their model clauses well, or
at least have access to a wordings library to check them.
If as the broker or insurer you want to amend a model clause, you can either do so using
tracked changes or list the amendments by clause or section number.
Example 2.1
You might find in an MRC (slip):
Institute Cargo Clauses A (1/1/09) CL 382 with exclusion 4.3 deleted.
There are two things that you have to appreciate as an insurer if you agree to this:
• This is an All Risks contract, so by deleting an exclusion the coverage is
automatically wider.
• You have just agreed in a cargo policy covering goods being transported to delete the
exclusion referring to packing or preparation of the goods. This will mean that if the
packing is not adequate, you are likely still to have to pay the claim.
The amendment is perfectly clear and it is up to the person agreeing the wording to be
sure of the potential ramifications of this change.
Many brokers and insurers will have their own in-house wordings databases but there are
also market subscription databases such as the Lloyd’s Wording Repository.
On the Web
If you work for a Lloyd’s managing agent, you can access the Lloyd’s Wording
Repository here: www.lloydswordings.com.
Use this link to access Brexit-related wordings that have been created for use by
the Market:
www.lmalloyds.com/LMA/Underwriting/Wordings/LMA/lma_wordings.aspx – and look for
link to Lloyd’s Europe wordings.
B6 Impact of broker-drafted contracts on the same topic

Alongside model contracts/clauses, which can be amended by both the broker and insurers,
most insurance contracts include a large number of other supplemental clauses which can
be added to them. Cutting and pasting clauses into a contract can cause major issues, if
attention is not paid to whether two separate elements of the text, which are fine on their
own, contradict each other.
From the client’s perspective there are benefits to doing this if terms and conditions are
broadened in a wording, or some area of administration in relation to the contract is made
clearer. However, for both sides, the more that is added, the greater the risk of contradiction/
conflict and ambiguity.
Later in this chapter we will consider the law of interpretation, and how this helps resolve the
problem of two parts of a contract apparently contradicting each other. Of course, it would
always be better if the problem were spotted early on in the pre-contract phase.
At this point we should pause and consider the universal use of coded model wordings and
clauses, which can be unlocked with the use of a wordings library. Does the ultimate client
have access to such a library?
The MRC (slip) into which these codes/references can be inserted may be the document on
which the request for insurance is presented and agreed, but if it is also to be issued to
clients as their evidence of the insurance, do they get sent a code book as well? If the client
does not have a code book, will it be possible to understand the exact contractual terms?
Consider this…
Who actually issues the documentation to the client most of the time? We will come back
to this later in the chapter.
Chapter 2
Sometimes the brokers and/or insurers are not using centrally-registered model clauses/
wordings but some of their own creation. There is the option of starting with a blank piece of
paper and creating a whole insurance contract from scratch but there is no reason why a
broker’s or insurer’s own clauses cannot be added to a model market wording.
These need to be inserted into the MRC (slip) in full for all parties to consider. Both brokers
and insurers should read these carefully, as even though the topic might be familiar, the
actual detail of the clause might differ greatly from broker to broker and therefore from
contract to contract.
Example 2.2
A removal of debris clause as additional cover to a property damage policy:
• One broker’s clause has the cover subject to a sublimit, which forms part of the main
policy limit.
• Another broker’s clause also has it subject to a sublimit, but it will be payable over and
above the main policy limit should there be a total loss.
Consider this…
Which of the above examples provides wider coverage for the client, and which will give
the insurers a shock if they are unclear as to the cover?
B7 When regulators require specific wordings

Later in this chapter we will consider the impact on wordings creation when the insured is
deemed by the regulators to be a consumer. There are other situations where it is important
to ensure that the contract includes all required content to meet specific regulatory
requirements.
A significant amount of the business coming into the London Market does so from overseas
and the permission of insurance regulators in the various territories is key to accessing the
business. With the permissions often come obligations which include, for example, reporting
and the payment of taxes. The regulators can also have requirements about wordings, which
might be in relation to language, content, or the fact that the wording must be filed or
registered with the regulator before use.
A search of Crystal, which is the Lloyd’s Market international regulation database, identifies
the following examples (which are for illustration only).
Country Requirement for language
Algeria Policies usually issued in French.
Belgium There are no requirements for non-life insurance contracts to be in a local language.
However, Lloyd’s recommends that documentation is in French or Dutch unless the insured
requests, or agrees to, another language.
France The French Insurance Code states that insurance documents (including proposal forms,
cover notes, policy contracts and endorsements) must be in French, unless:
• The insurance contract covers a large risk, in which case the language should be that
of the country whose law governs the contract.
• The insured is normally resident in another European Union country and makes a
written request for the policy to be in their national language.
• The risk is located outside of France and the insured submits a written request for the
contract to be in the native language of the risk location.
Reinsurance contracts may be in any language (but in practice are often in English).
Israel Policies for personal lines business should be in Hebrew unless an insured requests a
policy in English. If the Hebrew contract differs from the English contract, the insured will
be entitled to rely on the Hebrew version. For commercial classes, insureds routinely
receive policies in English.
How about regulators’ requirements as to specific clauses? The best known is probably the
general requirement in the USA for a service of suit clause to be inserted into contracts. This
contract agrees that the insurers are prepared to be sued in a court in the USA and this is
Chapter 2
very much part of being allowed to write the business in the first place.
Activity
If you work for a broker or insurer, find out what you do to ensure that contracts are
satisfactory regarding language and content from the regulators’ perspective.
Use this link for up-to-date information from Crystal:
crystal.lloyds.com/search.
Look up an EEA country and see the results for both Lloyd’s and Lloyd’s Brussels using
the same link.
B8 What are side letters and when are they used?

Side letters are used in many types of contracts and are often used to include matters which
are deemed sensitive, where one party does not want information shared with wider parties
which might have access to contractual documentation. There are other uses for side letters
such as:
• Clarification – Side letters are often used to confirm additional details that are not known
when the main documents are finalised, or to clarify certain points.
• Variation – When dealing with any last minute changes, it is often easier to set out the
relevant details in a side letter than to make manuscript changes and have them initialled.
Side letters are also an efficient means of documenting any changes that have been
agreed in relation to a party’s standard terms and conditions.
Consider this…
What do you consider to be the main risk of having the terms of a contract scattered
between multiple documents?
A side letter has to satisfy all the requirements of any type of contract to be enforceable as a
contract, including consensus and consideration, but if used will be a separate contractual
arrangement to that within the MRC (slip).
B9 Reverse engineering for wordings

Reverse engineering for wordings is a concept used particularly in the reinsurance market
where the traditional concept of an insurer writing direct business and obtaining reinsurance
protection to cover its account is reversed. The main players are the insured and the
reinsurer, with the direct insurer inserted into the middle as a fronting arrangement often to
satisfy regulatory requirements.
Reinforce
All London Market insurers write a large proportion of their business for clients outside the
UK and need regulatory permission to do so. Sometimes the only permission obtainable is
to write reinsurance business in a territory where a local or admitted insurer effectively has
to front the business to satisfy the local requirements.
What generally happens is that the reinsurer puts together the contract terms as it will be the
one ultimately taking the risk. Care must then be taken to ensure that the direct insurance
contract, which will be inserted between the client and the reinsurer, is as near as possible
identical to the reinsurance contract.
Why might it not be identical? If, for example:
• Care is not taken to read the contract terms and elements are missed making the
insurance wider than the reinsurance or vice versa.
• Regulatory requirements demand certain wordings be inserted into the direct local
insurance, which are not contained in the reinsurance contract.
A global insurance contract might be required to cover a client’s worldwide risks. An insurer
might not be able to write the business within each territory as direct insurance because it is
not an admitted insurer, and might only be allowed to write reinsurance in some locations.
Chapter 2
Therefore, what will be created is a structure involving some local insurers fronting elements
where required, which will then be reinsured by the overseas insurer. The overseas insurer
will directly write the other elements it is allowed to. If there is a difference in the cover that
can be provided by the local insurers and that which would be offered by the overseas
insurer, then a separate difference in conditions policy can be obtained to ensure the widest
cover is obtained.
B10 Considerations when clients are consumers

The traditional regulatory definition of a consumer was someone who buys insurance other
than for their trade, business or profession, i.e. for their personal use. This definition has
been retained in legislation such as the Consumer Insurance (Disclosure and
Representations) Act 2012 and the Insurance Act 2015. The regulators have become more
rigorous in their expectations of insurers, including that they treat their customers fairly. One
element of fairness is having clear and unambiguous insurance policy documentation both
pre- and post-sale.
Refer to
Remind yourself about the licences and other permissions required by insurers in Why
might the client have no choice about using the domestic market? on page 1/4 and Market
regulation on page 1/10
Activity
If you, or someone you know, has motor or house insurance, take a closer look at the
documentation in terms of how it is laid out. Consider whether you think the insurers have
tried to make the key elements of the contract clear, e.g. highlighting what is and is not
covered and any ‘special terms’.
All customers irrespective of their status should be treated fairly in this way and not expected
to engage in a treasure hunt to identify the terms of their insurance. The concept of conduct
risk continues this theme but specifically widens the application to all types of customer.
Insurers’ behaviour towards different types of customer does not, however, have to be
identical but should be mindful of their relative level of insurance knowledge, combined with
the complexity of the product being offered and the sales chain being used.
Refresh yourself on the points made in FCA/PRA on page 1/13 about vulnerable customers.
Activity
Use this link to watch a short video about conduct risk: bit.ly/2oQcgJm.
Consider this…
You, as an insurer or broker, have a client that is a small and very successful architects
partnership, which has won a number of major awards and is rated as one of the up-and-
coming young firms in the business. While they might be excellent architects, is it fair to
assume as a small business they have the capacity to become as sophisticated about
insurance as they are about design and construction?
The regulator thinks that small and medium enterprises, particularly those which fall within
the regulators’ definition of micro-enterprise should be treated more like consumers than
commercial customers. However, the Consumer Insurance (Disclosure and
Representations) Act 2012 will only apply to consumers as defined at the start of the
section, while the Insurance Act 2015 will apply to micro-enterprises.
Be aware
The regulatory definition of a micro-enterprise is one which employs fewer than ten people
and has an annual turnover of less than €2m. It is still stated in Euros as the definition
Chapter 2
originates in European regulation.
Both types of client (consumer and micro-enterprise), as well as small businesses with up to
50 employees or turnovers of less than £6.5m (NB pounds not Euros) can use the Financial
Ombudsman Service (FOS), which takes fairness as its measure rather than the strict letter
of the law.
How does this relate to wordings? As an insurer develops an insurance product it will usually
include a contract to support it, which should clearly set out the terms.
It is not a good sign if the underwriter proudly tells you that a contract is so complicated that
not even the brokers can understand it. Everyone should be able to understand the general
terms of the contract regarding what is covered and what is not, and any particular things
that the insured should do or not do, especially if their failure to comply might lead to the
policy being avoided or their ability to make a claim compromised.
From a practical perspective, while we will discuss the rules governing the legal
interpretation of contracts later in this chapter, many consumers will not take legal action if
there is a problem with their contract but will initially use services such as the FOS, which is
free to the consumer. As the FOS looks at fairness and is not bound by the strict rules of
legal interpretation, it might lead to a different outcome from the one insurers
were expecting.
The Consumer Rights Act 2015 provides that a contract term is transparent if it is
expressed in plain and intelligible language and, if written, is legible. If a term in a consumer
contract could have different meanings, then the one most favourable to the consumer
will prevail.
There are three terms which come up time and time again in relation to consumer policy
contracts but are in fact equally applicable to all policy contracts. They are:
• clear;
• fair; and
• not misleading.
Activity
Use this link to obtain the latest version of the Lloyd’s Market Association Consumer
Wording Guidance document (CWG):
www.lmalloyds.com/CWG.
Suggestions of things to consider within the CWG include:

• Is the documentation easy to read and follow? A key theme from the FCA is a document’s
look and feel.
• Have tools such as different fonts, colours or text boxes been used to draw the client’s
attention to key points such as exclusions?
• Is there clear signposting to key information – no small print buried in the document?
• Does important content appear early in the documentation, as most consumers (and
many commercial clients) do not read the documents until a claim arises?
• Is the running order of the document logical from a consumer’s perspective?
• Are definitions provided in the documentation for clarity, and if so, are they shown in bold
or italics to stand out?
Consider this…
Remember what has already been discussed about potentially sending a copy of the MRC
(slip) to an insured as the contract document, does this satisfy the FCA’s requirements if
the customer is a consumer?
Activity
Find out whether your company has consumer business and the steps taken to ensure
compliance with consumer wording requirements.
Chapter 2
In late July 2022 the FCA set out its final rules and guidance for the new Consumer Duty.
This sets higher and clearer standards of consumer protection across all financial service
companies. Many of the concepts within it are not totally new; however, some key elements
are reinforced that relate to wordings, including the need to ensure that consumers
understand the products that they are buying, products are developed with the target
customer in mind and that those products provide fairness in terms of price and value.
The rules came into force in July 2023 for new and existing products.
Activity
Use this link to read a helpful CII document: www.cii.co.uk/media/10129004/good-
practice-guide-consumer-duty-insurance.pdf.
If your business is involved with consumers, speak to your compliance team to find out
what this means for your organisation and what steps will be taken to evidence
compliance to the FCA – are any wordings being changed?
B11 Impact of using wordings originating outside the

London Market
We should consider why wordings from other markets might be used. Is it always in a
reinsurance scenario? The answer is no, they will not always be used in a reinsurance
scenario. Many overseas insurers use contracts that have origins in the London Market
and, equally, London Market insurers might use contracts whose origins are in
other marketplaces.
Why might they do this? The reasons could involve the following:
• The model wording for the product from another (non-London) market is wider than the
London equivalent and the customer wants the wider wording.
• The insurance placement has been led by another non-London insurer and only part of
the placement is in London, so it would not be helpful to have the insurance based on two
different sets of terms and conditions.
What problems might arise? Let us assume for the moment that the contract being used has
an accurate English translation. Will the translation have legal standing? Let us also assume
that the underwriter reads the contract and is happy that it contains no ambiguity.
What if the underwriters or brokers decide to make some additions to the wording, perhaps
following a pattern they would normally follow when using an English model wording. They
should consider carefully whether the same result will apply if the model wording they are
seeking to add to is different. Are they creating uncertainty or ambiguity where it did not
exist before?
Another area which can cause problems is in relation to the interpretation of contracts. When
using an overseas contract, it is important to check whether the overseas wording has an
inbuilt dispute resolution contract (e.g. a law and jurisdiction clause or an arbitration clause).
If it does, it is likely to refer to the local law and jurisdiction of the market which is the source
of the contract. For example, if using a property contract which was created by a US insurer,
it might have US-based dispute resolution wording built in, which might not be what the
insured actually wants.
Finally, if an additional wording is being incorporated, perhaps including terms such as
conditions precedent to liability, then it is important to understand that conditions precedent
are not legally recognised in some jurisdictions, so the impact that the insurers were
intending to achieve might not be possible.
Example 2.3
Conditions precedent to liability are often used in English law policies within claims
notifications clauses. This means that if they are not complied with then the policy remains
Chapter 2
valid but the insurers will not have to respond to the claim, as the condition that has to be
satisfied before (preceding) liability attaches has not been met.
Consider this…
Do you think other legal systems recognise the concept of conditions precedent? Also
consider what impact if any the Insurance Act 2015 has had on these types of clauses.
Question 2.3
Which of these problems is most likely to cause insurers in the London Market
serious issues if they are using a wording that originated in an overseas market?
a. It may impact on the price charged. □
b. The tax applicable might be different. □
c. The wording might have a different interpretation under English law. □
d. There may not be an accurate translation. □
C Contract interpretation
In this section we will consider what has to occur if questions arise about what a contract
means, i.e. its interpretation. English law has a well-developed set of guidelines for
interpreting both statutes (Government-made law) and contracts, and it is the rules that apply
to contracts which will be discussed here. We will be considering how a court might go about
trying to interpret the meaning of an agreement.
C1 Interpretation and the contract document

The first thing to consider is which document or documents we might have to ask a court to
review. The MRC (slip) performs the role of presenting the risk to the insurers and is the
document on which they confirm their agreement to participate. It may also be sent to the
client as the only insurance contractual document and, if that is the case, the court will have
to work from the MRC (slip). There may or may not be a detailed wording that sits alongside
the MRC (slip), creating a slip policy, but if model clauses are used they may only be
referenced by their codes and a wordings library/database is needed to find the
detailed content.
If, however, a formal policy has been created from the MRC (slip), then that will become the
primary document and the MRC (slip) becomes secondary. We will consider shortly what the
impact might be if the policy has been created incorrectly from the MRC (slip) and does not
reflect the same terms.
When considering a contract, the courts will use two sets of guidelines:
• statutory rules such as the Consumer Rights Act 2015 and Insurance Act 2015; and
• common law rules developed through case law.
For commercial contracts there are very few statutory rules governing what should or should
not go into contracts. However, as we have seen, consumers are better protected, so if a
term is deemed unfair under the provisions of the Consumer Rights Act 2015 it will be
interpreted in their favour.
C1A Common law rules of interpretation
Ordinary meaning – This means that the court will assume that the parties intended the
words to have their ordinary meaning.
Technical or legal meaning – If the word or words in question have a well-established
technical or legal meaning, the courts will use this meaning. Insurance is full of words which
have a different meaning from that in general use, and in some cases, the meaning can differ
between classes of business as well.
For example, the word ‘average’ can mean the following:
Chapter 2
Word Ordinary meaning Non-marine insurance Marine insurance
Average Typical or normal Underinsurance Loss
When a word or phrase has a technical meaning it must be shown that both parties to the
contract were familiar with that use of the word or phrase, rather than its ordinary meaning,
for the technical meaning to be relied upon.
Reinforce
Remember the earlier part of the chapter relating to consumer contracts and the need to
be clear and not misleading. When using words which have a strict legal interpretation
such as ‘riot’ or ‘theft’, insurers should make clear that the client understands the legal
meaning being used by defining the words clearly within the contract.
The courts will consider words in the context they are used, particularly when they look at
whether a word is meant to be of a similar nature to those around it. A good example is when
words such as ‘storm, tempest or flood’ are grouped together. The courts have interpreted
this to mean that the flood is intended to involve some aspect of suddenness, largeness or
violence and that gradual seepage of water from fields into a building is not a flood.
If there is a list of perils which ends with a more generic phrase such as ‘all other like perils,
losses and misfortunes’, then consideration must be given to what came in the list
beforehand to decide whether a peril, not actually listed, would fall within the generic
contract. The courts use a rule called ejusdem generis, which means ‘of the same kind’,
whereby they look at the context of the main list and only consider those other perils which
seem to be naturally included.
The case of Navigators Insurance Co Ltd and others v Atlasnavios-Navegação Lda
(Supreme Court) (2018) concerned the interpretation of an exclusion in a marine war and
strikes policy, relating to infringement of customs regulations and whether, as the
infringement was due to the malicious acts of third parties, it also came within the exclusion.
In the first instance, the court did not believe that it did and found for the insured. However,
the insurers appealed and won. The Court of Appeal referred to the ejusdem generis rule to
reinforce the position that it can limit the operation of exclusion clauses, as well as those
offering positive cover. The insured appealed to the Supreme Court who agreed with the
Court of Appeal.
What if the allegation is that the contract is ambiguous? Who will win the argument? The
court looks at who drafted the wording. Once this is established the benefit of the doubt will
be given to the other party. This is called the contra proferentum rule, which means that
ambiguities will be interpreted or construed against the drafter.
Reinforce
Remember the point made above that unfair terms in consumer contracts will be
interpreted against the insurers.
Let us consider this in light of who drafts/proposes the wording within the London Market.
The broker, who is the agent of the insured, puts together the MRC (slip), which, remember,
might be the document sent to the insured. Even if the insurer requires a formal policy to be
created, who will do this? Is it generally insurers in the London Market? No, it is not. The
MRC (slip) has a heading within the risk details section called Insurer Contract
Documentation which states the type(s) of insurer contract documentation to be produced,
by whom, and any particular requirements, e.g. any requirement for an insurer
approved policy.
In almost every case, the insurers effectively delegate the production of any documentation
(whether it be the MRC/policy etc.) intended for the client to the broker. The insurers do not
generally check the final output, thus creating a mini outsourcing arrangement, although the
insurers are deemed to have agreed the wording at the time of placement. While brokers
might ask insurers to review the wording before issuance, the insurers will not see the final
package sent to the clients.
The reality is that while insurers generally delegate responsibility for the creation of
Chapter 2
documentation to the broker, although they should take the opportunity to check if there is
ambiguity, it will be taken that the insurer created the documentation and in the case of
argument the benefit of the doubt will be given to the insured.
What about inconsistencies? Remember what was discussed earlier about adding extra
clauses, including the need for care when cutting and pasting, and the issues this can cause
such as contradictions within the document, where the provisions of one section clash with
those in another.
In the event of inconsistencies, the traditional interpretation rules look at how a model
wording has been adapted by the parties for the contract in question, and assume that the
amendments were what the parties intended. Hence, if an additional clause clashes with the
original unamended model wording, the additional clause will be taken as the parties’ intent.
What if the MRC (slip) was then superseded by a formal policy document? If there is clash
between those two documents, then the formal policy document will be taken as the final
version, as it is the formal expression of the contract between the parties.
C2 Interpretation issues with client contract

So far we have worked on the premise that the contract is driven by the insurer but a client
could take a large part in the development of a bespoke or manuscript contract. In this case,
the contra proferentum rule will turn 180 degrees as insurers might be given the benefit of
the doubt if the ambiguity comes from a client contract (or a client insertion into a
bigger contract).
Activity
Find out from your colleagues if there is an example in your organisation of when clients
have taken an active part in the creation of a policy wording.
C3 The role of the wordings specialist

Do you have colleagues who are wordings specialists? This is a different role to that of
underwriters and claims personnel.
The role of wordings specialists requires them to have the skill to read and review complete
contracts and to work out if they fit together properly, are clear, fair, non-misleading, cohesive
and above all make sense. While an underwriter should also be able to do this, it is the
contract specialist’s primary role.
A competent wordings person in either an insurer’s or broker’s office should be performing
these key functions:
• reviewing contracts and considering them in their entirety for ambiguity/
contradictions etc.;
• working on development of new products/contracts while also being mindful of regulatory
and statutory requirements both at home and overseas;
• considering issues which arise from claims and complaints, and assisting underwriters
and placing brokers with possible solutions; and
• monitoring changes in law, e.g. the Insurance Act 2015 and the Enterprise Act 2016, and
considering whether changes to existing wordings and other documentation (key facts,
proposal or claims forms) are required.
Activity
Find out if you have any dedicated wordings specialists within your organisation and
introduce yourself to find out what their role involves.
Use this weblink to see the model clauses that were issued by the LMA relating to the
Insurance Act 2015:
www.lmalloyds.com/actclauses.
C4 Wider business risks

As well as the insurance risk which is generally understood, the principle of Solvency II
instructs insurers to consider other types of business risk such as operational or counterparty
Chapter 2
risk. When considering the risk a poor wording could present, it is important to go back to the
basics. Do both parties clearly understand the agreement they have entered into? Or is there
a risk that when tested the contract will be found to be deficient, exposing the insurer to
financial and reputational risks? Does the insurer know exactly who its contractual partners
are and the true extent, both legal and financial, of its exposure under the contract? What will
the financial and reputational impact of disputes be? Under Solvency II all risks must be
quantified and have capital balanced against them, so the better the management and
mitigation of those types of risks, the less capital has to be set aside to balance them.
Although the UK has now moved away from Solvency II with the passing of the Financial
Services and Markets Act 2023, the basic common sense concepts of the business risks
still apply and any new regulation is likely to still expect understanding and awareness of
them by financial services organisations.
In 2022 Lloyd's moved away from the previous Minimum Standards concept to a new
concept of Principles for doing business. These Principles set out the fundamental
responsibilities for all managing agents but seek to look more at outcomes, rewarding the
high performers with growth opportunities while still maintaining oversight and intervention
for the weaker ones to enable them to achieve the necessary performance levels.
In relation to wordings in particular, the Principles offer the following guidance:
Principle 1: Underwriting profitability
High-level Principle: managing agents should produce and execute syndicate business plans
that are logical, realistic and achievable, and ensure the delivery of a sustainable profit,
including expense management.
Sub-Principle 3: have underwriting controls, monitoring and reporting in place that are
appropriate to their risk profile in order to deliver the agreed business plan.
The practical guidance under this sub-Principle includes:
• pre- and post-bind reviews to be done; and
• use of specialist legal/wordings personnel to assist with the production of wordings.
Managing agents will be assessed in terms of their ability to meet the expectations set by the
Principles according to a maturity matrix (from foundation to advanced) and the use of
specialist personnel is an indicator of an intermediate-level organisation.
On the Web
Use this link to find out more about the Principles: assets.lloyds.com/media/
9cc45b1c-8121-46b1-ae91-e7a4e24abd04/Principles-for-doing-business-at-Lloyds.pdf.
Be aware
Lloyd's has now removed the requirement for followers to conduct pre-bind checks and
leaves it to each managing agent to decide what controls that they wish to apply for their
follow business.
Activity
If you work for a broker or an insurer find out if there have ever been any disputed claims
arising because of a poorly worded contract. Find out both how the problem was resolved
and its cost, which could be financial, time-related or reputational. What steps have been
taken to ensure that similar issues do not arise in the future?
Key points

Chapter 2
Who’s who in the creation of a contract?
• Various parties, other than the insured and the insurers, might influence the purchasing
of insurance, as well as the terms of the contract.
• It is important to clearly identify the parties to the contract.
• Other parties may have rights under a contract, e.g. via the Third Party (Rights against
Insurers) Act.
• Joint insureds have the same rights and obligations under the insurance.
• Insureds under composite policies do not have the same rights and obligations.
• Non-parties might have rights in insurance contracts under the Contracts (Rights of
Third Parties) Act 1999 but the operation of the Act is often excluded in
insurance contracts.
Why is the contract wording so important?
• A poorly drafted wording can lead to problems for both insured and insurers. Beware of
cutting and pasting.
• Contract certainty is the complete and final agreement of all terms between insured
and insurer at the time they enter into the contract.
• The London Market has contract certainty principles.
• Some classes of business use proposal forms.
• The Market Reform Contract (MRC) is the document generally used in the London
Market to present risks to insurers, but it is often called by the historical name of the
‘MRC slip’.
• There are three formats each with supporting guidance notes, one for open market,
one for lineslip and one for binders.
• Contracts are often based on model wordings, supplemented by additional clauses
which can be model in nature, or can be drafted by insurers or brokers.
• Care should be taken to avoid contradiction when adding clauses to model wordings.
• Some wordings are required by regulators both in the UK and overseas, e.g. a service
of suit clause for US business.
• Side letters contain information not in the main contract.
• Specific considerations apply if the insured falls within the regulator’s classification
of consumer.
• The Consumer Rights Act 2015 requires that consumer contracts are clear, fair and
not misleading.
• Overseas wordings are used in the London Market and care should be taken to read
their terms carefully before then adding any additional clauses, which might not work in
the same way when added to model London wordings.
Contract interpretation
• When interpreting contracts, the courts will start with the ordinary meaning of words
and then consider any technical meaning.
• Wordings specialists at insurers or brokers work alongside underwriters and claims
teams. They review wordings in their entirety, monitor regulatory requirements, and
consider feedback from claims and complaints.
Question answers
2.1 b. They might require confirmation of insurance cover before starting work.
Chapter 2
2.2 a. It allows third parties to claim directly against insurers if the insured is insolvent.
2.3 c. The wording might have a different interpretation under English law.
Self-test questions
Chapter 2
1. Which of these is not an external stakeholder who might be involved in the purchase
of an insurance contract?
a. Bank. □
b. State. □
c. Business partner. □
d. Tax authority. □
2. Explain the difference between a joint and composite policy.
a. A joint policy treats the insured as a combined unit and a composite policy treats □
them as separate entities.
b. A composite policy treats the insureds as a combined unit and a joint policy treats □
c. A joint policy should be priced more highly than a composite policy, as claims will □
generally be larger.
d. A joint policy can only be written in the Lloyd's market but any insurer can write a □
composite policy.
3. What do insurers generally do to respond to the provisions of the Contracts (Rights

of Third Parties) Act 1999?
a. Charge an additional premium. □
b. Specifically contract out of the Act's terms. □
c. Ignore it as the Act does not apply to insurance. □
d. Always specifically list any eligible third parties. □
4. What does the term consensus ad idem mean in practical terms?
a. Premium has been paid. □
b. The offer has been accepted. □
c. Both parties have agreed on the terms. □
d. The risk has incepted. □
5. For what main reason should a property insurer be very clear about the precise
location of a building it is insuring?
a. To check for catastrophe exposure. □
b. To check the tax payable. □
c. To check the language of the policy. □
d. To check whether a local broker is needed. □
6. For what main reason should underwriters be familiar with the main clauses used in
their class of business?
a. Brokers do not have to provide track changed versions of clauses they have □
Chapter 2
changed, just a list of changes made.
b. The electronic placing systems will not show any details of coverage in the □
presentation being made.
c. The underwriter's authority will be linked to the clauses they are using. □
d. The taxes charged depend on the clauses. □
7. If brokers are using their own wording, can they present the slip to insurers without
providing it in full?
a. Yes, if the original language was English. □
b. No, if the original language was not English. □
c. Yes, if it has been centrally registered and has an LSW or similar code. □
d. No, they must always provide it in full. □
8. What are the three terms that are central descriptors of a good contract wording?
a. Clear/fair/not misleading. □
b. Wide/not misleading/brief. □
c. Wide/brief/easy to read. □
d. Ambiguous/easy to read/cheap. □
9. Which of these is not a benefit to an insurer of employing a dedicated contracts/
wordings specialist?
a. Working on new products. □
b. Assisting with pricing. □
c. Ensuring contract certainty. □
d. Monitoring changes in the law and their impact. □
10. Explain the concept of pre-bind quality assurance (PBQA).
a. Checking the pricing before quoting. □
b. Ensuring that contract certainty is achieved. □
c. Ensuring that all regulatory requirements are met. □
d. Ensuring that underwriters only operate within their authority. □
Business planning
3
and capital setting
Chapter 3
outcomes
Introduction
A Using your capital 3.3
B Creating the business plan 3.1
C Monitoring and reporting on the plan 3.2
D Accounts 3.4
Key points
Question answers
Self-test questions
Learning objectives
• explain the purpose and effect of business planning;
• explain the importance of ongoing monitoring and reporting on the business plan;
• explain the capital setting process; and
• explain technical accounts.
Introduction
In this chapter we will explore the key process of business planning and its starting point,
which is input from the investors and a consideration of the business’s risk appetite. The
investors will have indicated their expectations for returns on their capital and acceptable
levels of volatility, so everything else the business does should flow from a desire to satisfy,
and ideally exceed, those expectations. However, to exceed them, risk will have to be taken
which needs to be considered and quantified in the planning process. We will also look at the
tools that can be used both internally and externally to measure whether the planning and
risk taking have been successful.
Chapter 3
Key terms
1 in 200 year event Balance sheet Business planning Capital

Capital requirements Cash flow statement Combined ratio Enterprise risk
management (ERM)
Environmental, Financial accounts Gearing Income statement/
social and profit and loss
governance (ESG)
factors)
Liquidity Loss ratio Management Monitoring
accounts
Profit Own Risk and Return period Risk appetite
Solvency
Assessment (ORSA)
Senior Management Solvency Syndicate Business
Arrangements, Forecast (SBF)
Systems and
Controls (SYSC)
A Using your capital

A1 Sources of capital and what the investor wants
In chapter 1 we considered the various types of capital that a business might attract,
including from shareholders in insurance companies and investors in Lloyd’s. All of those
investors want the investment to be the best use of their money, given there are other
investment opportunities such as in property or other businesses.
The key concepts are return on capital or return on equity together with acceptable volatility.
Can the company make enough money to allow continued investment in the business, funds
to be put to one side for regulatory purposes, and also for investors to be able to see some
dividends or profit share-outs? Has the capital/equity been used in the most efficient or
effective way to make that return?
A2 Risk appetite
How much risk appetite do you have personally? Will you cross a busy street anywhere or
will you always go to a crossing? Financially, would you bet on a horse which is the favourite,
so the odds are short but you are more likely to win? Or would you bet on the horse with no
track record and higher odds?
If you are a broker or insurer, do you think your customers have a risk appetite? Do you think
it is high or low? Do you see evidence of it in terms of the insurers they are prepared to
accept on their policies? Will they only accept insurers with a security rating from Standard
and Poor’s of AAA or equivalent? What is that telling them? Perhaps it is telling them that the
company will be there when needed to pay valid claims, which removes one element of the
risk from the process.
Chapter 3 Business planning and capital setting 3/3
From a regulatory standpoint the PRA sets the following requirements in its general
prudential rules:
A firm must at all times maintain overall financial resources, including capital resources
and liquidity resources, which are adequate, both as to amount and quality, to ensure that
there is no significant risk that its liabilities cannot be met as they fall due.
GENPRU 1.2.26.
As an insurer you should also have a risk appetite, which has been set by the board. A risk
Chapter 3
appetite statement might include the following types of information:
• A statement of risks which are acceptable for a company to bear.
• Risks that are not acceptable.
• The probability of failure deemed to be acceptable, which will be expressed as a
probability in time such as 1:100 over twelve months.
• The maximum loss that is acceptable from any one incident.
The PRA requires that the probability of failure be no higher than a 1 in 200 year event over
a twelve-month period but insurers can set more stringent targets if they choose. Once the
risk appetite is decided, the business can then set more detailed criteria for acceptable risk,
investment and reinsurance policies, and other general policy statements.
Remember that risk for the business is not just insurance-based risk, there are operational,
counterparty, credit, liquidity and investment risks as well.
An insurer might set out a more detailed risk appetite for its business. For some categories a
zero tolerance of risk is perfectly acceptable, but for others zero tolerance would make the
business unworkable.
Look at these examples:
Risk type Tolerance
Insurance No tolerance for total claims that exceed 65% of premium.
No appetite for business from Latin America to exceed 20% of

premium income.
No tolerance for claims reserves to be more than 2% under final

payment figure.
Credit/counterparty A tolerance of counterparty losses of up to 5% of reinsurance recoverables.
Operational No tolerance for IT interruptions exceeding more than 30 minutes.
Zero tolerance of theft by employees.
Activity
See if you can find evidence of the above within your organisation.
A2A Enterprise risk management (ERM)

ERM is a method by which a company (or enterprise) manages risk of all types. It provides a
framework through which risk can be assessed for frequency and severity, as well as
mitigation, monitoring and reporting. An insurer, as well as any other type of business, can
be derailed by risk within the business (e.g. a whole team suddenly leaving the company),
which causes financial issues that had not been measured in the same way as more familiar
insurance risks.
This diagram illustrates how ERM works:
Review
and report
risks
Address Identify
risks risks
Chapter 3
Assess
risks
A key part of the process is to identify the risks the business faces, record them on a risk
register, and analyse the extent to which those risks can be avoided or mitigated. The
avoidance or mitigation potential will also then determine the extent to which the company
decides it has the appetite to take on those risks in furthering its goals.
It is also important to then monitor those risks regularly, using certain key performance
indicators, as well as identifying some key controls to manage and mitigate the
risks identified.
Question 3.1
Which of these situations is an example of a counterparty risk?
a. Client not paying their premiums. □
b. Interest rates not being high enough to generate investment returns. □
c. Claims personnel acting outside their authority. □
d. E-placing systems going offline for a day. □
A2B Imagining the black swans
Have you ever seen a black swan? They do exist but are very rare and come from
Australasia. They give rise to a concept in risk management, which deals with a highly
improbable incident with three principal characteristics, its:
• unpredictability;
• massive financial impact; and
• shock effect, as it never could have been conceived of as existing as a risk before the
incident occurred.
The WTC loss in 2001 falls into the black-swan category. A more recent example is the
explosion in Tianjin in China in 2015 or the pandemic in 2020 – although commentators
disagree whether the pandemic is a true black swan given that pandemic modelling did exist.
Activity
Read this article about black swan preparation and see what you can find out about the
Tianjin incident: aon.io/2jQdpsE.
Speak to colleagues to see if they consider the COVID-19 pandemic to be a black swan
event. For more opinions, you could read what is being written about it in the
insurance press.
As a starting point, use these links to read about both opinions:
www.forbes.com/sites/forbesbooksauthors/2020/03/19/covid-19-is-a-black-swan/?
Chapter 3
sh=6fb5ba437b4b.
theconversation.com/coronavirus-is-significant-but-is-it-a-true-black-swan-event-136675.
A2C Own Risk and Solvency Assessment (ORSA)

Every insurer covered by the Solvency II rules has to create and maintain a current ORSA
which is defined by Lloyd’s as:
…the entirety of the processes and procedures employed to identify, assess, monitor,
manage, and report the short and long term risks a (re)insurance undertaking faces or
may face and to determine the own funds necessary to ensure that the undertaking’s
overall solvency needs are met at all times.
Be aware
With the passing of the Financial Services and Markets Act 2023, Solvency II is no
longer in force in the UK. However, the basic principles are still good practice and the
future regulatory framework is likely to include something similar.
Lloyd’s gives guidance to syndicates regarding its expectations for ORSA in its Principles for
doing business (Principles 3 (Capital) and 10 (Governance, Risk Management and
Reporting), which includes the following:
• Foundation level: managing agents' own assessment of the risks and associated
economic capital required to meet their strategic objectives are captured within the ORSA
report in line with Solvency II requirements.
• Advanced level: a detailed comparison between material risks captured in the risk
management framework, the ORSA report and modelled risks takes place to ensure
consistency and support a holistic view of risk across the business.
Be aware
The Lloyd's Principles for doing business identify different levels of maturity in terms of
what managing agents will be doing in any particular area. The foundation level is the
base line that all managing agents have to meet, but a managing agent meeting the
advanced standard will benefit from opportunities to grow and develop their business.
A3 Return periods
The regulators want companies to be managed in such a way that their likelihood of failure is
a 1 in 200 year event over a twelve-month period. The return period is a measure of the
likelihood of recurrence of a particular event. Insurers also consider risks they face in the
same way. The one with which most people will be familiar is natural catastrophes such as
storms or floods. One of insurers’ concerns is that major events such as flooding are
happening more frequently now than before, thus throwing the predictive models about
frequency and severity into disarray.
On the Web
Read this report to see what investigation has been done into whether floods in the UK
are actually more frequent and more severe: www.lloyds.com/news-and-insights/risk-
reports/library/geomorphology-and-changing-flood-risk-in-the-uk.
A4 Matching risk appetite with company strategy

Having identified and set out the risk appetite at a high level within the company, it is
important to then align it with the company strategy so that everyone understands what to do
when writing the business.
The strategy and risk appetite should cover, for example:
• target areas of business;
• any areas of business not being written;
• any new markets being targeted or not targeted; and
Chapter 3
• changes in distribution models.

However, might there be challenges if you, as an insurer, are part of a larger market or a
branch of a larger international organisation?
How must insurers operating within that marketplace manage their internal plans to be
aligned with what Lloyd’s wants to do?
In its annual report for 2021, Lloyd's stated that its strategy for that year had four pillars:
• Returning to sustainable, profitable, market-leading underwriting performance.
• Implementing the Blueprint 2 digitalisation strategy for the long-term success of
the market.
• Sharing risk to create a braver world.
• Building a diverse and inclusive culture.
In relation to the pillar relating to sharing risk and creating a braver world, the steps were
taken by Lloyd's in 2021 and 2022 to embed sustainability across the market.
Lloyd's itself committed to transition investments to net zero by 2050 and also for the market
as a whole to reach a net zero underwriting position by 2050.
As part of that work, Lloyd's has set out an ESG strategy and guidance to support the
market, setting its own strategy and frameworks; however, with a set of minimum
requirements to be implemented during 2023.
Environmental, social and governance (ESG)
Is this just about climate change? No it is not – it is a far wider spectrum of issues facing the
world as a whole, including forced labour and gender inequality, as well as climate change.
All organisations within the wider financial services industry should now be considering their
own ESG strategy and factoring that into their business decisions.
For example, as an insurer, what is your position on coal risks, or risks that involve animal
transport, or the use of forced labour anywhere in the production chain? Are you changing
your business plan to take into account business that you will no longer be writing in the
future? Is there any new business that will be filling those gaps?
As a broker, what is your own organisation doing about sustainability, and what questions
are you seeing your clients being asked by insurers about the way they run their
businesses?
What about the investors in your businesses, are they interested in your ESG credentials?
Are you interested in theirs?
Activity
Use this link to read more about the FCA's ESG strategy: www.fca.org.uk/publications/
corporate-documents/strategy-positive-change-our-esg-priorities.
Use this link to read more about ESG in relation to non-life insurance:
www.unepfi.org/psi/wp-content/uploads/2020/06/PSI-ESG-guide-for-non-life-
insurance.pdf.
On the Web
For the annual report, see: www.lloyds.com/investor-relations/financial-performance/
financial-results.
It is important to note there are caveats to show how the managing agents/syndicates are
still in control. There is mention of stakeholders and partners within the wider marketplace,
which include both those within the market and the business partners outside.
How about a branch office of a major international insurance company? Where is the
strategy set? Is it in head office and then fed down to the branches? Can it be fed upwards
from the branch?
Finally, consider an insurer which is both a company and a syndicate? How are those
varying sources of strategy managed in reality?
Chapter 3
B Creating the business plan
In this section we will consider the next step in the process, having identified a risk appetite
and had some guidance from investors as to their expectations. We will examine both the
development and contents of an underwriting business plan, and what the plan will then be
used for and by whom.
B1 What is planning?
Are you someone who plans or are you more spontaneous? Do you have a plan as to how
you will navigate your way through your insurance qualifications? Or will you just think about
one unit at a time? Do you think this is the most efficient way to proceed? Might you end up
doing more units than necessary to achieve the required credits at the right level?
Perhaps you plan more in a professional environment and less in your personal life? Do you
know people who you perceive to be different to you in this way? Are they the organised
ones, while you do everything at the last minute? Or is it the other way around?
B2 Are there both upsides and downsides to having

a plan?
Taking this thought on, let’s consider a simple plan such as an agenda prepared and sent out
in advance of a meeting.
Upsides:
• All attendees know what is going to be discussed and can prepare accordingly (although
there is always the risk that they will not do so).
• The meeting has more chance of staying on track and focused.
Downsides:
• If a different matter needs discussing, strictly speaking other than under ‘Any other
business’ there is no room for it on the agenda.
• If the person who prepared the agenda did not include some key items that needed to be
discussed, flexibility will be required to add them and the meeting may overrun.
Moving on to a more complex example – an insurer putting together a business plan – the
same considerations can be given.
Upsides include providing clarity to:
• those inside the business as to what the targets are;
• investors regarding the planned use of their capital/equity; and
• regulators concerning the structure and organisation of the business.
Downsides include:
• spontaneity not being allowed, as businesses will have to go through the process in order
to change the plan mid-year; and
• if performance is not in accordance with the plan, the possibility for investors or regulators
to hold the insurer to account for failures to deliver.
It is important to understand that a good insurer business plan is an organic document which
can and should change during the underwriting year, particularly in response to new
opportunities which might arise out of nowhere and, if not taken at the right time, would
disappoint investors. Equally, once written, a business plan should not sit in a bottom drawer
but form part of the active framework of the business, constantly being referred to and
monitored to identify failure to comply and where modifications are appropriate.
A good plan should include targets which are SMART (i.e. specific, measurable, achievable,
relevant and time defined). It will also be properly titled with version control so everyone
knows they are reading the latest version.
B3 Regulatory guidance
B3A UK regulators
Both the FCA and PRA expect businesses to have a plan and much of the content of both of
the Handbook and Rulebook centres around divergence from a plan. In the Systems and
Controls section of the FCA Handbook there is, for example, the following requirement:
Chapter 3
As part of its business planning and risk management obligations under SYSC, a firm
must reverse stress test its business plan; that is, it must carry out stress tests and
scenario analyses that test its business plan to failure.
To that end, the firm must:
1. identify a range of adverse circumstances which would cause its business plan to
become unviable and assess the likelihood that such events could crystallise; and
2. where those tests reveal a risk of business failure that is unacceptably high when
considered against the firm’s risk appetite or tolerance, adopt effective arrangements,
processes, systems or other measures to prevent or mitigate that risk.
Activity
For more information see the FCA Handbook: www.handbook.fca.org.uk/handbook/SYSC.
Question 3.2
What key practical activity do the regulators expect to take place in relation to any
insurer's business plan?
a. Filing it away carefully. □
b. Stress testing it to see whether anything might make the business fail. □
c. Getting agreement from reinsurers. □
d. Obtaining sign-off from all staff. □
B3B Lloyd’s as a regulator
Lloyd’s as a regulator also has a number of requirements that must be followed by those
operating within that part of the Market. An example is shown below.
Develop and execute the plan – Principle 1: Underwriting profitability
Sub-principle 2 – Develop and execute annual business plans which align with their
business strategy
The foundation level expectations are included below:
• Business plan aligns to the syndicate's medium- to long-term underwriting strategy and
risk appetite.
• Board has responsibility for developing, challenging, and approving the annual
business plan.
• Business planning process engages, and allows for challenge from, all key stakeholders.
• Business plan includes assessment of both prior year performance and current prevailing
market conditions.
• Assumptions and key risks in the business plan are clearly articulated and understood by
all key stakeholders.
B4 Lloyd’s syndicate business planning process

as an exemplar
All insurers irrespective of the market in which they operate should have a plan which is
challenged and approved by their board. As Lloyd’s performs an overarching approval
process, its requirements for content are more transparent externally and hence will be used
as an exemplar here. However, all students are encouraged to find what the business
planning process includes in their own organisation. Remember, although we are discussing
an insurer’s business plan, brokers need a business plan as well for exactly the same
reasons, i.e. to identify and strategically aim towards the results expected by investors.
Chapter 3
B4A What goes into the plan?
Syndicates will provide data to Lloyd’s within what is known as a Syndicate Business
Forecast (SBF). This is data uploaded directly to Lloyd’s via a portal system. The forecast
allows Lloyd’s to set targets and guidelines through which it can monitor the syndicate and
the entire Lloyd’s Market for the next underwriting year.
If a syndicate does not submit an SBF or does not get it approved, then it will not be able to
write business via a Lloyd’s platform. Submission of the plans for the following year of
account should normally be made by early September with the approvals coming back no
later than the end of November.
During 2021 and 2022, Lloyd's streamlined the business planning process to take into
account the challenges caused by COVID-19, as shown in Market Bulletins Y5292 and
Y5337. Following a successful trial during 2020, business plans do not have to be submitted
until September. There are four different submission dates based on a combination of the
capital structure of the syndicate and how Lloyd's views them in terms of past performance
and future prospects. Syndicates will fall into either 'light touch', 'standard' or 'high touch'
categories, with 'high touch' syndicates having the greatest oversight put on their
business plans.
For the 2023 business plan, syndicates were required to submit an ESG strategy and
framework document as part of their plan and for 2024 syndicates had to provide far more
detailed information about their use of delegated authorities. In particular, if they are planning
to write property binding authorities using certain risk codes there are additional questions
that have to be answered, which address concerns that Lloyd's has about this sub-class
of business.
Syndicate business discussions about the next year take place between Lloyd’s and the
various syndicates from mid year, which allows the syndicates to set out their prospective
plans and to explain their one and three year plans to Lloyd’s at that stage.
Following those meetings Lloyd’s will provide feedback which should form part of the
syndicates’ consideration of what their final business plan will look like.
The key information submitted as part of the process is summarised here.
Form Purpose
Exchange rates Set by Lloyd’s, syndicates should make sure all their internal calculations use
them, as all Lloyd’s monitoring will be done using the rate of exchange
(ROE) provided.
This helps minimise distortions from rate of exchange fluctuations or when
different rates of exchange are used.
Class of business This is linked to the risk code list and allows risk codes to be grouped into
(COB) description different COBs. The system only allows certain risk codes to be allocated to
certain COBs and vice versa. All COBs, e.g. offshore energy, Gulf of Mexico
windstorm, will have a number of risk codes allocated to them.
Risk code mapping This allows syndicates to show which of the live risk codes that Lloyd’s has at
any one time links to which COB. This section will also require reporting of the
currency and distribution channel or channels which will be used for each
risk code.
Note distribution channels will include binding authority, lineslip or open market
(direct and reinsurance).
Syndicates will also have to provide information about their maximum line sizes
for each distribution channel, as well as COB.
Form Purpose
Underwriting performance This will be a forecast of claims, premium, reinsurance spend and reinsurance
forecast recoveries for each COB divided by distribution channels.
Premium income development Will all the premium be written in the first six months or will it be phased
throughout the year?
Loss ratio composition The syndicate should indicate how its losses will split into attritional (smaller
ones), large and catastrophe (Cat). If a syndicate is planning to write more Cat
business, then this should be reflected here.
Type of placement Breakdown needed by class of the split between direct, reinsurance, lineslip
Chapter 3
and delegated authority.
Premium income by risk code This data will be automatically generated based on the data provided under the
risk code mappings and the underwriting performance forecast.
Premium bridging analysis Why is less premium expected next year? Are you writing the same risks but
charging less money? Are the deductions expected to be higher this year?
(This area will be discussed in more detail in the next chapter on pricing.)
Capacity information Who are the backers? Is it aligned capacity so controlled from within the same
group as the syndicate or managing agent. Or is it non-aligned, therefore a
third party outside capacity? It might be a mixture, of course, but Lloyd’s
requires the details.
If you work for a managing agent, find out what your capacity is. Is it aligned or
non-aligned?
Underwriting controls All underwriters should have authority levels set and agreed. There should be
breach control processes in place.
Realistic disaster scenarios All insurers should consider the impact on the business of a certain type of
loss, whether it be a natural catastrophe, such as a storm or a hurricane, or
man-made such as an act of terrorism. Lloyd’s mandates a set series of
scenarios, as well as expecting syndicates to create their own based on their
particular books of business.
Outwards reinsurance Full details of how much is spent, on what type of reinsurance, and the identity
premium of the reinsurers.
Question 3.3
If a syndicate is considered 'high touch' by Lloyd's, what is the most obvious practical
impact on the business planning process?
a. The business planning will be mostly automated with very little oversight. □
b. The business plans must be submitted much earlier, usually in July. □
c. Only a limited range of classes of business can be written. □
d. The planning process will be subject to greater oversight from Lloyd's. □
B4B External plan – review by Lloyd’s
When received, the plans are assessed by a number of business teams within Lloyd’s,
including the Syndicate Business Performance team and the Capital and Planning group.
Feedback will be given to the syndicates/managing agents and then finalisation of the plans
will take place between September and November each year. The feedback loop also allows
syndicates to amend their business plans to ensure that they will receive Lloyd’s approval.
Lloyd's is looking for plans which are:
Logical
Planned actions reflect strong portfolio management to deliver sustainable,
profitable performance.
Realistic
Assumptions that underpin those actions are credible in the context of current
market conditions.
Achievable
Evidence syndicate has the expertise, track record, controls and governance to
execute plan.
Lloyd’s has the benefit of being able to review everyone’s plans and consider whether they
are viable and whether any identifiable dependencies are unrealistic.
Examples include:
• One syndicate indicating that it expects to expand a certain class of business through
taking on a team from another syndicate. The other syndicate stating it will be expanding
Chapter 3
that very same class of business through its current team. Which one might end
up disappointed?
• Several syndicates all indicating that they plan to expand a certain type of business in a
certain territory. Does the volume of business actually exist to satisfy them all or is
someone going to be disappointed?
• A number of syndicates all planning to buy reinsurance in bulk from one reinsurer –
Lloyd’s will be alert to the risk posed to the Market should that reinsurer itself fail.
Lloyd’s interaction with the plan is an ongoing process, as syndicates will often want to
submit changes to it throughout the year as new opportunities arise or circumstances
change. Monitoring against the plan should take place internally at an insurer at all times,
and in the case of a Lloyd’s syndicate, will also occur externally through the submission of
monthly or quarterly reports. These allow Lloyd’s to assess progress with each syndicate’s
business plan.
Every syndicate has its own liaison people in the various areas of Lloyd’s who consider the
business plans. This facilitates the smooth running of the process from start to finish,
including any changes.
B4C Impact on capital of business planning process
The review by Lloyd’s includes the Capital and Planning Group, which considers the
business plan alongside the capital review, so syndicates will be in regular contact with one
of the Lloyd’s actuaries.
Should any element of the business plan suggest a higher degree of risk than considered
prudent by Lloyd’s, given the protection of the Central Fund, then loading can be made onto
the capital of the syndicate. Loading has the effect of penalising the syndicate for assuming
more or additional risk than the standard level to which all its counterparts are expected
to comply.
For example, if a syndicate has chosen to use reinsurers with low ratings, thus increasing
the risk that they are not there to pay reinsurance claims, this might lead to concerns about
the counterparty risk to the syndicate and the impact on the overall business, depending on
the degree of exposure to that one reinsurer. Lloyd’s is careful to ensure that the quality of
reinsurance security is of the highest or best standard possible and is not overly
concentrated on one or more reinsurers.
Activity
Look at the Lloyd’s business timetable to see when the various aspects of business
planning have to be completed: www.lloyds.com/tools-and-systems/business-timetable.
C Monitoring and reporting on the plan

Think of a business plan as a map. You have identified your desired destination, just as you
would on a map, and considered the route you intend to take. In this section, we will consider
how you will check that you are still on track and what should be done if your journey hits
any type of roadblock.
C1 Importance of regular internal reporting

Let’s remind ourselves of what might have gone into the plan (irrespective of the type
of insurer):
• classes of business;
• gross written premium (GWP) anticipated;
• planned loss ratios;
• premium phasing (all in first six months or better spread);
• geographical spread by risk and insured;
Chapter 3
• acquisition costs;
• operating costs;
• sources of business – distribution networks/brokers used;
• investment strategy and likely returns; and
• reinsurance strategy – which reinsurance and how much of it?
What has gone into the plan has to be a logical starting point to ascertain whether its targets
and controls are being achieved. As with making a journey, the sooner you find out you have
taken the wrong turning, the easier it will be to get back on track without too much additional
cost or time wasted.
Particularly with GWP estimates, if a regular review indicates that reality is significantly lower
than expectation, it allows questions to be asked such as whether it is a data problem or
evidence of over-expectation in the planning?
Non-Lloyd’s insurers have discretion regarding management of their own internal
performance, but the regulators still expect controls to be in place for business operations.
The FCA Handbook has the following requirement under the Senior Management
Arrangements, Systems and Controls 4.1:
1. A firm must have robust governance arrangements, which include a clear

organisational structure with well defined, transparent and consistent lines of
responsibility, effective processes to identify, manage, monitor and report the risks it is
or might be exposed to, and internal control mechanisms, including sound
administrative and accounting procedures and effective control and safeguard
arrangements for information processing systems.
External reporting to Lloyd’s and what gets fed back

For the Lloyd’s syndicates, as well as approval of the business plan, Lloyd’s expects
continuous internal monitoring and the regular submission of information to enable it to
monitor the business as well.
Principle 1 – Underwriting profitability, sub-principle 3 states:

Have underwriting controls, monitoring and reporting in place which are appropriate to
their risk profile in order to deliver the agreed business plan.
There are a number of reports which have to be sent back to Lloyd’s on a regular basis
throughout the year which include the following:
Report Frequency Data collected Use of data
Gross quarterly data Quarterly Signed premium data, as well as To monitor quarterly reserves.
paid and outstanding claims
data for all years of account. To monitor incurred but not
reported (IBNR) burn
against benchmarks.
NB Remember incurred but not
reported reserves are added to
claim reserves to ensure enough
funds are put aside for
unexpected deterioration.
Report Frequency Data collected Use of data
Performance Monthly Granular data for each risk on: To check syndicate writing in
management data accordance with plan.
• written premium;
• benchmark price; and To check performance
against peers.
• risk adjusted rate change.
To take action if imprudent
underwriting is seen.
To take action when underwriters
are not meeting their plan.
Chapter 3
Monitoring class of Quarterly Data about premiums, claims To allow analysis of actual
business (COB) and acquisition costs split as in performance against plan.
performance the business plan.
To allow COB-based
Collected for current and some benchmarking against peers.
previous years.
To monitor reserving accuracy.
Realistic disaster Annually Syndicate estimates of what a To allow Lloyd’s to consider

scenarios large loss would mean whether the managing agents
financially, net and gross have a robust enterprise risk
of reinsurance. model, with the aim of protecting
the Lloyd’s chain of security,
mainly the Central Fund.
Syndicate reinsurance Quarterly The scale and nature of in force, To allow Lloyd’s to see how
(RI) programme outwards RI arrangements and much RI remains within Lloyd’s,
the counterparty risks thus not spreading the risk
they present. outside the market.
To allow monitoring of non-
standard RI arrangements, more
of a financial market type of
transaction as opposed to a true
indemnity RI contract.
To allow monitoring of whether
the actual RI bought matches
what was anticipated in the
business plan.
C2 Importance of accurate data

The FCA has some simple requirements under Senior Management Arrangements,
Systems and Controls (SYSC) 9.1.1, General rules on record-keeping, which will apply to
all types of firm coming under its regulatory control:
A firm must arrange for orderly records to be kept of its business and internal
organisation, including all services and transactions undertaken by it, which must be
sufficient to enable the appropriate regulator or any other relevant competent authority
under MiFID or the UCITS Directive to monitor the firm’s compliance with the
requirements under the regulatory system, and in particular to ascertain that the firm
has complied with all obligations with respect to clients.
Be aware
MiFID is the Markets in Financial Instruments Directive.
UCITS, the Undertakings for Collective Investment of Transferable Securities, is a
European Commission regulatory framework concerning the coordination of laws,
regulations and administrative provisions relating to undertakings for collective investment
in transferable securities.
Neither of these is of direct concern to insurers.
Even without being told by a regulator, a sensible organisation should be able to use data to
monitor what it is doing.
Think back to the journey example we used earlier, if your paper map has a typographical
error that you are not aware of, or your GPS system has become corrupted, how will you
know you are in fact heading 180 degrees in the wrong direction (assuming for the moment it
is cloudy so you cannot navigate using the sun)?
Lloyd’s, therefore, has Principles concerning data capture and reporting:
Principle 1 – Underwriting profitability
The foundation level includes an expectation that 'policies and procedures are in place
covering data accuracy, appropriateness and completeness'.
Principle 10 – Governance, risk management and reporting
Foundation level requirements include timely, accurate and complete business data being
Chapter 3
collected and provided to Lloyd's and regulators, in order to meet the Lloyd's and managing
agent prudential and regulatory obligations.
Reporting and regulatory deadlines are met, in line with UK and international
reporting regulations.
Principle 12 – Operational resilience
The foundation level requires that a director is in place with accountability for oversight of the
data governance framework with an appropriate data governance policy in place.
On the Web
For more detail about Lloyd's data governance framework, review the Principles referred
to above: assets.lloyds.com/media/9cc45b1c-8121-46b1-ae91-e7a4e24abd04/Principles-
for-doing-business-at-Lloyds.pdf.
Activity
Consider what steps are taken in your own organisation – it does not have to be an
insurer – to capture data accurately. Are there training notes given to new joiners for
example? What quality control process is in place to check things? Is everything checked
or is it a sample?
C3 So what if issues are spotted?

As we have seen, the core focus is making sure that what is done is in line with the plan
which, like our map, has our journey’s end as the target. Detailed and early monitoring
allows investigations to take place before a problem gets too big. For example, someone
holding delegated authority writing far in excess of their allocated premium, or too much risk
being concentrated in one area.
What can, however, be identified is that the world changes. The planning process for the
2024 year of account will take place between about April and November 2023. Even if all
seems on track at the start of 2024, something could occur which might, if seized upon, give
the insurer an opportunity to fulfil all the requirements of satisfying the risk appetite. The only
difference is that it was not in the original business plan, maybe because it was just not an
option at that point.
An example might be a regulator suddenly changing the rules to allow better access to its
market. While this is never going to be a speedy process, the final finishing line might end up
being crossed rather earlier than anyone anticipates. Therefore, an agile insurer might be
able to get access to the new market earlier than peers who move more slowly.
C4 Changing the plan – is it always negative?

Changing the plan is, therefore, not always negative. It could, in fact, be very positive for a
business, just as on a journey a positive decision to head off to a new destination might
reap benefits.
These situations are, however, triggered by a decision made when knowing exactly where
you are at that point in time. Far less positive is a change on a reactive basis when
discovering 'the map was upside down' and perhaps should have been consulted more
closely over the last six months.
An insurance company may not have any outsiders looking at its plan on a regular basis, so
is perhaps more exposed to this type of problem. Lloyd’s is looking at the same plan as the
syndicates so, if it has concerns, will soon ask for a meeting to find out what is going on.
A positive change in plan, backed up with the reasons why, should be presented to the board
and, where required, to Lloyd’s before anything practical is done. The paperwork should not
be completed some time after the event as a formality, as it evidences poor governance,
controls and risk management. Lloyd’s is quite clear in its Principles (previously Minimum
Standards) on this point.
From a practical perspective, those members of staff operating on the ground should
understand what this means for them. Each underwriting team should know exactly what it
can and cannot do, which might be quite granular in nature. Care should be taken within a
team to ensure it does not accidentally write business outside its approvals, as Lloyd’s will
Chapter 3
spot it on the next monthly submission and ask questions.
C5 Importance of always monitoring capital requirements

Capital is required to run the business, however, from a regulator’s perspective, it must be
sufficient to balance the risk being taken on by the business (remembering that risk is not
just an insurance risk but also operational, credit etc.).
When assessing the original plan, the insurer’s board should have considered the capital
requirements to deliver it. At all times of the underwriting year, therefore, the monitoring
should highlight whether what is being done remains in line with the risk appetite and the
exposure of the capital. When considering potential changes, the impact both of and on the
capital requirements should be central to the decision-making process.
Lloyd’s syndicates have to file a Lloyd’s capital return to provide the syndicate-level data
required to calculate the overall Lloyd’s-level solvency capital requirement.
Under Solvency II, the minimum capital requirement (MCR) is set at a level below which
policyholders would be exposed to an unacceptable level of risk, and which would trigger
supervisory intervention. The higher solvency capital requirement is the quantity of capital
needed to provide protection for the next year against a 1:200 year event and should
therefore be higher than the MCR.
Be aware
The Financial Services and Markets Act 2023 brings financial services regulation back
under UK control and the PRA will set the requirements, not based on any
EU requirements.
If there is inadequate regulatory capital what impact will this have on the business? It will
need to:
• raise more regulatory capital by issuing shares or issuing long-term debt that satisfies the
PRA requirements; and
• reduce the business written, particularly in those classes which have high capital
requirements, or buy more reinsurance (of a good quality).
D Accounts
In this final section, we will consider what external and internal documents might be
produced to show the financial outcome of all the planning, and whether the investors have
got their wish, i.e. a defined or minimum positive return on their capital.
Why would an insurer have financial accounts at all? What are they for and are they only
internal documents, external documents or a mixture of both?
Traditionally Lloyd’s syndicates accounted on a three-year cycle. Business written, for
example, in the 2021 year of account would be subject to a process called reinsurance to
close (RITC) after 36 months, so effectively at the start of 2024, when its profitability (or lack
of) would be assessed.
The General Accepted Accounting Principles (GAAP) are a set of common principles,
standards and procedures which companies should follow when compiling their financial
statements. They work on the basis of annual accounting cycles with the production of
standard documentation such as income statements and balance sheets.
Lloyd’s syndicates have been required to present accounts in a GAAP format for many
years, however, the discipline of RITC still exists within Lloyd’s so takes place after 36
months to allow accounts to develop.
All businesses have stakeholders keen to know what is going on in the business, as this
drives their relationship with it.
Stakeholder Reason for interest
Employee • Is the business going to survive and grow?

• Is it worth buying some shares?
Chapter 3
Investor • Wants a minimum return on capital.

• Might need to make strategic decisions relating to the future of
the company.
Regulator • Wants to ensure that the business is operating according to the regulations.
Director • Has overall responsibility for managing the business so needs to know the
ongoing state of capital, and whether the business is liquid and solvent.
• Will want to analyse different areas of the business to compare levels
of success.
Public • Might be potential investors, customers or employees.
Tax authorities • To check the correct amount of tax is being paid.
Analysts • Will want information on which to base advice to clients.
Creditors or lenders • Is it prudent to extend loans to the company or credit in relation to sales?
Brokers • Want to know that insurers they are recommending to their clients
are strong.
Competitors • Will be interested to know a company’s strengths and weaknesses.
D1 What are the stakeholders looking for?

They will often want a mixture of financial and factual information, some of which will be from
the accounts and some from the accompanying commentary.
These are some of the key financial aspects that will be sought:
Concept Measure
Profitability Is money left when you deduct all the costs and expenses from an
organisation’s income?
Liquidity How much cash does a business have? A business can have lots of assets
but if they are in forms which are illiquid, then it will not be able to pay its
day-to-day running costs and can fail.
Income/revenue/turnover What money came into the business throughout the year? Comparisons can
be made between years to see changes in the business. For an insurer the
main income is premium.
Expenditure What is the organisation spending its money on? Is it spending more than it
is bringing in? For an insurer the main expenditure will be claims, operating
and acquisition costs.
Organisational wealth How much asset value does the business have and what type of assets
are they?
Working capital The difference between the current assets and liabilities (which will mainly be
the claims paid and outstanding).
Solvency Does the insurer have more assets than liabilities? The regulators will require
a certain gap to be maintained called a solvency margin.
D2 What types of accounts can exist?

There are two main types of accounts: financial accounts, which state a current position
using historical information and are of interest to external and internal stakeholders, and
management accounts, which are internal documents used to assist with forward planning.
The financial accounts have to comply with legal and regulatory requirements. They are
prepared following a framework, which allows easy comparison between organisations and
across accounting periods for a single organisation. In contrast, management accounts, as
they are internal documents, can be put together in any way that suits the organisation.
They can include whatever information is deemed to be helpful to those making
strategic decisions.
D3 Documents used in financial accounts

There are three main documents used in financial accounts, the:
Chapter 3
• balance sheet, which shows the financial position at a single point in time, i.e. the
organisation’s year end;
• income statement (or profit and loss account), which shows the performance of the
business, i.e. whether it has made a profit or not; and
• cash flow statement.
These documents can also include what is known as a statement of retained earnings.
Retained earnings do not represent surplus funds. Instead, the retained earnings are
redirected, often as a reinvestment within the organisation.
D4 Capital
In Using your capital on page 3/2, we considered the role of capital in an insurance business,
how it might be sourced, and what the providers of the capital might be hoping for.
For an insurer, the concept of regulatory capital is important, i.e. the capital base that is
acceptable to the regulators in form or structure. An insurer could, therefore, have more
actual capital, but only a portion of it would be accepted by the regulators. The capital of any
company will usually include some long-term debt which seems as though it should be
classified as a liability. If the debt meets the requirements of the PRA (whose criteria are
outside the scope of this module), then it is not counted as a liability.
Why does it matter if the capital is accepted by the regulators or not? Think about the
concept of solvency. This is the balancing of an insurer’s assets against its liabilities, where
the assets must exceed the liabilities. The higher the liabilities, the more assets need to be
held to balance them, so by reducing liabilities using eligible debt as capital helps
the business.
D5 Assets and liabilities

The assets of a company are split into two categories:
• tangible assets which are physical in nature and for an insurer might be cash or buildings;
and
• intangible assets which are things such as goodwill or copyrights.
An insurer’s main liabilities will be the claims which have been, or are going to be, paid.
D6 The accounting equation

A business will need some capital with which to start up. For an insurance company this
could come from selling shares. For a Lloyd’s syndicate, this will come from the names’
investment for the year. The accounting equation is as follows:
Assets Equity Liabilities
Like any mathematical equation it can be moved around so could be expressed like this:
Equity Assets Liabilities

This second one is probably easier to understand, as the investors are going to be interested
in what remains in the business once the basic balance of liabilities against assets has been
calculated. It would be very tempting for the management of a business to make it look
better by suppressing the liabilities.
On the Web
This was done several years ago by the directors of the Independent Insurance Company.
Use this link to find out more: bit.ly/2mIq566.
Chapter 3
D7 Contents of an insurer’s financial accounts

D7A The income statement/profit and loss account
Within this document, all the income and expenses of the business for the accounting period
(usually a year) will be set out.
Income
What items form part of an insurer’s income?
• The main one, of course, is the premium coming in and the starting point for that is GWP.
• However, from an accounting perspective, although an underwriter might write some
premium today, it is considered as being earned throughout the policy period. What this
means is that if a twelve-month policy is written on 1 July, and if the accounts are drawn
up at 31 December, only half that written premium would be deemed earned at that point
in time. Therefore, only half of that premium, although written in this year, can be called
earned and the other half will feature in next year’s accounts.
• There might be some investment income, which can also form part of the income.
Insurers are limited from a regulatory perspective as to how they can invest premium
income but any further additions to the income pot will always be welcome.
Consider this…
If you work for an insurer or a broker, do you have a key time of year when most of your
business is renewed? Is it early in the year so most of the premium will have been earned
by 31 December? Or is your renewal period later in the year meaning very little will be
earned by 31 December?
Expenses
Balanced against the income will be expenses. What are an insurer’s expenses?
• The main expense will, of course, be claims but the costs of getting the business in the
first place should not be forgotten.
• Acquisition costs are a major part of the insurer’s operating expenses and include the
costs paid to brokers, overseas taxes payable by insurers, and more general ones such
as the transactional costs of operating within the London Market.
• Other operating costs should not be forgotten, including management and administrative
expenses. These are the costs of running the business, including paying your salary if
you work for an insurer.
• All insurers will use reinsurance to protect their accounts. (If required, refresh your
knowledge of reinsurance in LM2, chapter 3.) Insurers will buy reinsurance, and both the
costs of that protection and the recoveries obtained from reinsurers must be shown in
the accounts.
• The cost of reinsurance is usually shown in the income element as a negative amount
deducted from the GWP, and the reinsurance claims are added back in to reduce the
liabilities shown by the claims in the expenses area.
• Taxes payable by the insurer – other than the overseas taxes which are more like
acquisition costs – are those payable as a company overall, e.g. based on its profits.
All these aspects are summarised in the table below. The figures are purely illustrative.
Income statement for 12 months to 31/12/20xx

Income 000s Notes
GWP 2,000 This can include estimates of amounts to be written under

binders etc.
Outwards RI premium (400)
Net written premium 1,600
Change in unearned (90) This will be a calculation based on what has come forward as
premium provision on unearned from last year’s accounts and what will be unearned
Chapter 3
gross basis this year.
Less reinsurer’s share of 20

provision for unearned
premium
Change in the provision for (70)

unearned income
Net earned premium 1,530 GWP minus change for provision for unearned income.
Net investment return 400
Total income 1,930
Expenses
Gross incurred claims (2,500) Incurred is paid plus outstanding.
Reinsurers share 1,300 Hoping they all pay up.
Incurred, net of RI (1,200)
Acquisition costs (150)
Other operating costs (120)
Total expenses (1,470)
Profit before tax 460 1,930 less 1,470.
Tax Expense (400)
Profit for the period 60
When considering the business of an insurer, and particularly when planning, many of the
elements in the accounts will be part of the decision-making process, e.g. acquisition and
operating costs. If a piece of business might not be cost effective to write as an open-market
risk, might it make more sense to use another distribution model such as delegated
underwriting of some type?
D7B The balance sheet
The balance sheet shows a snapshot (usually the last day of the accounting period) of the
assets and liabilities of the business at that time. Items that will appear include:
• Provisions for unearned premium – remember the earlier discussion of how premiums are
earned throughout the policy year. All premiums which are not earned at the time the
balance sheet is drawn up are shown here on the liability side of the equation, as they are
not an asset of the business. However, unearned premiums from the previous year rolling
forward are shown as an asset.
• Provisions for losses and loss adjustment expenses. This figure goes on the liability side
of the balance sheet and should be the ultimate cost of all claims incurred (including
IBNR) but not settled at the time the balance sheet is being drawn up, i.e. paid losses are
not included in this amount. Long-tail losses, and those arising from emerging and
unexpected losses, are difficult to estimate accurately.
• Reinsurance – the likely recoveries from reinsurers will go on the asset side of the
balance sheet. However, the costs of the reinsurance itself will be entered on the
liability side.
• Investments of all types are shown on the asset side.
• Debtors – this will include premium written and invoiced but not yet paid by either
brokers/other intermediaries or clients, for example, and this is an asset.
D7C Cash flow statements

Liquidity and solvency are two different things and a solvent business, which is illiquid (so
has assets which cannot be quickly converted into cash), will rapidly become a business that
cannot operate. Cash flow, therefore, is not the same as profit. An insurer can have an
apparently good income based on written premiums, but if none of the clients actually pay
their premiums on time, or at all, the insurer’s business will be put under severe stress.
A business’s cash flow comes from three distinct activities:
• operating;
Chapter 3
• investment; and
• financing.
An insurer’s operating activities are its day-to-day business with cash flowing in as premiums
and out as claims or operating expenses.
The investment activities will generate and use cash through the sale, purchase and yields of
investments. From a financial perspective, if an insurer decides to buy back some of its
shares to regain control, it will have to use cash to do so in most cases.
D8 Management accounts
As we have already discussed, the management accounts are inward-facing documents
used as part of the strategic planning process. They should, therefore, be considered when
looking at an insurer’s business planning.
Although they might be created annually, more regular management accounting information
should be provided to management weekly, fortnightly or monthly, so that the business can
be closely monitored and problems identified quickly.
Most businesses will be split by profit centre and in order to measure the efficiency and
profitability of each one, relevant accounts will be required. This exercise often involves
dividing the operating or overhead expenses by profit centre. These splits may be quite
arbitrary. The aim is usually to identify the most profitable departments and, at the same
time, identify those areas that might need changing or more resources. In insurance
companies some classes form independent profit centres, while other classes may depend
on each other, especially when written as a package.
D9 Using the information in the accounts to draw

conclusions
We have already seen that there are various stakeholders, both inside and outside a
business, who might use financial accounts to analyse the performance of a company. In this
section we are going to consider further some of the data they might use and for
what purpose.
Ratios are the general measurement tool used. There are five categories into which ratios
can be grouped:
• profitability;
• productivity;
• liquidity;
• activity or turnover; and
• gearing.
Remember that these ratios can be used for all types of company, not just insurers.
D9A Profitability
When we looked at the income statement we saw a bare figure for profit which, as long as it
is profit and not loss, we might consider to be enough information. However, what does it tell
us about how successful the company is? Perhaps if we compare it to the revenue, we might
see that the company has made very little profit for the large revenue it obtained, or
alternatively, it has made a very large profit compared to the amount of revenue.
Example 3.1
Company 1 £400 profit on a revenue of £400,000. Profit is 0.1% of revenue.
Company 2 £400 profit on revenue of £40,000. Profit is 1% of revenue.
Which company do you think has been more successful? Surely the one whose profit is a
larger percentage of its revenue is the more successful. The comparison can also be
made using figures which are gross or net of acquisition costs. A higher net profit figure
might suggest that a business manages its operating and acquisition costs better than
another business.
Chapter 3
All investors are going to be interested in what return they will receive on their capital/
investment/equity. There is a ratio that will give them information about the relationship
between the amount of profit and the amount of capital that had to be used to make the
profit. A higher ratio shows that the company has used the capital efficiently and effectively
within the business.
Remember the investors are choosing to come into insurance as they believe (or hope) that
they will make a better return on their investment than by putting their money into a bank
account. As a rule of thumb, they are generally looking for at least twice the bank
account return.
An insurer’s profit, however, includes an element of speculation about how much claims are
going to cost, as the liability/expense side of the calculation includes claims reserves.
Therefore, for an insurer, it is often sensible to consider its profitability over a number of
years, rather than just looking at one.
D9B Productivity
This can seem more complicated as an insurer does not appear to be producing tangible
things like, say, nuts and bolts in a factory but it is, in fact, producing contracts which are the
insurance policies. When comparing cars we might use fuel efficiency as a measure. We can
do the same with insurers by looking, for example, at how efficient their premium monitoring
and debt-chasing are over time. Giving customers time to pay their premiums (terms of
trade) may be standard practice and form part of good customer service, but it puts the
insurer under strain financially, as it has to finance those debts. The longer the amounts are
unpaid, the higher the risk of them never being paid might become.
Remember in Solvency II, one of the areas of risk is counterparty/credit risk, which in this
context is the risk of bad debt relating to premiums.
D9C Liquidity
The more liquid a company’s assets the better able it will be to pay its own creditors on time.
A ratio of current assets over current liabilities is generally used but within the assets the
company can include stock which, depending on what it is, may be liquid or illiquid. If you are
a second-hand musical instrument seller you might not be able to sell your stock quickly if
the market is saturated, whereas if your business is second-hand gold, the market is more
flexible which would allow you to sell it for cash quickly if needed.
Another ratio excluding stock can be used (again to compare with liabilities) and that might
give a more exact insight into the state of a company’s finances. If the ratio between assets
and liabilities is less than 1, then this suggests that if it were to pay all its creditors today, and
also collected from its debtors, it would still need an overdraft to balance the books. If a bank
is happy to offer an overdraft, then fine. If not, the company has potential, if only
temporary, trouble.
For an insurer, the liquidity calculation will be total liabilities divided by its cash plus
investments.
D9D Activity
A company has to do something to make money, so an insurer has to sell insurance. For a
manufacturing business the activity ratio could look at the sales it makes and compare these
with the number of items held in stock at any point in time. For an insurer, it is not such a
good ratio, however, activity related to debt can be a relevant measure (linked to the liquidity
point above).
If an insurer sells 2,000 policies a year and, at any one point, has outstanding premium due
on 1,000 of them, then the debt should be turned over once every six months, i.e. the debt
stays on the books for six months and the average client takes six months to pay
their premium.
D9E Gearing
How much is the business borrowing compared to the amount of investors’ equity in the
business? If the borrowing is high compared to the amount of shareholder/investor equity,
then the company is very reliant on debt finance.
Chapter 3
We have already seen that only certain types of debt will be accepted by the regulators as
regulatory capital, so as not to appear as a liability on the balance sheet. Borrowing costs
money in the payment of interest, and however badly the company might be doing, debts
have to be paid back. If a debt-free insurer has a bad year, then the shareholders will not get
dividends. However, if the company has debt, the debt still has to be serviced putting more
pressure on the business.
Selling more shares to raise money might seem the better option in any event, however, it is
entirely possible to borrow money, expand the business, and make enough additional profit
so that servicing the debt is entirely doable.
D10 Combined ratio

For an insurer this compares its net premium income to its losses, expenses and
commissions by taking the total incurred losses and expenses and dividing them by the
earned premium to get a percentage. The combined ratio will then enable a business to
see whether its net income can cover claims, costs of reinsurance, costs of claims handling,
administration etc.
A ratio below 100% shows that the company is making a profit, while one above 100%
means the company is paying out more in claims and operating expenses than it is receiving
in premium. Investments can factor into the calculation which will offset apparent losses.
However, given that we are considering the operation of insurance, not investment,
companies, shouldn’t positive performance be making an underwriting profit, rather than
relying on investment income only?
Underwriters will be interested in the combined ratio to see how effectively a class of
business is performing, while competitors will be reviewing their operation against that of
their counterparts. Senior management will use the combined ratio as a measure of whether,
for example, they should be allocating capital to that area of the business next year.
Investment income does not normally figure within the combined ratio, and in past years
where investment income has been high, this has disguised other weaknesses within the
underwriting. In today’s far weaker investment environment such disguise or bolstering of the
technical performance is no longer possible.
Activity
If you work for an insurer, see if you can find some information about the combined ratio of
the business overall in a past year or in your class of business.
Use this link to find the latest Lloyd’s annual report to see the Market’s combined ratios for
each class: www.lloyds.com/investor-relations.
Key points
Using your capital
• Investors will have a certain risk appetite.

• The risks to be considered are not just the insurance risks but the wider business risks.
• Enterprise risk management is the discipline which considers the overall risks
Chapter 3
of a business.
• The Own Risk and Solvency Assessment (ORSA) was a requirement under Solvency
II. UK regulators will now be setting their own requirements.
• Return periods express how often an event is expected to happen.
• It is important to match risk appetite with company strategy.
Creating the business plan
• The regulators expect businesses to plan positively.

• Lloyd's has Principles for doing business, which include requirements centred around
the business planning process.
• All plans should be stress tested, then monitored and reported on regularly throughout
the year.
Monitoring and reporting on plan
• The regulators require large amounts of data be kept, and significant reporting also has
to be undertaken for Lloyd’s.
• Plans can and should be changed mid-year if appropriate.
Accounts
• The financial accounts of any business are of interest to both internal and external
stakeholders.
• Financial accounts are external-facing documents and management accounts are
internal-facing documents.
• Assets should be equal to or in excess of equity plus liabilities.
• Financial accounts include income statements, cash flow statements and
balance sheets.
• Several measures can be taken from accounts:
– profitability;
– liquidity; and
– solvency.
• Ratios are an important measure of the company’s operation.
Question answers
3.1 a. Client not paying their premiums.
3.2 b. Stress testing it to see whether anything might make the business fail.
3.3 d. The planning process will be subject to greater oversight from Lloyd's.
Chapter 3
Self-test questions
1. Which piece of information would not normally be found in an insurer's risk appetite
statement?
a. Unacceptable risks. □
b. Unacceptable premium rates. □
□
Chapter 3
c. Unacceptable probability of failure.
d. Unacceptable maximum loss sizes. □

2. Which of these is the best explanation of a black swan event?
a. One that is unpredictable, irrespective of the financial impact. □
b. One that has a massive financial impact but could be predicted. □
c. One that had only been predicted in loss modelling but was not believed to be □
possible.
d. One that was unpredictable, massive in impact and had shock impact. □
3. What is a return period?
a. A measure of the likelihood of a recurring particular event. □
b. The time period during which premium charged will be earned. □
c. The time period after which the investors expect profit or loss to be declared. □
d. A measure of the likelihood of making a profit over a cycle of underwriting years. □
4. Which entities within Lloyd's review the syndicates' business plans?
a. Syndicate business performance team/executive committee. □
b. Council/Lloyd's claims team. □
c. Syndicate business performance team/capital and planning group. □
d. Capital and planning group/Lloyd's claims team. □
5. Why might Lloyd's be concerned if it sees that several syndicates appear to be
targeting the same business in their business plans?
a. There might not be enough business to go around so at least one organisation will □
fail to meet its plan.
b. The syndicates might try and poach another syndicate's staff to run the business. □
c. Lloyd's will be worried about reputational risk. □
d. There is an immediate threat to the Central Fund. □
6. For what main reason is it important that an insurer monitors its own performance
against its plan?
a. To ensure it has enough staff to run the business. □
b. To ensure that it has enough reinsurance. □
c. To ensure that it pays enough tax. □
d. To ensure that problems can be quickly identified and action taken. □
Chapter 3
7. What is the definition of the solvency capital requirement for an insurer?

a. The quantity of capital an insurer needs to provide protection for the next year □
against a 1:200 year event.
b. Double the amount of the current claims reserves being held. □
c. The level of capital below which there will never be regulatory intervention. □
d. The amount of capital required to set up a managing agency at Lloyd's. □
8. What is the key difference between management accounts and financial accounts?
a. They are the same thing but management accounts is the old name for them. □
b. Management accounts are used internally for forward planning, while financial □
accounts are for external use.
c. Management accounts are for external use and financial accounts are internal □
documents only.
d. Financial accounts are used for PLCs only and management accounts are used □
for all other companies.
9. Which document would not generally be seen in an insurer's accounts?

a. Income statement. □
b. Cash flow statement. □
c. Balance sheet. □
d. Tax return. □
10. What is meant by a business being illiquid?
a. It has assets but they are not held in a form that is easily convertible to cash. □
b. It has assets but they are not worth very much in real terms. □
c. It has assets but they are in overseas bank accounts. □
d. It does not have any real assets. □
Pricing
4
outcomes
Introduction
A Statistical tools for the underwriter 4.1
Chapter 4
B Pricing 4.2, 4.3
Key points
Question answers
Self-test questions
Learning objectives
• explain basic statistical theory;
• explain how an insurance rate is constructed; and
• explain the use of realistic disaster scenarios and catastrophe models in the pricing
process.
Introduction
This chapter is focused on pricing, which is one of the most important exercises when
underwriting or reviewing a risk. In the first part, we will look at tools the underwriter can use
when considering what needs to be factored into the price. We will then address how a price
is calculated (at least in theory).
Key terms
Burning cost Catastrophe Deterministic Frequency

modelling
Frequency Law of large Mean Median
distribution numbers
Chapter 4
Mode Pricing adequacy Probability Rating factors

Rating model Realistic disaster Return on capital Return period
scenario employed
Risk adjusted rate Risk premium Severity Triangulations
change
A Statistical tools for the underwriter

Past experience is very important for an underwriter when considering pricing for a risk, not
only from an individual perspective (personal experience) but from the organisation’s
collective knowledge and the market as a whole. The more information that is available both
for individual risks and the detail within those risks, the more powerful the statistical analysis
and the more accurate the pricing of the risk.
A1 Basic statistical theory

A1A Frequency and severity of risk
Every event that occurs, whether or not it results in a loss, can be quantified using a
combination of two measures, its frequency (how often it happens) and its severity (how
bad or expensive it will be when it does happen). The combination of (balance between)
these two measures will inevitably vary between different classes and types of business, but
underwriters need to consider them for all possible loss events in their class of business
when calculating a price.
Classes that have higher frequency but generally lower severity include personal lines such
as household and motor claims. This does not mean that they do not have high severity
losses but that these are rare and considered to be outliers. For example, in motor insurance
serious bodily injury claims are rarer but much more expensive than those relating
to windscreens.
Similarly, an insurer covering property risks for large industrial buildings might expect fewer
losses but when they do occur they will be higher in severity. You can see that even within a
property insurer’s portfolio, there are different types of risk which will create different
frequency and severity graphs.
Chapter 4 Pricing 4/3
The graph below shows the relationship between frequency and severity.
Frequency
Severity B
The left-hand side of the graph at point ‘A’ shows the high frequency/low severity claims
which, based on the law of large numbers, tend to be predictable.
Chapter 4
The right-hand side of the graph at point ‘B’ shows the low frequency/high severity claims,
which are difficult to predict owing to their random nature.
Risks which are prone to a high frequency of claims provide insurers with a large amount of
data. This can be used to analyse the likely cost of claims with some certainty. In contrast,
those claims which are low in frequency do not provide the same quantity of data to be
analysed, which means that any predictions regarding likely future claims’ costs will be
less certain.
Activity
Consider a class of business with which you are familiar. Do you think it can have both
high frequency and low severity losses and low frequency and high severity losses? Or
just one or the other? Discuss this with some colleagues and see what they think.
A1B What does ‘average’ mean in statistical terms?

If you use the word average in general terms you usually mean somewhere representing the
middle of a set of data. In statistical terms, the concept is the same but there are three main
ways of calculating the average, all resulting in a slightly different end point.
Be aware
In insurance the word ‘average’ can have very different meanings. In this context, we are
using its general non-insurance meaning only.
Arithmetic mean – this is one that would most often be used in day-to-day work and is the
result of adding up all the values and dividing the total by the number of individual values.
Median– here you arrange the values in ascending order and find the one exactly halfway
through the list. If you have an even number of values, you take the middle two and find their
arithmetic mean.
Example 4.1
1, 2, 5, 10, 25, 56, 84, 95.
There is no middle value so you work out the mean of 10 and 25 which is (10+25)/
2 = 17.5.
Mode – using this method, you look for the value that occurs most frequently in a set of data.
This means that there can be more than one mode, if there is more than one value that
appears regularly.
Example 4.2
1, 2, 2, 2, 5, 6, 7, 7, 7, 9, 10, 11, 15.
In this case both the values 2 and 7 would be the mode.
So why use one method over the other?

• The mode is often better to use than the mean, if the data contains a number of very
extreme outliers (i.e. very large or very small claims).
• The mode can be better than the median if, by taking the middle value only, data of value
from an analysis perspective is effectively ignored because it is on the edges.
• The mode is often used for expression of preference or time taken to perform tasks.
Activity
Find out if any analysis is done in your office of tasks such as entering risks onto the
system or providing quotes for clients. If so, are any of the ways of calculating the average
used to provide information to management, for example?
A1C Variance in data

When considering averages, we also have to look at the spread of data involved, as it has an
Chapter 4
impact on where the average appears, particularly for the arithmetic mean. It is therefore
important to look at the range, which is the difference between the largest and smallest
values, and the variance which is a measure of the spread of data.
Linked to this is the idea of the distribution of data and what is considered ‘normal’.
A ‘normal’ distribution appears like a bell shape as illustrated below.
Number of
people
5´ 8˝
Height
The concept of standard deviation indicates how widely the data differs from the mean. If the
data is very spread out (with extreme outliers), then we say that it has a high standard
deviation. If the data is more clumped around the mean, then we say that it has a low
standard deviation.
When looking at claims data, if the data available has a low standard deviation, then there is
not much variance which suggests a stable claims history and which, if nothing changes,
should remain reasonably predictable. However, the reverse is also true, where a high
standard deviation suggests more volatility in the claims experience, which the underwriter
should factor into the pricing.
The calculation of standard deviations is outside the scope of this unit but is covered in
M80: Underwriting practice.
Question 4.1
If there was a low standard deviation in the claims data being reviewed, what does
that suggest?
a. High volatility and difficulties in prediction. □
b. Automated reserving practices being used, rather than considering each claim. □
c. A stable claims history and predictability, as long as nothing changes. □
d. Probably looking at a class of business such as motor first party. □
A1D Frequency distributions

We have already discussed the concepts of frequency and severity, so are now going to look
at the idea of taking frequency data and doing something with it.
If an insurer wants to find out how long it is taking to settle professional indemnity claims, it
would start by finding the base data related to a number of those claims. The more base
data that can be obtained, the better.
A simple way to consider the average time to settle would be to add up all the times (20
days, 25 days etc.) and then divide the result by the number of claims to obtain the mean.
However, if you have a large amount of data, it might be easier to group the claims so that
you then know the following:
Number of claims Days to settle Number of days
20 15 300
25 18 450
Chapter 4
30 25 750
Total 75 Total 1,500
The mean will be 1,500/75 which is 20 days. The end result is the same as adding up 75
different numbers, just quicker to calculate.
A1E Probability and the law of large numbers
We have already looked at how often an event might happen and how expensive it might be
when it does, so we will now consider how likely it is to happen. This is the concept
of probability.
The law of large numbers tells us that the number of events that occur will tend towards the
number expected, where there are a large number of similar situations. For example, if you
drop your toast five times, it might fall butter-side down all five times. However, if you drop it
500 times, then you should start to see times when the toast lands butter-side up (the only
other possibility). Taking this theory and applying it to insurance, the more data the insurers
have about the risk, the better any statistical data will be.
When expressing probability, a scale between 0 and 1 is used with 0 being impossible and 1
being a certainty. Both are extremes. However, the closer the probability is to 1, then the
more likely it is to occur. Hence this concept becomes very important to an insurer
concerned with fortuities and not wanting to insure certainties.
When stating probabilities, there are various ways of saying the same thing, you can say:
• 95% probability;
• 0.95; or
• 95/100.
An annual probability can be allocated to any event that could possibly occur over the course
of a year. For example, for a chocolate factory the probability of a strike by the staff might be
0.1, a flood 0.35, and a theft of finished products 0.8. Which one do you think is most likely to
happen based on these numbers?
Activity
Consider one of your own clients and the unfortunate things that could happen to them. Is
your sense that some are more likely than others? Why do you think that? Is it based on
historic knowledge of what has already happened?
Calculation of probabilities
There are a number of methods which we will consider in outline.
Option 1 is where all the outcomes are known and all equally likely, e.g. choosing a
particular card from a pack or throwing a six using a die.
What is the probability of choosing an ace from a standard set of playing cards? How many
aces are there? The answer is four. How many cards are there in total? The answer is 52.
The probability is therefore 4/52, which is 0.077. This will be well known to a regular
card player.
Using the die example, there is one six on a die and six options, so the probability of
throwing a six is 1/6 or 0.16 – a better chance than picking an ace out of a pack of cards.
Consider this…
This system works for contingency insurers covering the chances of prizes being won and
when they know all the data. However, most insurers do not have all the information. Does
a marine insurer know how many collisions a client’s vessel will have, for example?
This first method does not work for most classes of business, so let’s look at some others.
Option 2 uses the concept of relative frequencies. In this situation, we express how often we
see something happening as a percentage of the total number of things that have happened.
So, using the example above, we consider how many collisions a ship owner has as an
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overall percentage of all the ship’s losses. All types of potential loss to the ship should be
allocated a percentage, which should add up to 100% of all the losses.
Therefore, the statistics for our ship owner could be expressed as facts:
Collision 15%
Engine breakdown 20%
Grounding 50%
Fire 10%
Piracy 5%
Total 100%
Or alternatively, they could be expressed in bands as figures:

Claims between 0–50,000 75%
Claims between 50,001–100,000 20%
Claims over 100,001 5%
Using this historic data, the insurer can consider the relative likelihood of these things
happening again in the future, and assume they are as likely to happen in the future as they
did in the past. Claims distributions, in particular, can be used to set deductible levels to
manage the impact of attritional (smaller, but more frequent) claims.
If there is no historic data available, for example for a completely new class, or where there
is some doubt over the accuracy of the historic data, then a third option is available.
Option 3 uses subjectivity as the underwriters apply their own skill and judgment to work out
the probability for any given event. The main problem with this method is the very nature of
subjectivity in that different people view things in different ways, so two underwriters could
come up with very different ideas. The greater the underwriting experience, theoretically, the
more the underwriters have seen to inform their perspectives but that is not always going to
be the case.
A1F Return periods
Return periods are linked to probabilities in that they are used to express how often a
particular event is expected to occur, e.g. a certain severity of flood. They use data gathered
over a given period of time in the past and, as mentioned above, work on the basis that the
recurrence cycle of the past will be continued into the future.
For example, if property developers are considering whether to build on a particular piece of
land, they might want to consider how often in the past the land has flooded and how serious
those floods were.
However, ‘return periods’ are widely misunderstood when quoted in the popular press,
especially after a major catastrophe such as a flood or an earthquake. There is a
misconception that once a particular event has occurred, the return period or probability of a
subsequent similar event has changed, when it will, in fact, remain the same, providing there
has been no change in circumstances relating to it.
When considering probabilities and using return periods, the analysis is actually of the risk of
the ten-year flood happening this year. A flood that is only supposed to be of a certain size
once every ten years has a 0.1 or 10% chance of happening in any one year. A flood that is
only supposed to happen once every 100 years should only have a 1% chance of happening
in any one given year.
Problems can occur when things happen with greater frequency than expected. Why has
that happened? Is it all climate change? Or is it because property developers are building on
flood plains, not realising that if rain water has nowhere to drain away naturally floods may
occur? The usual reason for such a change is that the hazard has changed which may call
for a reassessment of the risk.
On the Web
Look at this emerging risks report dealing with flooding in California: www.lloyds.com/
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news-and-insights/risk-reports/library/california-flood-central-valley-risk-analysis.
And, see this case study on the flood risks in the UK: eciu.net/analysis/briefings/climate-
impacts/flood-risk-and-the-uk.
A1G How to deal with less frequent/more catastrophe events

If the business we are concerned with is the high severity but low frequency type, then
perhaps we will not have the sheer amount of data that makes the previous types of
statistical tools so useful, and alternative methods will have to be considered.
The underwriter has to factor something into the price for these types of loss because when
they do occur they will be costly and, if the insurer is small in size, will have a more
significant impact on the capital of the business.
In these cases, insurers will use tools such as stochastic models based on larger datasets to
generate a large number of scenarios, which are simulated statistically to consider how claim
frequency, timing and values might vary if some of the data inputs are tweaked.
A2 Interpretation and use of statistics

Whenever looking at any statistical information, care should be taken to consider whether
anything has changed which would make extrapolating from it less accurate.
The underwriter must understand whether there has been any change in legislation, for
example, which would make certain types of claim more or less expensive than before, the
impact of inflation, as well as the risk management work that the insured might or should
have done.
Consider the changes that underwriters might make to the business which would reduce the
value of some historic data. For example:
• moving away from writing primary business to writing excess business;
• widening or narrowing cover;
• opening up new areas of business or new territories following changes in the law; and
• changing the types of risk being insured, e.g. moving a property account from retail
to factories.
When considering pricing in the next section, we will look further at how statistics can be
used for future predictions and the danger of using them if the business has changed.
Question 4.2
What factor is most likely to render any historic statistics less valuable?
a. Change of underwriting or claims personnel. □
b. Change of location of office. □
c. Change from writing primary to excess business. □
d. Change from Lloyd's to company stamp. □
A2A Is knowing your client just the data?
While the data related to a proposed risk is very important, there are other considerations
which should be taken into account, including the insurer’s personal knowledge of the risk
and the client, as well as the organisation’s collective knowledge.
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The underwriter should consider the world in which a client is operating. What is the client’s
reality? Is business difficult for them? Might that mean that savings will be made on routine
maintenance, thus creating a greater exposure for the insurers? Alternatively, is the insured
becoming more focused on risk management and loss prevention, meaning that the historic
loss pattern is not necessarily going to repeat itself in the future because clear steps have
been taken in areas such as staff training or upgrading systems. If this is the case, then the
relative frequency method looked at above will have less value than it might have
done otherwise.
It is also important to consider the legal and regulatory world, firstly as it applies to clients.
Are they facing greater liabilities than before, which might lead to more frequent claims or the
claims being more severe? Does the relaxation of some sanctions, meaning that business
can now be done with countries such as Iran, make a difference to either the customers or
the insurers?
A3 The purpose and value of catastrophe (cat) modelling

As well as insurers considering single or individual risks, it is vitally important that they think
about the extent to which they are exposed to an aggregation of risk should an event occur.
Be it natural or man-made, a large number of losses to individual risks will result in an
outsized claim for the event.
Every insurer should have a tolerance as to how much loss from an aggregation of exposure
it is prepared to accept. This might, for example, be expressed on a location basis for
property risks, or in relation to an organisation or country for political or trade credit risks.
When considering aggregations, while the starting point can be within individual classes of
business, that should not be the end point as for many catastrophe-type losses, claims can
appear from unexpected classes of business.
For each of these classes of business consider how an aggregation, just within each class,
might arise.
Class How aggregation might arise
Property Storm hitting many properties insured in locations affected by the

storm track.
Personal accident/travel Air crash with large number of insured people affected by the accident.
Marine cargo Large amounts of insured cargo on a vessel when it sinks.
Aviation Fire in a hangar damaging numerous aircraft.
Professional indemnity/ Financial crisis with many different experts being sued for negligence.
financial lines
Products liability Large scale failure or contamination of a consumer product, which is

made by a number of different suppliers who are all insured.
Yacht Large number of insured yachts being caught in a hurricane in

the Caribbean.
Consider now the cross-class aggregation that could also arise. For example, a severe storm
could lead to property damage, liability or contingency (e.g. concert/event cancellations).
Activity
Read the risk report on a simulated cyber attack and pay particular attention to the various
classes of business which might be impacted should one occur: www.lloyds.com/news-
and-insights/risk-reports/library/business-blackout.
Also look at this pandemic report produced by Lloyd's in 2008 and notice how many of the
suggested issues have transpired as a result of COVID-19: www.lloyds.com/news-and-
insights/risk-reports/library/pandemic-potential-insurance-impacts.
Capturing aggregation data is relatively simple for those assets such as properties which do
not move, as long as insurers are given accurate data. However, it becomes far more difficult
for mobile things such as vessels, goods, aircraft and of course people. In these situations,
having completely accurate data is not possible and some degree of statistical analysis and
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subjectivity must be applied.
So, what is catastrophe modelling? It allows the insurers to take aggregation data and
analyse what the impact of certain types of disaster would be on their book of business by
applying annual probabilities to a number of (stochastic) events.
An insurer might want to know what the impact would be on its US property portfolio should
a 1 in 100-year or a 1 in 50-year earthquake occur. It can then consider what its probable
maximum loss would be in that scenario, so as to set its reinsurance purchasing at the
right level.
A good catastrophe modelling system will, for example, be able to take into account the
latest work being done in the analysis of natural perils, such as flood research, weather
analysis, seismology and structural engineering, to continually refine the data being
presented.
Catastrophe modelling will also assist in calculating the risk premium for individual
properties, depending on their exposure to certain natural perils.
Activity
Talk to anyone involved in catastrophe modelling in your organisation. Find out whether
the Italian earthquake in August 2016 was viewed as a major issue before the incident,
and whether your exposures are mapped there if you are an insurer.
Look at these reports about other natural catastrophe events. This one was written after
Hurricanes Harvey, Irma and Maria struck the USA and Caribbean: bit.ly/2H2uyzj.
Look at this report about best practice in modelling catastrophe risk: www.lloyds.com/
news-and-insights/risk-reports/library/catastrophe-modelling-and-climate-change-report.
This report covers quake risk in the Middle East which has not been an area of focus
historically: bit.ly/2py1isr.
A3A Deterministic versus probabilistic approaches

We have already seen that when considering elements of a risk there are often a number of
parameters – for a property risk it might be location, occupancy, size of building etc.
Deterministic calculations take one value for each of those parameters for a set level of
probability and will provide one answer, so for example when thinking about the actual
maximum loss, you would take high values for each.
A probabilistic approach uses a spread of variables for each parameter and therefore
produces a spread of likely outcomes, which can then be analysed using (averaging and
standard deviations) stochastic tools. Most underwriters will apply the concept of a probable
maximum loss as opposed to an actual maximum loss when considering the risk, so a
spread of options including a loss probability assessment will help in this analysis.
A4 What is the added value of realistic disaster

scenarios (RDSs)?
Within the Lloyd’s Market, the managing agents are mandated to calculate certain scenarios
and report the results back to Lloyd’s. The idea is to stress test both individual syndicates
and the Market as a whole. The event scenarios are regularly reviewed to ensure they
represent material catastrophe risks.
There are three sets of RDSs. First are the compulsory scenarios, for which all syndicates
report estimated losses to Lloyd’s. These represent events to which most of the Market
would potentially be exposed, and for which Lloyd’s monitors the total of all syndicate losses.
There is then a set of more specific scenarios, which need only be reported if estimated
losses exceed a threshold. Finally, there are two events which syndicates must define for
themselves as representing material, potential losses not captured in other scenarios.
Compulsory scenarios:
• two consecutive Atlantic seaboard windstorms;
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• Florida windstorm;
• Gulf of Mexico windstorm;
• European windstorm;
• Japanese windstorm;
• California earthquake;
• New Madrid earthquake;
• Japanese earthquake;
• UK flood;
• cyber; and
• terrorism in two places in New York.
Specific scenarios:
• marine event;
• loss of major complex;
• aviation collision;
• satellite risks;
• liability risks;
• political risks; and
• two syndicate-defined RDSs.
Syndicate-defined scenarios:
• windstorm in an area not specified above; and
• earthquake in an area not specified above.
Insurers should be doing this type of stress testing, regardless of whether mandated by a
regulator, to ascertain in particular where large losses might arise.
Examples of where the market has been caught out in the past include:
• The Deepwater Horizon oil spill in 2010, where the precise nature of underlying
contractual relationships between contractors and subcontractors was not entirely clear.
• The Japan tsunami in 2011, followed by the 2011 Thai floods, where the market did not
realise the extent to which Thailand was used as a backup location for Japanese
manufacturing.
• Superstorm Sandy in 2012 which, unusually, took a northerly path causing significant
damage to New York and New Jersey.
• The Arab Spring uprisings which started in late 2010 and rapidly spread across North
Africa and into the Middle East.
• The Tianjin port explosion in 2015 where insurers did not realise the total aggregated
concentrations of what was insured under cargo/stock/storage policies in a confined area.
B Pricing
Insurers bring risk together in a common pool. While the risks are not all the same, they each
need to make a contribution to that pool which represents the degree of risk they bring and is
also fair to them.
We have already addressed how statistics will help with the analysis of the risk presented to
the pool, and in this section we will consider what other elements the insurer should be
adding to the premium charged.
Before we move on, it would be useful to ensure that any technical terms are
clearly understood.
Written premium This is the original premium charged to the client (before cancellations,
deductions, signings etc., apportioned among all participating insurers).
Signed premium This is the premium after apportioning or ‘signing down’ to all the underwriters
participating on the risk, and occurs when the risk has been oversubscribed.
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Gross premium This is the premium received by an insurer before any deductions are made for
either commissions or reinsurance.
Net premium This is the gross premium less deductions such as brokerage, other acquisition
costs and reinsurance.
Brokerage A percentage of the gross premium or fee charged by the broker.
Earned premium Premiums are ‘earned’ during the lifetime of the policy, until the policy either
expires, lapses or is cancelled. While the policy is ‘live’, the premium will only
be partially earned and this has to be recognised when drawing up a
balance sheet.
The later in the year the risk is written, the smaller proportion of the premium
will be earned by 31 December (when most accounts are drawn up).
Incurred losses In relation to claims, it is the total of paid losses and outstanding loss reserves.
What is the price supposed to cover?

The price is intended to cover the premium for the risk, including any loadings for expenses
or costs of acquisition.
When considering the right price for any risk, the insurer will, of course, consider the extent
of the risk that is being brought into the pool. However, the premium charged needs to
consist of more than the bare risk and should include the following:
• risk premium;
• (management) expenses of the business;
• costs of acquisition including brokerage, commissions etc.; and
• return on capital (includes profit).
Question 4.3
If an underwriter writes a twelve-month risk incepting on 1 April with a gross premium
of $120,000 (US), how much of that premium will be earned by year end on 31
December?
a. $0. □
b. $120,000. □
c. $30,000. □
d. $90,000. □
B1 Risk premium
The risk premium has to cover the cost of the losses (loss cost), but take into account the
fact that the claims might arise some time in the future (the value of losses over time), and
therefore might be subject to inflation. Liability classes tend to be long-tail and property/
physical damage shorter-tail. However, there is no reason why a liability claim should not be
resolved quickly or a property claim take a significant time to sort out.
The underwriter will consider the frequency and severity for different types of potential claim
and may consider the following factors:
• the subject matter being insured;
• the exposure/size;
• the cover being offered;
• any particular rating factors;
• historic claims experience;
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• large catastrophe claims; and

• whatever the future might hold.
Refer to
If necessary, remind yourself about short- and long-tail classes of business in LM1 and
LM2 and how they affect the length of time claims take to settle
B1A Subject matter

Underwriters must be absolutely clear about what it is they are being asked to insure. If it is a
ship, what type of ship, what is its function and where is it going? If liabilities, are they tort-
based (involuntary) or contractual liabilities as well?
It might be that the underwriter will consider some elements of the risk separately. For
example, tort-based liabilities might be viewed differently to contractual liabilities, which the
insured has taken on voluntarily. For an employer’s liability policy, the insurer might consider
the risks to office-based staff differently to those in a factory setting. An insurer covering
stock stored in a warehouse might be interested to know details of whether certain things,
such as alcohol or tobacco, might be more susceptible to theft.
B1B Size and exposure
In the case of a factory, what is its value? How is it constructed? What does it produce? How
well is it managed? How many staff are employed? All these factors will have a bearing on
the risk. The insureds will have considered whether certain perils (e.g. a natural catastrophe)
will realistically lead to a total loss of the insured property. They will also have considered
whether others (e.g. fire or theft) will ever lead to such a large loss that it is necessary to buy
insurance to the full limit for those perils (i.e. if it will never be used).
When some perils have a lower total loss payable this is known as first loss limits, and the
pricing for those perils will be proportionately reduced, as the cover provided for some of
them will be lower in value than for others.
B1C Scope of cover
How generous are you being as an insurer in terms of policy coverage? What else should an
insurer take into consideration? How low or high is the excess you are considering? Are you
now offering sublimits on coverage which were excluded before? How are the changes you
might be making today going to affect your consideration of historic claims data?
Activity
Access one of the aggregators’ websites, such as www.comparethemarket.com or similar,
and experiment with how raising and lowering deductibles impacts on the price, or how
adding or removing cover changes it.
B1D Application of rating factors

These are the factors which can raise and lower the price for an otherwise standard risk. The
work so far will have established a base rate for a risk, and the rating factors will operate as
either discounts or loadings onto that basic rate.
Some of the elements will be familiar to you from the concepts of perils and hazards in your
previous studies. If you need to refresh your memory on these see LM1, chapter 1. Let us
consider what discount or loading factors might be.
Property insurance Proximity to a hazard such as a river – loading.

Sprinkler system – discount.
Thatched roof – loading.
Inner city location close to similar risks – loading.
Unoccupied for more than 30 days – loading.
Fire alarm to central monitoring station – discount.
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Age – loading for older building.
Usage – might be loading depending on use.
Size of deductible – will usually result in a lower rate the higher the deductible.
Liability insurance Good procedures and training – discount.

Roles being performed for employers’ liability insurance – discount for office staff.
Type of work at a location – hazardous work will be loaded.
Much of this information will be obtained as part of the initial presentation to underwriters or
on a proposal form. It is very important that questions are asked by underwriters about
matters which they believe are significant to their consideration of the risk. Of course, they
may also take the opportunity to survey risks of all types to get an independent expert view.
B1E Claims experience including large/catastrophe claims
Part of the underwriting presentation will be the loss and claims history for the risk going
back a number of years (unless, of course, the risk is completely new). As we have already
seen, we need to factor into the price the potential for large/catastrophe claims but the
statistical information may not always exist. This is a good example of when the use of
catastrophe modelling is key. In a market as international as London's, the currency in which
the premium has been received and in which claims will be paid may also have an impact on
the cost of claims.
Activity
Find out if your organisation accounts in just one or in multiple currencies, especially
Sterling and the US dollar.
The future
The impact of inflation on claims costs is the obvious matter to consider here but other things
also need to be taken in account, including:
• changes in the law which might increase the costs of claims;
• changes in the climate which might increase the potential for natural catastrophe losses;
and
• the overall state of the economy, which might lead the insured to cut corners in areas
such as training, maintenance and health and safety.
Some types of reinsurance (specifically liability classes) will have indexation provisions built
into them, whereby the effect of inflation when a claim takes a long time to resolve is shared
between the cedant and the reinsurer. The practical impact is that the retention and limit can
move during the lifecycle of the contract, and most usually will be adjusted upwards in line
with an agreed index such as the Retail Price Index. The limit and retention will be multiplied
by the chosen index to provide the new values.
The impact of a retention increasing effectively over time is that some claims might not then
impact the reinsurance contract.
The other consideration has to be emerging risks – those which are lurking over the horizon
but have not been considered in enough detail or at all as a potential problem. Cyber risk is a
good example of this, where some time has been spent in recent years trying to work out
where the problems might arise, and how claims might manifest in different lines
of insurance.
Activity
Find out whether there are colleagues in your own organisation whose roles include the
consideration of emerging risks. Try to speak to them to find out what this means in
practice to the business.
Use this link to find work being done in Lloyd’s around emerging risks. Find a report on a
topic that interests you and read it.
www.lloyds.com/news-and-insights/risk-reports/library.
Chapter 4
B2 Expenses
An insurer’s expenses can be categorised as those which are fixed and those which are
variable. Fixed costs generally remain the same in the short term, irrespective of the risk
itself, and would include the share of central costs such as office space, staff and HR.
Variable costs may be associated with the type and volume of risks and should also take into
account any enhanced costs of servicing the risk. For example, a risk written on an open-
cover basis with a large number of declarations, which need to be individually reviewed, will
take up more insurer time than a single, albeit possibly large, facultative risk. The most
obvious variable cost is commission or brokerage paid to agents, which is geared to volume.
Some management costs can be outsourced through competitive tenders.
Claims handling costs also have to be factored in (which are separate from the actual
indemnity/expert cost of the claims themselves). An insurer’s claims team is an important
part of the service and will, therefore, be an expensive resource for the insurer to bear. For
high frequency but low severity losses, this element of costs might lead the insurer to
consider outsourcing some of the claims function so as to better manage operating costs in
this area. However, for the higher severity, lower frequency claims an in-house team might
offer a better service, although the individual cost of handling claims might be less easy
to compute.
Reinsurance might be a fixed cost, if looking at the spreading of the cost of a reinsurance
treaty across a whole book of business, but the purchase of a specific, facultative
reinsurance to protect an individual risk will be variable and unique to the risk in question.
As London is an international market the vast majority of the risks come from outside the UK.
The regulatory permissions that are obtained by London insurers to write the business often
come with requirements both for reporting and the payment of certain taxes and levies.
Some of these are payable by the insurers themselves and others are collectable from the
insured and paid on by the insurers. It is very important that the insurer knows what the
various rates of premium or policy taxes are, who has to pay them, and whether they are
payable on gross or net premium.
Reinforce
Gross premium is what is paid by the client.
Net premium is the gross premium less any brokerage paid to the broker, and any other
deductions applicable, which is ultimately the amount received by the insurer.
There are also some levies which the insurer has to pay centrally based on premium income,
e.g. the levy payable to the Financial Services Compensation Scheme in the UK. This
scheme protects consumers if insurers are unable to pay claims, for example because
of insolvency.
Activity
Look at Crystal (bit.ly/2CB8zx4) or your own international tax database if you have one,
and find out if other European countries have the equivalent of the UK Insurance Premium
Tax. See if you can find out how much it is in other countries and think about whether the
UK rate is cheap or expensive.
Payment to intermediaries is a key expense for an insurer, and the brokerage payable by
insurers to brokers is the basic, traditional format seen in London. Rates can vary
dramatically but it is an amount generally calculated on gross premium and must be factored
into the pricing calculations. The end customer will not necessarily know what it is, although
in the UK consumer customers must be told.
Of course, there are other entities which will receive payments from insurers for introducing
business. The most obvious example in London would be the coverholders or managing
general agents (MGAs). They might be brokers as well but, if an MGA, they will be acting
purely as the insurer’s representative in accepting risks. There are a number of different
Chapter 4
types of commission that would be paid to them based on both the volume or profitability of
the business. In each case the underwriter must consider the premium net of these
deductions from which other expenses, and of course claims, have to be paid.
Activity
Find some examples of risks written by you (or placed by you if a broker) and look at all
the various deductions and discounts. Consider to whom they are being paid, and whether
they are automatic or linked to something like a no-claims discount.
Consider what that means in terms of the bottom line ending up in the insurer’s
bank account.
B2A Electronic placing and cost reduction

The expenses in the London Market can be typically divided between acquisition costs (i.e.
the costs of getting the business in the first place such as brokerage) and operating costs
(i.e. the costs of running the business which will include both office costs and the overheads
of being in the Lloyd’s Market as a syndicate).
The Future at Lloyd's project (the forerunner of Blueprint 2) started by looking at six
suggestions for future development. At least some of these were aimed at reducing some of
the operating costs of being in the Lloyd’s Market (which can range from 30% to 40%
of premiums).
The Blueprint 2 project also has cost reduction among its aims, alongside creating a better
business environment overall and making London easier and more efficient to do
business with.
One arm of the modernisation work is a drive towards more use of electronic placing
platforms. There are a number of options available including Placing Platform Limited (PPL)
which is a not-for-profit company owned by the Market, commercial offerings such as
Whitespace and brokers’ own platforms.
The benefits highlighted by PPL include:
• parties being able to work more efficiently;
• simultaneous quotations can be requested;
• face-to-face negotiations can still occur where information has already been provided;
• risks can be tracked online through their whole life cycle;
• all documents can be stored on the system with a full audit trail;
• potential for link up with back-office systems; and
• all risk negotiation information can be produced quickly in the event of a dispute.
In its capacity as a regulator, Lloyd’s set targets for business to be placed via electronic
placement and agreed that for those managing agents that meet the required targets, their
syndicates will receive a rebate on their annual subscriptions. Moreover, those who do not
meet the targets will find additional charges levied on them as a result.
The COVID-19 pandemic accelerated the take-up of electronic placing systems as a

necessity for organisations to continue operating in the London Market when everyone was
working from home and the traditional methods of face-to-face placing were impossible.
On the Web
Lloyd's continued to set targets for use of the systems even in 2021. Market bulletin
Y5330 set out targets for the rest of 2021. Go to the Lloyd's website and look for the
bulletin for more information. There is no longer a set target from Lloyd's for the use of
electronic placing as there is generally such a large use of it across the market.
PPL: placingplatformlimited.com.
Whitespace: www.whitespace.co.uk/about.
Activity
If you work for a broker:
Chapter 4
• Find out if you have your own platform or are using another one.
• When was the first piece of business handled electronically by your organisation?
• How much business is being placed via the platform and is it concentrated in certain
classes of business? What impact has the COVID-19 pandemic and working from
home had on the way you work?
• What issues might there be with the system(s)? Have there been any particular issues
during the period of remote working?
• Are any of your colleagues actively involved in improvements and development work?
If you work for an insurer:
• Which platforms are you using?
• Are you meeting the targets that Lloyd’s had previously set or even exceeding them?
What impact has the COVID-19 pandemic and working from home had on the way you
work? Is business continuing as normal?
• Do you have other online options for brokers to use such as portal systems? Are they
being used more now?
• Is there more business transacted in certain classes of business than others?
• What particular issues are you or colleagues finding with the system(s)?
• Are you or any of your colleagues actively involved in testing and improving the
systems for the future?
B3 Profit and return on capital employed (ROCE)

The return on capital employed (ROCE) ratio assists with the understanding of how well a
company is generating profits from its capital. In an insurance context, if claims and
expenses are less than the premium received, then the insurer has made a technical profit
before any investment income. Another way of looking at this is by analysing the ‘combined
ratio’. If claims and expenses net of reinsurance are less than 100% of premiums, this is a
positive combined ratio and a positive technical result. A result over 100% indicates a
negative result or technical loss before investment income.
A healthy profit will allow the insurer to do two things. It can put something aside in its capital
reserves for future years and also offer a dividend to its shareholders/capital providers.
If the technical ratios and the investment returns are poor, then the insurer will be using
existing reserves and capital to cover larger than planned losses, and the dividends may not
be payable.
Therefore, the strategy set out by the underwriter should ideally be focused on making an
underwriting profit or at worst breaking even. Deliberately targeting a negative loss ratio is a
dangerous strategy, and while it might be feasible for a short time using good investment
returns on negative technical results and releasing claims reserves, it is not a good long-term
strategy. Investment returns may be negligible in today’s market and if you over-release
claims reserves, you can find later that you may be under-reserved when claims are
finally paid.
Investors will inevitably often set out their expectations of the minimum return on capital, and
the regulator(s) overseeing the insurers will, of course, also have its own requirements
in establishing minimum solvency margins.
Activity
If you work for an insurer look at your last set of accounts. Did you make money overall
from underwriting? How did each class of business perform if such data is broken down?
Use this link to have a look at Lloyd’s 2022 performance as a marketplace (as at
August 2023):
www.lloyds.com/investor-relations/financial-performance/financial-results.
Use this link to view the IUA 2022 statistics report, which shows 2021 data:
bit.ly/2oaLQ5b.
Chapter 4
B4 Calculating the premiums
Simple risks will often use rating matrices into which the pricing structure has been built and
which can also take account of loading/discounting factors. More complex risks will require
more individual rating, using statistics as a base but then adjusting to take the specifics of
the risk into account.
Most insurers will have a minimum premium below which it is not worth writing the risk. The
cost effectiveness of writing business is, of course, key to the decision of whether to use
delegated authority formats.
Premiums can be fixed and they can be adjustable depending on the risk in question. For
risks such as storage or professional liability, where the premium base is the goods in store
or the fees being earned, it makes more sense to calculate the final premium due at the end
of the risk when the actual amounts in store or fees earned are known. This does not mean
that no premium is payable beforehand, as a deposit premium will usually be paid, just that
the final numbers are adjusted after the policy expires.
It is also important to understand that along with the minimum price, there is always a
technical price for a risk, which sadly might not be the actual price that the insurer receives.
Market forces such as an over-supply of insurers will mean that prices will be forced down.
Insurers should be aware of the prices being charged by their competitors and be able to
calculate a price that, while less than they might like, is one that they can justify and bear
without running at a loss.
Underwriters will often have to provide a rationale for writing a risk at below the technical
price or below the premium expected to meet the business plan – the benchmark prices of
Lloyd’s underwriters.
To win new business, an insurer might offer a low opening premium with the hope that a
gradual increase in each renewal will allow it to creep closer to the level the technical
premium should be. This is a delicate balance in that renewal business is cheaper than new
business on an acquisition basis, however, when the market is so competitive, too large an
increase will lead to the business moving elsewhere. This then gives the insurer the problem
of not retaining enough business and having to incur further cost to win more to fill the gap.
B4A Burning cost
Burning cost is the amount of premium ‘burned’ in paying losses over a period of time.
When a risk has generated a large number of claims, the underwriter can use that data to
assist in the pricing of the risk. In order to work well, there must be enough claims, across
enough years of account, for the data that can be analysed to be reliable and stable.
This method works well for those classes which have a large number of claims but the size
of which does not vary very much, as opposed to those classes where the value of individual
claims can vary quite dramatically.
The benefit of this method for the insured is that only their claims’ record is taken into
account, rather than their premium being affected by the claims’ records of other insureds,
which might be significantly worse.
There are therefore a few downsides to this method of calculating premium:

• Figures might not represent the ultimate value of claims settled, so additional techniques
such as triangulations might have to be used.
• Inflation may not be factored in.
• It does not adequately take into account changes to the risk or to the cover offered.
• Trends within claims data may not be taken into account.
Regarding claims data in particular, underwriters should consider doing the following to give
themselves a better starting point from which to work:
• Analyse claims data and project the ultimate net loss for any underwriting year.
• Consider revaluing historic claims to current day values by using an index.
• Factor in the potential for large losses.
• Adjust for any changes in cover and risk being presented today, if different to the past.
• Consider any trends in the data.
Chapter 4
• Consider any emerging risks.

• Charge a premium for ‘unused’ cover (the policy cover over and above the
loss experience).
B4B Use of triangulations
Triangulations are one tool that can be used to extrapolate how other years will pan out
based on known claims development. They only work if there is no change in the underlying
risks or legal framework, otherwise like is not being compared with like.
The following table shows an example of a triangulation of paid claims development over a
number of years. Across the top you can see time in twelve month increments. The figures
are in GBP millions.
Year 12 24 36 48 60 72 84
2015 2.33 3.40 3.78 4.00 4.15 4.17 4.17
2016 2.65 3.55 3.85 4.10 4.12 4.20
2017 2.50 3.60 3.70 4.05 4.08
2018 2.45 3.50 3.70 3.95
2019 2.40 3.49 3.80
2020 2.52
You can take the numbers that you do know and use them to work out what those you don’t
know might be.
For example, we want to know what the 24-month position on the 2020 year of account is
going to be – how shall we do it?
Start by calculating the percentage jump from the 12- to 24-month position on all the years
that we know for certain:
• The 2015 jump from £2.33m to £3.40m is 46% (i.e. £3.40m is 146% of £2.33m) and
the 2016 jump from £2.65m to £3.55m is 34% etc.
• Once all the percentage jumps are known, then the mean can be obtained by adding
them together and dividing by the number of values. This mean figure can then be
applied to the known number for 2020 (which is 2.52 for the 12-month period) to get a
likely estimate of the 24-month position.
In the triangulation above we have used paid figures, which are known numbers. However,
claims figures will be made up of other elements which are the reserves for the claims yet to
be paid.
Within this reserve number there will be:

• Specific reserves that have been raised on claims on the basis of known information on
known claims.
• An element called Incurred But Not Reported (IBNR). This takes into account the fact that
some claims will only be reported quite late in the particular year of account and ensures
that the known reserves are ‘padded’, so enough money is available for these claims.
• An element called Incurred But Not Enough Reported (IBNER). This deals with claims
that are known about but the reserve entered on them is not high enough to cover the
ultimate settled amount.
While the input from the claims team will be very important in considering this data,
underwriters will often use their actuarial team to provide detailed statistical analysis of
whatever data is available.
B4C Rating models
Most insurers will use rating model, based on generic risk data, and rating parameters
Chapter 4
which will allow them to feed known information about an individual risk into a framework.
They will then consider a number of variables and propose a rate for the risk. This method
offers consistency across risks but may also be viewed as a support for underwriter-driven
pricing, so that underwriters using the tools can analyse and justify the end result from
the model.
This links to our earlier discussion of technical versus actual price in that the model should
show the technical price for the risk. But, if insurers want to accept a lower market price, they
will have to justify the difference between the two, where the savings can be made, and the
impact on the basic requirement to cover the cost of claims and expenses, as well as offer
some profit and return on capital.
Activity
If you work for an insurer, ask an underwriter to show you how the rating model works for
their class of business. If you work for a broker, ask some colleagues how they calculate
the premium that they expect/want the insurers to offer.
B5 Regulatory oversight of pricing

For those insurers operating within the Lloyd’s Market there are Principles applied to the
pricing of business and the monitoring of rates, which are good business practice for any
insurer irrespective of their marketplace. This is not central control of how prices are set, but
rather the expectation and monitoring that organisations are setting realistic prices, which
are justifiable and support their business plans.
B5A Principle 1 – Underwriting profitability
Sub-Principle 6 – have an effective pricing framework in place in order to evaluate
sustainable technical price, rate adequacy and deliver sustainable profit.
The first Principle requires that managing agents have an effective pricing and rate-
monitoring framework in place for each syndicate they manage. What do you think this
means in practice? It means there is an expectation that there is a clear and identifiable link
between the organisation’s high-level risk appetite and what is happening in individual
classes of business.
If you recall the return period discussion earlier in this chapter, this concept allows the
insurers to consider the likelihood of certain events happening and their appetite for loss
relating to them. The risk appetite should also factor in the need to make a return on capital
and be reviewed throughout the year, so that if a particular class or territory is not providing
sufficient premium, then either reviewing the pricing or pulling back from that class or
territory can be considered.
Additionally, there should be a pricing policy which sets out how pricing is carried out for
risks, supports the proposed results in the business plan and how it will be managed across
the underwriting cycle. This is particularly important in a soft market, where the actual price
being accepted might be below the technical price calculated via rating models
or experience.
B5B Pricing methodology

Another element of the same Principle is that the managing agent should have an
appropriate pricing methodology.
In practice this means that the managing agent has to ensure that:
• There are appropriate and transparent pricing procedures and methodologies which are
consistent for each class of business and in writing.
• Benchmark premiums are calculated taking into account internal expense, reinsurance
and acquisition costs.
• Pricing is supported by relevant experience or exposure data and is within a structured
process or model. Benchmarks and expert judgement are not enough.
• The pricing process demonstrates the expected loss ratio for each risk with an explicit
split between attritional, large and catastrophe losses.
• Models are reviewed at least annually and recalibrated where required (usually
by actuaries).
Chapter 4
• Pricing for attritional, large and catastrophe losses is explicit.

• Written guidelines exist to assist the underwriters in using the process/model, including
escalation processes for deviations.
• Rationales are recorded for pricing.
• There is an established feedback loop on pricing model development and assumption
setting to ensure they are updated regularly.
Activity
If you work for an insurer, find a copy of any guidelines for your internal pricing processes/
models. Are they being used by your underwriting colleagues?
B5C Pricing adequacy and rate change management and monitoring

The same Principle also has a requirement that managing agents have mechanisms in place
to manage and monitor both the adequacy of prices and the changes in rates charged on a
risk between one year and another.
The managing agent must assess and calculate the impact any non-renewal of business,
any new business, and pricing movements generally, have on the overall loss ratio, as well
as measure the difference between technical/benchmark prices and the actual price
charged. The key question to keep in mind at all times is ‘Can we meet our business plan?’
The impact of non-renewed business may also be captured and analysed and data provided
to Lloyd’s via the performance management data return (PMDR). This report allows Lloyd’s
to consider data for each syndicate and risk level, and to measure the performance of a
syndicate against its own business plan and peers. The data that this report includes is:
• premium volume summary, including acquisition costs;
• new risks, including both the benchmark and actual price;
• renewed risks, including the changes in pricing on renewals; and
• non-renewed risks.
Consider this…
What do you think is the impact of cancelled or lapsed business? Will it always be
replaced by new business? Will the lapsed or cancelled business be the good business,
the not so good business, or a mixture?
Remember what was discussed above about trying to win business through offering a low
opening premium and then gradually increasing it towards the technical rate? The danger
is that the client might walk away at any time to another insurer offering a low
opening premium.
If you work for an insurer, do you have regular reviews of upcoming renewals and analysis
of what has not been renewed?
As well as looking at what has not been renewed, managing agents must review how the
price for each risk this year compares to that achieved last year. If the risk is exactly the
same this year as last, then it is a straight comparison between the actual prices. However, if
there are subtle or not so subtle changes between the risks, then a more detailed approach
needs to be taken.
Look at this example.
Example 4.3
Last year you insured one hotel, offering fire and flood cover, at a premium of £100. This
year the following changes take place:
• Nine hotels are added.
• Fire cover is removed worth £20 off the gross net premium per hotel on an
expiring basis.
• The deductible changes, which is worth an extra £15 on the gross net premium per
Chapter 4
hotel on an expiring basis.
The current terms are ten hotels, with flood cover only, at £100 gross net premium
per hotel.
You would calculate the risk adjusted rate change as follows:
Start with the changes for one hotel. The starting premium was £100 – deduct £20 for the
reduction in cover and add £15 for the change in deductible.
This year’s premium should therefore be £95 for one hotel and £950 for the ten hotels.
The change in premium for one hotel should be –£5, so £95 instead of £100.
However, an extra £855 should also be received because there are nine other hotels,
which should also be charged £95 totalling £950.
In fact, £1000 is received which means that per hotel, the pure rate change difference is +
£5 per hotel.
The rise from £95 to £100 per hotel is +5.3% which is the pure risk adjusted rate change.
Activity
If you work for an insurer, find some examples of risk adjusted rate change work and see
how the calculations have been done. Can you find any examples of positive rate changes
or are they all negative?
B5D Price and rate monitoring, audit and review

Principle 1 also covers the need to have effective systems and controls in place to audit and
review pricing and rate monitoring.
This will be done by ensuring that all the pricing and rate monitoring information is captured
by the underwriters and that checks are regularly carried out on data quality. Additionally,
checks should be done (usually by actuaries) to ensure that the pricing models are being
used appropriately.
Independent reviewers can be used to appraise the pricing and rate monitoring work
undertaken internally. The board should be updated regularly on how the processes are
supporting the business plan.
Key points
Statistical tools for the underwriter
• Underwriters will look at frequency and severity when considering risk.

• There are various ways to measure average in statistical terms: mean, median
and mode.
• Alongside the average, the spread or deviation of data should be considered.
• Probability is the likelihood of something happening and includes the use of
frequencies and return periods.
• A return period expresses how often a particular event is expected to occur.
• Statistics should always be carefully considered to appreciate how changes in the
underlying data might impact the result.
Chapter 4
• Catastrophe modelling uses data to monitor the aggregation of risk.

• Realistic disaster scenarios plot the financial impact on an insurer of a predetermined
set of events.
Pricing
• Every risk must make a contribution to the pool which represents the risk it presents to
that pool.
• There are various types of premium such as:
– written and signed;
– gross and net; and
– earned.
• The price should cover the cost of claims together with the expenses of the business,
and provide a return on capital.
• Underwriters will consider a number of elements such as subject matter and exposure,
and can also apply rating factors which can load or discount the basic premium.
• Underwriters can use rating matrices but many risks should be priced individually.
• Burning cost premiums take into account the historic cost of claims.
• Triangulations allow the underwriter to predict likely performance based on known data
but are only useful if there is no change to the book of business over time.
• There is regulatory oversight of pricing, including Lloyd’s Principles for doing business.
• Insurers should monitor pricing adequacy and the changes to rates being charged year
on year.
Question answers
4.1 c. A stable claims history and predictability, as long as nothing changes.
4.2 c. Change from writing primary to excess business.
4.3 d. $90,000.
Chapter 4
Self-test questions
1. Give an example of a risk that is low frequency but high severity.
a. Homeowners' building insurance. □
b. Motor first party. □
c. Aviation hull and liabilities. □
d. Pet insurance. □
2. How do you calculate the median in a group of numbers?
a. Rank the numbers in order and the median is the one halfway through the list. □
Chapter 4
b. Add the numbers up and divide by the amount of individual numbers. □

c. Find the number that repeats most frequently. □
d. Add all the numbers up, add 5 and then divide by 2. □
3. If data is said to have a high standard deviation what does that mean?
a. It is tightly grouped around the average. □
b. There are very large numbers and very small numbers. □
c. There is no pattern. □
d. The data is very spread out from the average. □
4. Why might it be difficult to do accurate exposure modelling on aviation and marine
risks?
a. There is not enough data about losses. □
b. Their values are constantly changing. □
c. The risks are constantly moving around. □
d. The computer models are not sophisticated enough. □
5. Which of these is not an example of the realistic disaster scenarios identified by
Lloyd's?
a. New Madrid earthquake. □
b. UK flood. □
c. European windstorm. □
d. Antarctic ice cap melting. □
6. If a risk has a gross premium of $100,000 (US) and $50,000 (US) of that premium is
earned by 31 December, when did the risk incept?
a. 1 January. □
b. 1 July. □
c. 1 March. □
d. 1 September. □
7. If you were writing a property risk, which of these factors would probably lead to the
premium being loaded?
a. Sprinkler system installed. □
b. Monitored fire alarm. □
Chapter 4
c. Concrete construction. □
d. Proximity to a river. □
8. How does writing business from overseas impact on the deductions made from
premiums?
a. Broker will require more brokerage. □
b. Reinsurance will be more expensive. □
c. Potential for more taxes to be paid. □
d. Lloyd's central charges will be higher. □
9. Explain how the combined ratio is calculated for an insurer.
a. Premium compared to claims. □
b. Premiums compared to only claims and operating costs. □
c. Premiums compared to tax. □
d. Premiums compared to claims and all expenses net of reinsurance. □
10. What benefit does the use of a rating model offer underwriters?
a. Price repeatability year on year. □
b. Giving a robust basis from which to overlay individual pricing for a risk. □
c. Confirmation for regulators that systems are being used. □
d. Calculating the tax payable. □
Distribution
5
outcomes
Introduction
A Different ways of writing business 5.1, 5.6
B Distribution methods 5.2, 5.3, 5.4, 5.5
C Delegated authority management 5.3, 5.4, 5.5
Key points
Question answers
Chapter 5
Self-test questions
Learning objectives
• explain the different types of placement available;
• explain different distribution methods;
• differentiate between various types of delegated underwriting;
• explain the stakeholders’ roles and responsibilities in relation to various distribution
methods;
• explain the benefits and risks to all parties involved; and
• explain the management and control of various distribution methods.
Introduction
In this chapter we will explore the different ways that insurers in the London Market can
choose to write business and to what extent their choice or lack of choice affects other
considerations. Many of the topics covered in this chapter have already been introduced in
LM1 and LM2, so consider refreshing your memory before starting this chapter.
Key terms
Audit Conduct risk Consortium Contract for

insurance
Contract of Coverholder Delegated authority Delegated claims
insurance management administrators
(DCAs)
Distribution methods Fronting Group/affinity Layers
programme
Lineslip Managing general Managing general Master policy
agent underwriter
Peer review Subscription market Third party Underwriting controls
Chapter 5
administrators
(TPAs)
A Different ways of writing business

A1 Why be part of a subscription market?
The London Market is a subscription market, which means that while any insurer can
choose to take 100% of a risk, they very rarely do, preferring to take smaller shares so a
single risk is split between a number of different insurers.
A distinction often observed between the Lloyd’s syndicates and the insurance companies
operating in London is that the companies have the size and appetite to write 100% of risks,
but the syndicates do this far less often.
There are a number of reasons why this choice might be made, and sometimes it will not in
fact be a choice at all. The insurer will not be in a position to accept more than a small share
of the risk, and has no opportunity to take a larger share. We will call this enforced choice.
Activity
Can you remember any of the reasons why an insurer might only take a share of the risk?
Can you divide them into real and enforced choice (i.e. influenced from outside
the business)?
The enforced choice list is actually the same length as the real choice list, as shown below:
Enforced choice Real choice
Broker influence Managing capacity
Licensing Branch office controls from head office
Client influence Managing aggregates
Availability of reinsurance Managing geographical exposures
Price Price
If the insurer is not licensed to write business in a particular area the choice will be quite
simple – they cannot write the business at all. However, it might be that a different structure
will allow them to write the business and that is part of the analysis of the risk.
Chapter 5 Distribution 5/3
Broker and client influence is very important, so the insurer has to work hard to build and
maintain relationships with both. Also, in a marketplace where it is quite difficult to compete
on price, insurers have to be able to differentiate themselves from competitors in other ways.
Activity
If you work for an insurer, consider how you can stand out from your competitors and
appeal to brokers/clients.
If you work for a broker, consider what draws your attention to a particular insurer as
suitable for your client.
Did your ideas include any of the following?

• As an insurer, being accessible and available to the brokers/clients to discuss matters.
• Knowledge of the business and the client’s needs.
• Offering solutions if the original proposal is not acceptable.
• Willingness to explain, particularly if unable to say yes to something.
• Being proactive in turnarounds on matters such as pre-risk catastrophe modelling.
• Approach to claims and service.
Looking at the real choice list, can you remember why it is important to monitor aggregates
or manage capacity? Monitoring aggregate exposure in any one location allows an insurer to
Chapter 5
measure how large a loss would be should a catastrophe, such as a bomb or windstorm, hit
that location. Knowing what the exposures are in any one location is very important for an
insurer but, of course, one of the challenges is that often the things being insured are mobile,
such as aircraft, vessels, cargo or people. In these cases, it is impossible to accurately
measure aggregation or accumulation.
Lloyd’s Principles for doing business offer the following guidance in Principle 2 –
Catastrophe Exposure:
Managing agents should ensure that their syndicates have robust governance and
oversight of risk aggregation.
Also consider what was discussed in chapter 4 about the importance of modelling to the
accurate pricing of risk.
Finally, think about the impact of being an insurer operating in the London Market as part of
a much larger international organisation. It might be a syndicate, which is part of a large US
insurance company, or a branch office of a large European firm. In either situation, your
operations will form part of the wider scope of the business and therefore have to fit with it.
There might be underwriting restrictions in terms of the risks, and the percentage share of
those risks that can be accepted.
Consider this…
Why do you think restrictions are applied? Might your company do the same in relation to
other offices if London is the head office?
Perhaps companies want to ensure that they do not accidentally write the same risk from
different offices or compete between offices for the same business.
A2 Why front business?

When we were discussing the licensing point above, there did not appear to be a choice in
that if there was no regulatory permission to write the business, it could not be written.
However, permissions are more subtle than that, as while there are some countries in which
neither direct nor reinsurance business can be written by overseas insurers, in many others
it is just direct business which is restricted. This means that reinsurance business can be
written by overseas insurers, but the original risk has to be written by a local or
admitted insurer.
For an insurance company operating in the London Market, it might be as simple as finding
out whether there is a local office and routing the business through it, but for other insurers,
or where a local office is not available, the process requires a little more effort.
The concept of fronting is reinsurance but when the arrangements have usually been set up
by the original insured and the reinsurer, with the direct insurer being slotted into the gap to
satisfy the regulatory requirements.
Fronting can also be used to insert an admitted insurer in front of a captive or similar insurer,
again to satisfy regulatory requirements. The fronting company would bear none of the risk
as it would all be passed through to the captive company. However, the fronting company
does have a credit risk as it is primarily liable for the payment of any claims. If the captive
insurer chose not to reimburse the fronting company it would be financially exposed.
This structure can often be in the form of a quota share reinsurance, where the original
insurer only retains as much of the risk as the regulators require (which might be a very
small percentage, if anything at all).
Why would a London Market insurer choose to write business this way? What are the
advantages and disadvantages of this type of structure?
Advantages
• Access to business which would not otherwise be available.
• The reinsurer will often control the drafting of the contract for both the reinsurance and
insurance, so should not get any nasty surprises from the original contract wording.
• The reinsurer should be able to control the claims.
Disadvantages
• The original insurer might ignore the contract wording and settle claims without the
Chapter 5
reinsurer’s involvement.
• Fronting commissions may have to be paid.
• The reinsurer might be exposed to litigation overseas which would be costly and risky.
On the Web
Use this link to see where Lloyd’s syndicates have permission to write business:
crystal.lloyds.com/search.
A3 Link back to business planning process

When creating a business plan, the insurers should always be considering not only the types
of risks to write, but also the source of those risks and the platform or structure through
which they will be written.
Focusing on the direct portfolio, will it all be written on an open-market basis? Or will use be
made of other distribution methods such as delegated underwriting of various forms? If it is
the latter, what are the pluses and minuses? We will consider different distribution networks
later in the chapter, but the key point to remember is that they must be considered and
justified in the business planning process, highlighting both the benefits to the business, the
potential exposures, and the ways of managing or mitigating those exposures.
Sometimes an insurer has a choice of how to write business, for example direct or
reinsurance, and should consider whether one type or the other appeals more, or whether, in
fact, a balance between direct and reinsurance is a better portfolio mix.
Sometimes the option is only reinsurance but then the choice becomes what type
of reinsurance.
Refer to
If necessary, remind yourself about the different types of reinsurance in LM2, chapter 3
Facultative reinsurance (Fac RI) is as close to direct insurance as reinsurance will get, and in
this type of business, a reinsurer will know the identity of the original insured and consider
each risk on its own merits. Traditionally, the proportional treaty reinsurances (quota share
and surplus lines, for example) were more opaque in that a reinsurer had no knowledge of
the individual risks being written by the cedant/original insurer. However, more recently such
reinsurances include a requirement on the cedant to provide risk bordereaux (i.e. groups of
data such as premiums payable and claims paid) to the reinsurers, so they can see all the
original risks written. This takes some of the risk away from the reinsurers, as long as they
read the bordereaux.
Activity
If you work for an insurer, find a copy of your annual report or similar, and see if you can
find out how your business is split between direct and reinsurance. For direct business
see if you can find the split between open-market and delegated underwriting.
Can you see any differences between classes of business such as more marine insurance
being written direct and non-marine written as reinsurance, for example?
Question 5.1
What practical benefit do risk bordereaux give to a quota share reinsurer?
a. The reinsurers have complete visibility of the original risks being written by □
the cedant.
b. The reinsurers can request that the cedant prices the original risks in a □
certain way.
c. The reinsurers can decline some of the risks being ceded. □
d. The reinsurers can vary the percentage cession for each individual risk. □
Chapter 5
A4 Layers and appetite
Both direct and reinsurance business can be placed in a programme of layers and there are
benefits for all parties in doing this.
For the re/insured, the higher the layers in the programme, there is, theoretically, less
likelihood of a claim. For the same amount of cover, the price should be cheaper for a higher
layer than for one of the same size situated further down. For an insurer/reinsurer, the
benefit is that they can match their risk appetite to the risk on offer. If their risk appetite is for
less exposure, they can take a share higher up, and those with a larger risk appetite can be
involved lower down the programme.
For all insurers participating in layered programmes, knowing the combined impact of a loss
that affects all layers is very important. Moreover, a risk appetite might be to only write every
other layer. If this is the case, then care should be taken to ensure that other underwriters in
the same organisation, but perhaps in different offices, do not accidentally fill the gaps by
writing the other layers without realising the exposure already taken on. The discipline of
capturing risk information quickly and accurately will help in this regard.
£500,000 limit This layer is still the same size as the others but should be the cheapest
excess of £1m as it should get used the least often
£500,000 limit This layer offers the same amount of insurance cover but should be
excess of £500,000 slightly cheaper as it will only respond to claims which are over £500,000
This layer should cost the most as it is nearest the losses as it pays
£500,000 limit claims from zero
Activity
If you work for an insurer, find out if you write any business which is placed in layers. Then
find out what your appetite is and whether it differs between classes of business.
If you work for a broker, find out if your colleagues know whether certain insurers prefer
higher or lower layers.
Are there any downsides to a layered programme? There might be if the layers are not
identical in terms of cover, for example. If a lower layer is wider than a higher layer, a claim
might not be recoverable from the higher layer, thus depriving insureds of coverage they
believed that they had bought. If the reverse is true, the same problem can arise where
insureds have to bear a large portion of the loss themselves before their insurance will
respond, which is probably not what they were expecting.
In liability insurance, where the cover provided also includes the insured’s own legal defence
costs, the impact of layers can vary depending on the wording. If the legal costs are payable
as part of the overall sum insured, then expensive litigation will erode the limit of the layer
very quickly and the upper layers will be exposed more rapidly. If the legal costs are payable
in addition to the policy limit, especially if there is no financial cap to them, the lower or
primary layer will be faced with a large defence-costs burden, which will not have to be
shared with the upper layers unless the wording specifically provides for allocation of those
costs (and some do).
Activity
If you are involved with liability insurance written on a layered basis, look at the wordings
and see if they are ‘costs in addition’ (also known as ‘costs exclusive’) or ‘costs inclusive’.
A5 Underwriting controls/peer review

However you choose to write business as an insurer, it is important to build your thinking
about distribution methods into your business planning. It is also important, at all times, to
maintain control over the acceptance of risk, both in terms of who can do what, and to
Chapter 5
ensure that the business accepted is in line with the plan and guidelines set out by the
company. Maintaining central control helps satisfy the regulators as to the way the overall
business is being managed.
A5A Individual authorities
Every underwriter, from the most senior to the most junior should have express authorities
which are documented. These authorities will be partially financial (risks can only be bound
to a certain value) and will usually have factual elements to them as well.
For example, the first level of authority given to an inexperienced underwriter might be:
• agreement to non-material endorsements;
• inking a line on a piece of business previously agreed by another underwriter (who has
the authority to bind the insurer to that business); and
• the concept of 'inking a line' of course also applies to confirming an acceptable via an
electronic system!
It is very important, therefore, that all underwriters understand their own authorities and that
those working with them, for example underwriting assistants, understand them as well, as
they will be an early line of defence in identifying whether an underwriter might have done
something above their level of authority.
Consider this…
Why do you think it matters if the underwriter binds something above their level of
authority? If it is a good risk, is it really a problem?
Of course, it might be a wonderful insurance risk, but the point is not the insurance risk, but
the operational risk that the underwriter poses to the business. Within the insurance market a
fine balance needs to be struck between empowering people to make decisions and
managing the exposure to the business that such empowerment brings.
Lloyd's Principle 1, sub-Principle 3 states that managing agents should have underwriting
controls, monitoring and reporting in place which are appropriate to their risk profile in order
to deliver the agreed business plan.
Practical examples of expected behaviour include the following:

• Underwriting systems and controls include a range of prevention and detection controls.
• The systems and controls framework is aligned to the syndicate business plan.
• Underwriting authorities are in place, properly authorised, signed and subject to
annual review.
• Underwriting authorities are directly linked to experience, knowledge and expertise of
the individual.
• Underwriting authority and escalation procedures are clear and consistent, including the
effective period of the licence.
• Breaches against underwriting authorities are escalated and reported upwards, as well as
to compliance.
• Underwriters have the appropriate experience and capabilities to write and manage
policies profitably in line with the business plan.
• Deviation from technical price is controlled via underwriting authority or escalated in line
with procedures.
This is common sense really – make sure each underwriter has a copy of their underwriting
authority document and that they read and sign it. For an inexperienced underwriter, it can
also form the basis of promotion as gaining additional authority is a target to work towards.
A5B Individual risk controls
Chapter 5
One of the detection, as opposed to prevention, methods of risk control is underwriting peer
review. This exercise involves risks (which have already been bound) being reviewed by
either an internal or external reviewer. This will both highlight areas of concern, where a risk
may contain elements outside the expected appetite (e.g. a historic exclusion having been
removed), and can act as a method of learning for underwriters, as others in the team can
review a risk and consider how they would price it, for example, and then compare it with
what was actually done. It might also highlight where process controls are not being
followed, for example making sure that pricing information is loaded into the system, or that
sanctions checks are being carried out.
However, if something is found which is a problem, the insurers are already bound to the
risk, so what can be done? It might be that nothing needs to be done – it is just a learning
experience. It might also be that internal processes will have to be followed to get retroactive
approval for a risk which was outside the authority of the underwriter concerned.
A worst case scenario might involve obtaining some specific Fac RI to protect the insurer if a
risk has been accepted, which is beyond all levels of authority or general appetite (perhaps
for commercial reasons), and cannot be tolerated otherwise.
Peer review in particular has to be undertaken in an open and cooperative atmosphere,
where underwriters are not permanently on the defensive about what they have done, and
the reviewers are not relying on 20/20 hindsight.
Activity
If you work for an insurer, find out what your internal underwriting peer review process is,
and whether you have external peer reviewers as well.
If you work for a broker, does anyone review the slips before they are placed or before
documentation goes out to the client? Is the purpose of the review the same as for
the underwriters?
A5C Higher level controls

From an overarching perspective, Lloyd’s in particular expects an organisation to have
effective systems and controls. This is set out in a number of their Principles for
doing business.
Principle 1 – Underwriting profitability:
• Have underwriting controls, monitoring and reporting, appropriate to their risk profile in
order to deliver the agreed business plan
• Have robust governance processes in place to support underwriting decision-making.
Principle 4 – claims management:
• Systems and controls to monitor large losses, and adherence to authority levels.
Principle 10 – Governance, management and risk reporting:
• Systems and controls in relation to regulatory reporting to ensure accuracy.
Principle 11 – Regulatory and financial crime:
• Have appropriate systems and controls including training in place to manage regulatory
responsibility and financial crime risk.
Controls generally can sit under two headings:
• Prevention controls such as written authorities, and robust policies and procedures.
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• Detection controls such as audits, breach reporting and peer review processes.
It is important to note how many things link back to the business plan and how significant this
document is in the running of the organisation. Other documents such as the underwriting
guidelines will feed from the business plan and form the framework for how the plan can be
delivered, which is ultimately the aim of both management and investors.
We have already discussed some of the points covered above: contract certainty in chapter
2, pricing in chapter 4, and fronting earlier in this chapter, which also shows how interwoven
many of these concepts and disciplines are.
Be aware
One of the key elements of the Lloyd's Principles for doing business is the lack of
prescription of how a syndicate might meet the expected outcomes set out at each level of
the maturity matrix.
Take some time to look closer at one or two examples and think about how the
expectations increase from foundation status to advanced maturity: assets.lloyds.com/
media/9cc45b1c-8121-46b1-ae91-e7a4e24abd04/Principles-for-doing-business-at-
Lloyds.pdf.
B Distribution methods
We will now move on to consider what methods might be used to attract business to a
London Market insurer, where a traditional open-market, written-in-London system might no
longer be practical as the only option.
Question 5.2
For what practical reason has Lloyd's modified some of the minimum standards
requirements to distinguish between expectations on leaders and followers?
a. To reduce operating costs for the leaders. □
b. To reduce work for the brokers. □
c. To reduce operating costs for followers. □
d. To reduce work for the Lloyd's oversight team. □
B1 Going to the customer

Traditionally, the London Market has very much focused on business coming to it, happy in
the knowledge that there was not much competition from other insurers. The world has
changed, however, and as we discussed in chapter 1, both capacity and competency have
increased dramatically in other markets. Customers have choices, and those advised by
brokers should make very informed choices, so sitting in London waiting for business to
arrive is not necessarily the only way to proceed.
As an insurer, whether you are in the Lloyd’s or company market, you face the same
challenges writing business from other parts of the world. This is because the insurance
regulators in the various countries the risks are coming from may have to grant permission.
They might say a complete no, they might say yes to reinsurance and no to direct insurance,
or they might say yes to both.
Be aware
Do not forget that in the USA, the permission is granted at state level. For direct business,
the permission granted can be of admitted status or only as a surplus lines carrier.
The regulators might only be prepared to give permission if an office is set up in the country
concerned. For an insurer this is, therefore, a considered step, as it will involve a significant
amount of capital expenditure, which will not be recouped should the business not turn out to
be successful. However, having an office in a country can also offer great marketing
Chapter 5
opportunities.
If you consider the insurance companies operating in the London Market, how many have
UK origins? Or are many of them overseas insurers which deliberately chose to open an
office in London, not to write UK risks necessarily (although they might do), but to obtain
access to the business placed in the London Market. In this case, perhaps those insurers are
hedging their bets by having a local office and also a London office.
For the Lloyd’s Market, the permissions are obtained centrally by Lloyd’s from the various
regulators and they benefit all the syndicates operating within the Market. This, of course, is
one of the reasons that insurance companies choose to also set up a Lloyd’s syndicate,
as it might be that they can access risks from key countries without needing to set up
offices there.
Notwithstanding Lloyd’s rather unique position, the Market itself and organisations within it
have realised that waiting in London for risks to arrive is naïve, so various things have been
done to get closer to potential customers. They vary in structure and operation but we will
consider the main variations.
Lloyd’s China
This is an insurance and reinsurance company with offices in Beijing and Shanghai. It
operates through a number of different underwriting divisions which mirror the various
syndicates that are part of the platform.
Lloyd’s Japan
This has a slightly different structure, as Lloyd’s Japan is actually a local coverholder writing
non-life business on behalf of syndicates.
Lloyd’s Singapore and Lloyd’s Dubai
These are different again as Lloyd’s Singapore and Lloyd’s Dubai are mini marketplaces
populated by a number of service companies working on behalf of various syndicates.
Remember that a service company is effectively a coverholder but is an entity which is part
of the same corporate family as the backers. Lloyd's Singapore also has a number of
syndicates operating directly from that location.
Lloyd’s Colombia
Here the Lloyd’s representative acts as a focal contact point helping the local market with
expertise, and building on the relationships established since Lloyd’s first obtained
permissions in this market in 1999.
Lloyd’s Australia
The office’s prime functions are to represent the Lloyd’s Market at all levels, promote and
protect the Lloyd’s brand, and ensure all Lloyd’s business complies with local legislative
requirements and licensing stipulations.
Lloyd’s South Africa

Here the Lloyd’s representative has to ensure that Lloyd’s underwriters comply with both the
provisions of the local South African Insurance Act and the Lloyd’s South Africa Trust Funds,
and that Lloyd’s submits appropriate regulatory returns.
Lloyd’s USA offices
The Lloyd’s team in the USA plays an important role in educating a variety of audiences
about how Lloyd’s works. The team also ensures regulatory compliance in the 50 states and
other US jurisdictions where Lloyd’s operates.
Lloyd’s Insurance Company SA (Lloyd’s Brussels)
A Belgian-regulated insurance company set up as a subsidiary of Lloyd's to enable EEA
risks to be written without losing the benefits of the passporting system within Europe
post-Brexit.
As can be seen from this list, various different strategies are used to widen the awareness of
the Lloyd’s Market around the world and to compete with local insurers and the local offices
of international ones. For example, both the Lloyd’s Market and QBE, a large Australian
insurance company, have looked east and north respectively to Singapore as a potential
market for growth.
Activity
As the examples above are just a sample, use this link to see where Lloyd’s has offices
around the world and the different roles they perform: www.lloyds.com/lloyds/offices.
Chapter 5
What about the brokers? Do they have the same challenges attracting business into the
London Market or do they have offices around the world feeding business in? By moving to
other parts of the world to get closer to clients, are insurers also getting closer to
local brokers?
Consider how business reaches you as an insurer or broker. What is the chain between you
and the ultimate client? Is the retail broker (the one closer to the client) an office in the same
organisation as the wholesale broker or are they different? If they are different consider why
– is it because the wholesale broker in London does not have overseas offices?
If the insurer has moved closer to the client, for example to Singapore or Dubai, does that
shorten the broking chain and potentially reduce the acquisition costs discussed in
earlier chapters?
Consider this…
If you work for an insurer or a broker, have you now got new offices within Europe to
handle EEA-related work post-Brexit?
B2 Linking into pre-existing networks

There are two main methods of obtaining business in this way and both are reliant on using
a preset group of customers as a target market.
B2A Group/affinity programmes
A group/affinity programme takes a group of customers belonging to an organisation such
as a bank and allows it to offer add-ons to core products. Many different organisations can
do this such as retailers, credit card companies and membership associations. The add-ons
can be quite varied. They might offer you cover for a physical asset, such as your mobile
phone, or warranty insurance for electrical goods over and above the manufacturer’s.
The key is that the organisation wants to differentiate itself from its competitors, and price/
costs alone will not necessarily make the difference.
For a monthly fee, a bank account might provide you with additional benefits such as:
• worldwide travel insurance;
• 24-hour roadside breakdown assistance;
• a certain level of mobile phone insurance; and
• commission free travellers’ cheques and foreign currency.
The travel and mobile phone insurance are being sold as add-ons. The real question is the
extent to which the customers buying them are aware of this. Later in this section, we will
consider the question of conduct risk and how particularly with add-on products in the
personal lines sectors, the insurers must satisfy themselves, and more importantly the
regulators, as to the controls they are putting in place to ensure that products are not sold to
people for whom they are unsuitable. For example, the sale of travel insurance to older
people where there is an exclusion for those over 70 years of age.
B2B Master policies
With master policies there is one policyholder such as a bank or an employer and cover is
provided to members of that group. As an individual you might be in the group as an
employee or because you have a bank account. You are not the insured, the bank/employer
is but you have the benefit of the insurance.
A company buying private health care for its employees, or a professional association
providing liability insurance for its members, are good examples of this concept. It is not truly
delegated underwriting as no decision making is delegated – if you are in the group you have
the benefit (although you can opt out).
Consider this…
Does your employer have a private health scheme for employees? What are the benefits
to you? Have you taken the benefit? Did you ask about benefits when you had
your interview?
Chapter 5
B3 Partnering with other insurers
If moving towards potential clients is not necessarily the answer, perhaps teaming up with
other insurers might be. London is a subscription market and that insurers in it generally
choose not to write 100% of any one risk. However, the downside is that if an insurer is
prepared to write either 100% or at least a very large line, it might get the business
instead of you.
An insurer’s line size will be dictated partly by its risk appetite but also by its size or capacity,
so the very large insurance companies such as AIG or Zurich can write large lines on risks,
thus excluding insurers who are equally good but cannot compete on line size.
For a broker, going to see one insurer which takes a large share or even all the risk is
efficient, so will inevitably always be popular.
What solutions exist that can allow other insurers to compete on line size and efficiency with
the largest international insurers?
B3A Lineslips
A broker can create a preset group of insurers, which will provide the same end result of
good quality security and require only one visit.
The broker will place the lineslip agreement, whereby all the insurers set out the extent of
the authority they are giving the lineslip leader. The broker then presents each potential risk
to be bound to that lineslip leader. Once bound, the broker will normally take care of the
processing of the risk in the normal way via the London Market systems, either monthly on
an aggregated basis for a bulking lineslip, or as individual risks for a non-bulking lineslip.
Refer to
Lineslip agreements were introduced in LM2, chapter 9
As a reminder the benefits to all parties are, for:

• brokers – ease of placement with a large amount of security made available by a
single visit;
• followers – access to business without having to agree risks on an individual basis; and
• all insurers – the ability to compete directly against the large insurers.
The downsides from the followers’ perspective are that the leader could bind risks outside
their authority. If the followers are not diligent in their review of the bound risks they may not
realise this for some time, if at all. Additionally, with most lineslips, the only broker able to
access the grouped security is the one which set the arrangement up.
From the broker’s perspective, there is always the chance that the security available on the
lineslip will not be enough for the risk needing to be placed, so it will have to be topped up
either with security from another lineslip or with open-market security. Neither of these
situations is particularly difficult, however, the broker will not be able to place the risk with a
single group of insurers.
Many large brokers are seeking to maximise their own revenue streams. One means of
doing this is to set up arrangements by which groups of insurers agree to accept risks within
certain criteria, where part of the risk has been placed on an open-market basis through the
broker. These arrangements are either set up in the form of lineslips or binding authorities
and have benefits and risks for the insurers.
Benefits:
• access to business without having to individually write the risks;
• access to business not otherwise seen via the open market; and
• potentially reduced acquisition costs.
Risks:
• accidental over-lining (i.e. taking a share of the risk which is larger than anticipated) if not
monitoring declarations;
• relying on others to perform appropriate underwriting and pricing, and the potential for
Chapter 5
unexpected exposures;
• being bound to a risk that has been declined on an open-market basis and not realising
until too late;
• not obtaining declarations at all; and
• a reduction in the amount of risk available for the open market, thus potentially excluding
insurers not part of the facility (arrangement) which do not get a chance to see these risks
on the open market.
Be aware
Lineslips can be created which involve no delegation of authority to a single insurer, but
require each insurer to agree their own line. Some of the benefits mentioned above are
lost but, equally, the risks involved with the delegation of authority are removed. The main
benefit of this form of lineslip is that brokers can advise their clients that they have preset
security already agreed, and the broker knows the types of risks the underwriters in the
lineslip group want to see, so should receive a positive response (but this is not
necessarily guaranteed).
You might also see a contract which is called a lineslip but only appears to involve one
insurer. What is happening here is that both brokers and insurers are taking advantage of
being able to group submissions together into DXC/Xchanging for processing, if the risks
are attached to a lineslip rather than written on an open-market basis. The insurer
receives more aggregated data via the market systems but the costs of the processing are
reduced if not as many transactions are being put through.
B3B Consortium
The other alternative is the insurers’ group itself acting together without the use of a broker.
This is known as a consortium. The structure is the same as a lineslip with an agreement
between insurers giving authority to one of their number, but the insurers set this up entirely
between themselves and hence the consortium can do business with any brokers it chooses.
Consortia (i.e. consortiums) are often created to take advantage of one underwriter’s
technical expertise in a particular niche class of business (e.g. space or political risks). That
underwriter cannot compete with larger organisations on line size alone, and the other
insurers cannot write the business as they do not have enough technical knowledge. Bring
the two together and the system works well for both sides.
Refer to
Consortiums were introduced in LM2, chapter 9
There are benefits to all the parties involved:

• Brokers can access a large amount of security with a single visit.
• Consortium leaders can compete for business they would not otherwise be shown
because of their line size. Profit commissions and leaders’ fees are also standard in a
consortium agreement. The leaders’ fees also reflect that, unlike a lineslip, the leader will
be responsible for reporting bound risks to the followers.
• Following insurers have access to business they might not otherwise see, either because
of line size or perceived expertise in the class.
Later in this chapter we will examine some key aspects related to the management and
monitoring of both lineslips and consortia.
B4 Using partners to attract business

So far, we have considered locating closer to clients, bolting products onto those already
being made available, and grouping together as insurers to be able to compete on a line-size
basis with larger insurers.
The final concept for consideration is when insurers team up with other non-insurance
organisations, which they believe bring some key benefits, and for which the insurers, in
turn, provide benefits.
As we will see, the arrangements entered into will often involve some delegation of authority,
including underwriting authority, but unlike lineslips and consortia, the entity to which the
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authority might be delegated is not itself a risk bearer but a third party altogether.
The most common form of arrangement used is a binding authority (or binder), where the
entity to which the authority is delegated is known as a coverholder or managing general
agent (MGA).
Within Lloyd’s, the term coverholder means any entity to which authority has been delegated
under a binding authority. It is generally used in the London Market, rather than elsewhere in
the world.
Different types of organisation can have authority delegated to them under a binder, as set
out below:
• An MGA is an organisation to which authority can be delegated under a binder but it will
never be a broker, as MGAs only have one principal which is the insurer.
• A broker can be a coverholder but will have two principals in that case and will need to
manage the conflict of interest.
• A managing general underwriter (MGU) is an entity similar to an MGA but which will sit
between the MGAs and the insurers providing the capacity. Effectively, the MGU will have
the relationship with the insurers and will use that capacity to back MGAs writing the
business on a day-to-day basis.
Remember that under English law the broker is the agent of the insured.
Be aware
We have previously mentioned that service companies are organisations to which
authority can be delegated, but which are part of the same corporate group as the insurers
from which the authority is being delegated. For the purposes of this section, they will not
be treated differently from any other holder of authority.
B4A What are the benefits/risks for an insurer of partnering with

another organisation?
The risks are all linked to the loss of control and the resultant potential mismanagement of
funds, failure to account for premiums and tax, anti-selection and reputational risks caused
by poor customer service.
However, the benefits would include the following:

• The insurer can access business, which would not otherwise come into the London
Market, without having to ‘go to the customer’ itself.
• For smaller risks the underwriting process might be more cost effective than if it was
undertaken for each individual risk.
• Depending on the location of the MGA, the operating costs should be lower on a per risk
basis even with the commissions payable.
• The MGA may have knowledge, experience and contacts, as well as a good reputation in
its market/field.
• It is a less capital-intense way of trying a new area of business than employing an
underwriting team yourself.
• Customer service benefits can exist if, for example, there is localised claims handling.
B4B What are the benefits/risks from the MGA’s perspective?
• The main benefit is access to high-quality security for the business being placed.
• There should be reputational benefits (hopefully both ways) from the partnership.
• Depending on the level of authority given, the MGA might have a fairly free hand to run
the book of business.
The downsides start with dependency on a single insurer if it is a one-to-one relationship, as
well as the insurer short-circuiting the relationship and writing the business directly. While it
Chapter 5
may not specifically be a downside, the MGA has to ensure that it has the knowledge and
resources to handle the financial and regulatory side of the arrangement as well.
B4C The broker’s position
In this scenario, the broker could be just the intermediary between an insurer and an MGA,
or could be the coverholder holding authority on behalf of the insurer. We will discuss conflict
of interest later but now we will consider the pros and cons of such an arrangement,
including when the broker holds authority.
The pros would include:
• An efficient mechanism for obtaining high-quality insurance security for low-value, high-
volume risks, even more so if the broker holds the authority itself.
• London Market insurers can be accessed from the regions/overseas without having to
use London brokers.
• Strong business relationships can be built with the MGAs.
The cons would include:
• The danger of dependency on one MGA whose backing might be withdrawn.
• If holding the authority, the broker has additional regulatory and compliance
responsibilities.
• Holding the authority does not become more cost effective because of the increased
headcount needed to cover responsibilities, which raises the broker’s base
operating costs.
• Increased errors and omissions (E&O) exposure from additional tasks.
• Loss of the relationship with other insurers as a broker, which will be bad for clients for
whom delegated authority is not the best security.
B5 Matters to be considered for all distribution methods

discussed
The main issue for the insurers is the basic risk/reward balance. By delegating authority of
any kind, whether to another insurer under a lineslip/consortium or to a third party under a
binder, control is being lost. The risk can be avoided completely by not using these methods
of obtaining business, but is that the right solution? If good-quality business is available via
these means, the better solution is to identify the risks they might present and then consider
steps to both mitigate and manage them.
From an insurer’s perspective the greatest risk is loss of control, as we have already
mentioned. We cannot avoid losing some control if we delegate authority, but we can be
careful in our choice of business partner, set up the arrangements carefully and monitor
them well. None of these steps will remove risk completely but will serve to mitigate and
manage the risk to an extent. All of these steps will be considered in more detail in the next
section of this chapter on delegated authority management.
B5A Conduct risks including web-based selling
We have already seen that a key target area of business for delegated underwriting is the
low-value, high-volume risks, whether sold on a standalone basis or linked to a group or
master scheme. This brings all areas of regulation which link to treating customers fairly into
focus, and with the added complication of a potentially long distribution chain.
The insurer remains responsible for the ultimate objective of conduct risk, which is a positive
customer outcome. This is not to say that all claims should be paid, but that at all stages of
development, distribution and servicing of an insurance contract, the needs of the customer
come first. Traditionally the regulator’s focus has been very much on protecting the personal
lines or consumer customers, i.e. those buying insurance other than for their business, trade
or profession. However, latterly the emphasis has been on the fair treatment of all customers
but with different behaviour expected of insurers depending upon customers’
insurance knowledge.
Broadly speaking, the end customer – for the high-volume, low-value risks traditionally
presented via binders – is less knowledgeable about insurance than an insurance company
buying its own reinsurance. Moreover, the customer might be buying insurance directly
rather than via a broker. In this case, particularly if the sales route is the internet, so with no
Chapter 5
human interaction, it is paramount that the insurer not only makes sure the product being
marketed is fit-for-purpose, suitable for its target market and clear in its terms, but also that
the sales routes used are not in any way inappropriate.
The key concept in conduct risk is product risk. The equation for product risk is as follows:
Customer Product Sales Service Product

risk complexity risk risk risk
On the Web
Lloyd's Principles for doing business 5 – Customer Outcomes gives some useful pointers
for syndicates in relation to conduct risk concepts:
'Managing agents should embed a culture and associated behaviours throughout their
business to ensure that they consistently focus on good customer outcomes and that
products provide fair value.'
assets.lloyds.com/media/9cc45b1c-8121-46b1-ae91-e7a4e24abd04/Principles-for-doing-
business-at-Lloyds.pdf
Customer risk involves the relative sophistication of the client’s insurance knowledge from a
reinsurer at one end of the spectrum to a vulnerable individual at the other. The danger area
for insurers is not actually either end of the spectrum but the small to medium enterprises,
which are viewed as corporate clients but unlikely to have much time to consider their
insurance requirements in detail, let alone read their policy documents.
Product complexity is what it sounds like. One of the key elements of conduct risk is the
ability to explain the product to a layman, not to find that the only people who understand it
are the underwriters and their assistants. This latter scenario is not one to be proud of as an
insurer. Consideration should be given to whether the product is novel, whether the customer
is expected to be familiar with it, how complicated the paperwork is, and the time expected of
the customer to read it.
Sales risk involves the distribution chain – how long is it? Are those involved always
insurance professionals (think about the warranty insurance sold by retailers of electrical
goods)? Will there be internet sales? The longer and more complex the chain, the less
control the insurer has over what is said on its behalf, which might influence the customer’s
decision to buy something unsuitable.
Finally, service risk considers how clients can interact with the insurer or its representatives
after buying the policy. Can they cancel it without difficulty? Can they make changes or
claims easily? For any product involving a broker, the service risk is deemed to be lower, as
the broker will assist its client to make any changes etc.
So what types of business do you think are most likely to be a high product risk? Lloyd’s
suggests the following non-exhaustive list:
• motor;
• household;
• accident and health;
• legal expenses;
• payment protection insurance;
• extended warranty products;
• mobile phone or gadget insurance;
• travel insurance;
• pet insurance;
• add-on products;
• home emergency cover; and
• guaranteed asset protection.
Chapter 5
Activity
Consider some of the following classes and investigate whether your organisation is
involved with any of them either as an insurer or a broker:
• Directors and officers – where part of the cover is for individual directors.
• Yachts – owned by one-man companies in tax havens.
• Fine art – are your customers individual collectors or galleries?
Is any of this business written under delegated authority arrangements?
The higher the product risk, the more exposure to the underwriters and therefore the tighter
the controls that need to be put into place. Product design is a key area to be considered. It
might be that the reason an insurer wants to partner with an organisation is because that
organisation has designed a new product, which it has brought to the insurer. The insurer
must analyse the product as if it were its own design, and put it through all the necessary
checks and balances relating to conduct risk before taking the matter any further. Particular
care should be taken to research the product to find out whether there is a target market,
whether it is suitable for that market, and that matters such as pricing are clear and
transparent, particularly if it is suggested that it should be an add-on product. When we look
at choosing a partner later in this chapter, we will consider the extent to which evidencing
compliance with conduct risk is a factor to take into account, particularly in relation to how
the product will be sold.
Refer to
Remember that a customer is not necessarily permanently vulnerable, so care should
always be taken to consider the current needs of clients. Refer back to chapter 1 for
further reading on the FCA's guidance.
Question 5.3
Which of these is not an element in the conduct risk equation?
a. Service risk. □
b. Customer sophistication. □
c. Price variability. □
d. Product complexity. □
The Consumer Duty rules, which came into force on 31 July 2023, require financial services
providers to ensure that there are fair outcomes for all retail consumers. As many insurances
targeting these customers are distributed through delegated authority frameworks it is very
important for insurers and all parties in the chain to be clear as to their responsibilities to
ensure the following:
• Products are fit for purpose for the target audience.
• The audience will actually be able to use that product (which in the context of insurance is
to be able to make a claim).
• There is fair value – which goes to useability and to price.
Chapter 5
On the Web
Read the CII's Good Practice Guide:
www.cii.co.uk/media/10129004/good-practice-guide-consumer-duty-insurance.pdf.
B5B Acquisition costs

The brokerage and other acquisition costs have to be considered as well, not just the gross
figure. The more parties involved in the chain, the more ‘mouths to feed’ leading to
potentially higher acquisition costs than for simple open-market business.
This has to be part of the balance of risk and reward, as if the business is marginal and only
just makes money, the higher the acquisition costs are as a percentage of each individual
risk premium, the more marginal it becomes. Consider who might be a 'hungry mouth' in the
various scenarios we have discussed:
• Lineslip: broker placing business onto the lineslip getting brokerage, possibly lineslip
leader.
• Consortium: broker placing business into the consortium getting brokerage, consortium
leader getting leader’s fees and profit commissions.
• Binding authority:
– broker placing business; and
– coverholder (which could also be the broker) commissioning. The coverholder has two
types of commission:
▪ for getting the business in the first place; and
▪ profit-based commission.
There might be further 'hungry mouths' down the line depending on the length of the chain of
distribution. They might be paid out of the coverholder's commissions or the insurers might
have to pay upfront and distribute it down the chain. What can also happen is that the
premium paid by the customer is eroded, as it is transferred back up the chain so the final
amount paid to the insurers is significantly less (although it should be the expected amount,
as long as the insurers know what they have signed up to).
When considering amounts which will be deducted from the premium, it is also important to
remember the regulatory ‘hungry mouths’ in terms of taxes and other charges, such as fire
brigade charges for some Australian business. What makes Australian business
complicated, for example, is that the deductions vary from state to state. There is no way to
avoid paying them, other than not writing the business, so it is key to factor them into any
discussion of whether the business is worth writing in the first place.
The FCA has been focused recently on fair value, in relation to insurers knowing exactly who
is being paid how much in commissions down the chain, and for what reason, to ensure that
insurers always remain focused on the ultimate price to the client, and how fair that is for the
product being purchased. This also forms a large part of the new Consumer Duty
requirements.
B5C Stakeholder responsibilities
Within the insurance market there are a number of different stakeholders, including the
insurers, their clients, the intermediaries, the regulators and entities to which tasks can be
outsourced. All of them have differing roles and responsibilities and, at any one time, some
might be wearing more than one hat, i.e. performing more than one role.
The insurers might be the risk bearers in terms of writing inwards business but the client in
relation to their own reinsurance protection.
A broker might be part of a long chain of brokers, with the one closer to the end client being
called a retail broker and the one nearer the insurers being a wholesale broker.
Consider this…
If you are an insurer, consider whether you do all your work with London-based brokers, or
are you seeing business from overseas brokers as well? If you have overseas offices, how
do you think business gets to them?
Chapter 5
In LM1 and LM2 the law of agency was considered. If necessary, remind yourself of the
detail in LM2, chapter 6. A quick reminder of the duties and rights of an agent follows.
The duties of the agents towards their principals are to:
• obey the principal’s instructions;
• exercise proper care and skill;
• perform duties personally;
• act in good faith towards the principal; and
• account for monies received on behalf of the principal.
In return the agent is entitled to the following rights:
• to be paid; and
• to be indemnified (unless they were in breach of their instructions or their action was not
authorised or ratified by their principals).
If a broker is a coverholder there is the potential for a conflict of interest, as the broker’s
primary client is the insured. When a coverholder, the broker also gains another client, i.e.
the insurer. Sensible internal controls can mitigate the risk of this conflict but all parties
(insureds, brokers and insurers) should consider the issue and satisfy themselves that it is
being managed properly.
Insurers become
The insured is the a client/principal if
broker’s main they give some
principal/client authority to the
broker
Broker
When brokers are considering the best market for a client, they should do so without being
swayed by the potential for additional income if a binder is used. Key, therefore, is the
evidence in the broker’s file regarding their investigations for the insured client and
supporting the decision that the binder is the right market for the business (which it might
well be).
If brokers accept business onto a binder they manage, which is outside the terms of the
agreement with insurers, then they will lose their right to be indemnified as they have failed
to comply with their duties.
Finally, we should also consider the relationship between leaders and followers when
business is being written on a subscription basis. Each insurer binds risks for its own share,
but often post-bind activities such as contract changes and claims are delegated to a smaller
subset of the insurers involved. Claims are outside the remit of this unit but post-bind
contract changes are very important.
Within the London Market, most insurance contracts incorporate the General Underwriters
Agreement which was last updated in February 2014. Supported by schedules that are
specific to various classes of business, this agreement sets out the terms on which insurers
can bind their co-subscribers to changes to the risk. Within the context of the agreement, the
leader (and any other insurers involved in agreeing the changes) acts as agent of the other
insurers in making the decision to accept the amendment, and should therefore be mindful of
agents’ basic duties mentioned above.
Activity
Read the 2014 General Underwriters Agreement and the schedule applicable to
your class of business. Consider in particular how changes are categorised into the
three types.
You can find a copy in the LMG Document library – search for GUA: lmg.london/
document-library/.
Consider the impact to a following-market insurer and the client, if the leader agreed to a
change outside the terms of the agreement.
Chapter 5
C Delegated authority management
In this section, we will consider the potential benefits to an insurer of using delegated
underwriting/delegation of any type, and what steps should be taken to best mitigate the
risks that will always be present should any activities be outsourced.
C1 Prudent use of delegated underwriting

Earlier in the study text the importance of detailed business planning was considered, part of
which should include analysis of the distribution networks to be used.
Lloyd’s Principles require that the insurers within that Market have a clear strategy for the
use of delegated underwriting of all types.
When the FCA performed a review in 2015 of the use of delegated underwriting in the UK
insurance market (not London), it found that many insurers did not have a clear plan for its
use, and some even had arrangements that did not support their business plan. Sadly, when
it performed a follow-up review, the results of which were published in 2019, the FCA found
that many insurers had not taken heed of the expectations set out in the 2015 report.
On the Web
For the follow-up review, see: www.fca.org.uk/publication/thematic-reviews/tr19-02.pdf.
One of the other key findings of the regulator’s review was that insurers did not perceive
much of the activity as outsourcing, so were not putting any particular controls concerning
the choice of partner, contractual arrangements or management of the ongoing relationship
in place. This led to a lack of visibility and awareness of what was happening and a lack of
focus on customers’ best interests.
When considering the prudent use of delegated underwriting, it is important to consider not
only binding authorities but lineslips and consortia. If an insurer is not the leader under those
arrangements, the benefits of the distribution methods, as well as the exposures and cost
implications, should be clear in the insurer’s business plan.
C2 Partner selection
When participating in a lineslip or a consortium, the partner to which you are delegating
authority as an insurer is a fellow risk bearer, whereas for a binding authority (other than for
a service company arrangement) the authority is going to an outsider, who bears none of the
risk. Should this make a difference when considering the party to which authority is given?
Perhaps not, however, in the past less attention may have been paid to the setting up and
running of lineslips and consortia, as they were thought to be less volatile than binders and
less likely to run out of control.
We have already seen that consortium leaders will often be those underwriters, with
particular technical knowledge, gathering other insurers with them in order to offer a larger
market presence. In this case, the supporting insurers should be clear about the leaders’
supposed technical knowledge. They should also be satisfied with the plan for winning
business, the income projections, and the arrangements for day-to-day operations such as
reporting risks bound to the members.
Let us consider the key issues when deciding whether a coverholder might a viable, new
business partner. Before entering into a business arrangement you need to think about
the following:
• Who are they? What is their experience and track record in this type of business?
• Have they been profitable in the past?
• What reputation do they have in their own area? Are they in good standing with their
local regulator?
• Who are the staff who will be handling the business? Have a look at their CVs.
C3 Partner approval
Having identified a potential partner, all insurers should engage in an approval process even
Chapter 5
before considering entering into any specific contracts. This should include extensive due
diligence, which will also serve to satisfy the regulators that enough care is being taken in
the choice of business partners.
For lineslips and consortia, the approval process for the leader (i.e. the entity to which the
authority is given) has historically been easy, as the market players and leaders were static.
However, as more and more new insurers come into the Market with new, unproven leaders,
careful consideration should be given to the choice of partners, ongoing results should be
carefully monitored, and a strong contract with explicit parameters should be in place.
Underwriters are bound (certainly within Lloyd’s) by the Principles for lead and follow
business however it is written.
For coverholders the process both within insurers and also as mandated by Lloyd’s is more
detailed. For a coverholder to be approved at Lloyd’s, which it must be before a syndicate
can do business with it, a detailed approval process, has to be undertaken.
This includes the following investigations:
• company information – legal name, registration;
• business strategy – details of the business and business plan;
• ownership;
• key staff;
• reputation and financial standing;
• Lloyd’s and binding authority experience;
• professional indemnity insurance held;
• accounts and financial information;
• bank accounts including details of segregated accounts (e.g. to hold loss funds in);
• systems and controls;
• business continuity plan – what to do if a disaster strikes the office;
• licences – all authorisations and licences held, which will vary from jurisdiction to
jurisdiction;
• underwriting and claims authority sought;
• classes of business proposed, including whether any consumer business is involved; and
• territorial scope required – permission will be granted for a coverholder’s home territory
but it must be able to justify its requests for others.
Each insurer, whether Lloyd’s or company market, should also have its own version of this
approval process. For a coverholder/MGA operating in the Lloyd’s Market there is, therefore,
a double process as one has to be undertaken by Lloyd’s and one by the individual
syndicates forming the partnership. Within the company market, however, there is only a
single process carried out by the insurers themselves.
A system called ATLAS is used for the Lloyd’s process, which allows for both the central
storage of documents and the management of the various approvals. The broker is also
involved in gathering information to support the approval process and can support the new
coverholder applying for Lloyd’s approval.
Activity
If you work for an insurer or broker, find out whether any of your colleagues uses the
ATLAS system and have a closer look at it. If you work for an insurer, see what you can
find out about your own internal processes.
C4 Regulatory oversight
Within the London Market, the insurers are regulated by the FCA and PRA but it is important
to remember that Lloyd’s acts as a partial regulator as well.
C4A FCA
Under the FCA regulations, there are a number of rules that apply to businesses choosing to
Chapter 5
use delegated underwriting/outsourcing in their business model.
Within the Principles for Businesses (PRIN) there are five which are particularly relevant:
PRIN 2 – A firm must conduct its business with due skill, care and diligence.
PRIN 3 – A firm must take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.
PRIN 6 – A firm must pay due regard to the interests of its customers and treat
them fairly.
PRIN 8 – A firm must manage conflicts of interest fairly, both between itself and its
customers and between a customer and another client.
PRIN 12 – A firm must act to deliver good outcomes for retail customers.
Within the Senior Management Arrangements, Systems and Controls (SYSC), there is clear
reference to when a firm delegates functions and tasks to a third party.
From the regulators’ standpoint, delegation should not lead to disadvantages for the
customer in particular, and suitable controls should be in place to ensure no unnecessary
risk for the insurer.
Activity
Consider these risks in relation to delegating underwriting authority:
• accepting risks outside the authority;
• accepting risks without understanding them;
• not reporting information;
• not paying taxes; and
• not paying the premium through to insurers.
Consider what can be done by insurers to mitigate these risks?
When the FCA conducted a thematic review in 2015 of UK insurers writing retail business, it
found that generally there were not acceptable levels of control in place.
Its high-level findings included that insurers were:

• unaware that delegating claims or underwriting authority was outsourcing;
• focusing on the underwriting elements and not considering the operational side of the
arrangements at all;
• not including conduct-related areas within their due diligence;
• not exercising control of claims functions if outsourced;
• not relying wholly on the annual audit to highlight problems; and that
• agreements were out of date and some did not exist in writing.
See Prudent use of delegated underwriting on page 5/19 for the 2019 follow-up review.
C4B Lloyd’s
Lloyd’s has a detailed and robust regulatory framework around the use of delegated
underwriting which is, in part, responsive to the relative lack of control that existed before the
introduction of the franchise structure in the early 2000s. However, certain elements of it
have been reviewed and overhauled in recent years to move towards a more risk-based
approach.
The basic framework is now:
• A risk-based approach to the approval of applications.
• Parties handling claims only under contracts of delegation will be subject to Lloyd's
Chapter 5
approval and ongoing oversight.

– Existing organisations were 'grandfathered' into this approval but will be subject to
ongoing oversight.
– Be aware that Lloyd's uses the term 'delegated claims administrator'. This is an all-
encompassing term for parties acting on behalf of insurers in relation to claims which
includes both the traditional third-party administrator role of delegated decision-
making, but also medical assistance companies who will be helping the insured but
would not normally have coverage decision-making powers. The reason for this is that
Lloyd's wants to have more visibility of any entity that is involved in handling claims
involving Lloyd's policyholders.
The term does not include other experts who would be involved in the claims process,
such as loss adjusters or lawyers, unless they held delegated coverage decision-
making authority.
• Flexible discretion will allow firms to be given delegated authority without having to obtain
Lloyd's prior approval (for example, when online systems are being used that do not
involve any individual risk underwriting).
• Flexible discretion will allow sub-delegation of authority.
The framework starts with rules concerning to whom authority can be given. They are set out
in the amended Intermediaries Byelaw.
A managing agent shall not delegate its authority to enter into contracts of insurance to be
underwritten by the members of a syndicate managed by it to any person other than –
a. to a director or employee of the managing agent or, with the consent of the Franchise
Board, to any other individual engaged to provide services to the managing agent;
b. to another managing agent or authorised insurance company in accordance with the
terms of a line slip;
c. to another managing agent in accordance with the terms of a consortium agreement;
d. to an approved coverholder in accordance with the terms of a binding authority;
e. to such other person or class or category of persons as the Franchise Board may
permit in accordance with the terms of a contract of delegated authority;
f. to the Society, or a representative or agent of the Society; or
g. in accordance with any other of the requirements of the Council.
Originally, the byelaw precluded sub-delegation except from service companies to external
coverholders but the revised version now permits certain types of sub-delegation, which
reflects the changing nature of the market. However, the parties to whom sub-delegation is
allowed are still tightly controlled.
Lloyd's has a number of Principles with which managing agents must comply. Some of these
Principles are not specifically focused on delegated underwriting but include content that is
relevant to this type of business – examples of which are shown below:
Principle 1 – underwriting profitability
• Strategy to articulate appetite for open market as contrasted with delegated business.
• Process in place for approval of delegated authority.
• DUA reporting to be done at a frequency which allows for effective challenge.
• Binding authority agreements should include sufficient underwriting controls and be
subject to annual review.
• Costs charged are commensurate with the services being delivered.
• Ensuring that the pricing approach, philosophy and expected performance of any
delegation aligns with the syndicate's business plan.
• Price adequacy is monitored.
• Guidance is provided to any delegated parties in relation to the ESG approach to
be taken.
Chapter 5
On the Web
Lloyd’s has a Code of Practice which provides practical guidance around the byelaw for
market practitioners: bit.ly/2E2ZiiK.
The IUA has also published a good practice guide: bit.ly/2QIWAAF.
Remember that as Lloyd’s is a partial regulator, it can take steps if the Code of Practice
guidance is not followed. However, the IUA’s document is merely information and
guidance for its members.
The Lloyd’s Code of Practice is divided into a number of sections, which firstly identify the
types of delegated underwriting that fall within its remit. Be aware it refers to the previous
Lloyd's regulatory framework of Minimum Standards; however, it is still a live document and
offers some useful practical guidance.
As a guide, the strategy should include:
An executive summary
An overview of the managing agent's current position on writing binding authorities, lineslips
and consortium arrangements, plus an outline of the objectives for the year ahead.
Business rationale
An explanation why the managing agent wishes to delegate any authority. This may include
an analysis of:
• the expected gain from delegating authority;
• current and projected market conditions;
• methods of distribution;
• territorial considerations;
• consistency with the SBF; and
• how such arrangements would fit with the managing agent's organisation and reporting
structure, business strategy, overall risk profile, and ability to meet its regulatory
obligations.
Roadmap
This may include information on:
• resourcing (both systems and individuals);
• how suitable coverholders will be identified;
• the extent of delegation;
• how claims will be handled;
• pre-approval due diligence;
• an overall process framework specifying the procedures for ensuring effective due
diligence is carried out and evidenced by all involved at inception and renewal of
contracts, as well as throughout the year when monitoring that reporting is in line with
contract conditions; and
• details of how to ensure that sufficient information and reporting is received to meet the
minimum standards (e.g. requesting it in the delegated authority contract).
Underwriting
This section may include an analysis of the:
• projected underwriting results from delegated authorities for the next three to five years,
including a split by classes of business to be written and geographical distribution;
• number of coverholders that the managing agent has binding authority contracts with;
• number of contracts (binders, lineslips and consortia) which the syndicate leads
Chapter 5
or follows;
• level of catastrophe exposure; and
• ongoing management.
In summary, the plan should reflect the strategy to be adopted when leading or following a
contract of delegation.
C5 What authority to give

The authority an insurer can give under any delegated authority arrangement can be divided
into underwriting, claims and issuance of documents. Each of these will be discussed
separately below.
C5A Underwriting
In any delegated underwriting arrangement, the decision of how much authority to delegate
has to be made. The insurer can never delegate more authority than it has itself, so for
example if the insurer is not licensed to write risks in a particular territory, anyone writing for
it will not be either.
The first level of authority often granted under a binder is prior submit, which is in fact no
decision-making authority at all. In this situation the coverholder will find the business but the
decision of whether to accept the risk will remain with the insurers. Once their decision has
been fed back to the coverholder, the coverholder can then bind the risk with the client. This
starting point allows the coverholder the chance to see how the insurer rates the business. It
also gives the insurer the chance to control the risks that are being bound, as it learns what
types of risks the coverholder can attract. This type of authority is rarely used with lineslips
and consortia.
The second level of authority is using a pre-agreed rating matrix. Here the coverholder has
the right to say yes or no to risks, and if saying yes, the pricing will be governed by the
matrix. This allows the insurer to manage the pricing more carefully but lets the coverholder
learn more about the pricing theory applied by the insurer. There will often be areas of
tolerance allowing for discounts or requiring weighting of pricing depending on the facts of
the risk. These can be managed by the coverholder within the insurer’s guidelines. This type
of authority is not often used with lineslips/consortia but could be.
The final type of authority gives the coverholder full decision-making and pricing freedom,
within the confines of the agreement they have with the insurers. The need for a detailed
agreement between the insurers and anyone to whom they delegate their authority is very
important so that the coverholder knows what can, and in particular cannot, be done. This
type of authority is most commonly found within lineslips and consortia where the leader (or
sometimes two leaders) are empowered to bind risks within the lineslip/consortium
agreement.
C5B Claims including use of third party administrators (TPAs)/
delegated claims administrators (DCAs)
Remember
Lloyd's is now using the term delegated claims administrator (DCA) for organisations
that hold delegated claims authority. Other insurers will continue to use the term third
party administrator (TPA). The term DCA includes both TPAs and organisations, such as
medical assistance companies who assist with claims but generally do not hold any
decision-making authority.
Even if delegating underwriting authority, the decision to delegate claims authority should be
made separately, considering whether the necessary skills and experience are present.
Although it might appear strange, Lloyd's 2017 thematic review on delegated claims reported
that, in some cases, not enough authority was being delegated to allow the contract to
perform at its most efficient.
As with underwriting, there are a number of levels of delegation possible:
• No authority at all which means that all claims will have to be handled by the insurers.
Within the London Market there are both Lloyd’s and IUA claims handling agreements,
Chapter 5
which provide for a subset of insurers to handle claims in any event. The rules would
apply as if the risk had been written on an open-market basis.
• Limited financial and factual authority which means that the insurers are letting
another party handle claims but its authority is capped using both financial and
factual criteria.
– Financial – claims can be handled up to an incurred figure of say US$25,000. Incurred
is paid plus outstanding.
– Factual – this will generally be a list of things that cannot be handled such as serious
personal injuries, fraud or complaints.
In any case, who will actually be given the authority? It might be the lineslip or consortium
leader, or the coverholder, but it might also be a completely separate third party.
The TPA/DCA is a specialist claims handler to whom claims can be outsourced from all
types of business (including open-market). It might be that while the coverholder has the
necessary technical expertise for underwriting, it might not have it for claims. The TPA/DCA
will normally have a contract directly with the insurers, which as with all contracts, should be
absolutely clear regarding the duties and rights of both parties.
C5C Document issuance only
This will often go alongside prior submit underwriting authority and will be within any other
underwriting authority given. Key for the insurers will be whether the documents are being
issued in a timely fashion and in a format which satisfies regulatory requirements.
When deciding whether to delegate authority, the thought process could perhaps be
summarised as follows:
To whom should authority be given? Can they bring business we would not get otherwise?
What suitability criteria should be applied? Do they have a good reputation and proven track record of success
to date?
How much authority? Should a staged approach be adopted?
What are the risks and benefits? The benefits are hopefully new business but what additional
resources will be required internally to manage the arrangements.
What are the cost implications? The business should be cheaper to obtain on a risk-by-risk basis
but what are the other costs linked to managing the contracts, and
are there additional acquisition costs?
C6 Importance of contract certainty

In many places earlier in this module the importance of clarity in the agreement has been
mentioned. When considering delegating authority of any type, the insurer should ensure
that the document setting out the agreement is absolutely clear regarding the extent of the
authority and the rights and obligations of both parties. This is the same whether it is a
lineslip/consortium, where the delegation is to another insurer, or a binding authority where it
is to a third party.
When using any form of delegated underwriting, two contracts will be created. The contract
of delegation is a contract for insurance. The contracts entered into under the authority
with the insured clients will be contracts of insurance and will be structured in the
normal format.
Be aware
Remember that under a binding authority the coverholder will not be a party to the
contract of insurance.
However, under a lineslip/consortium because the authority rests with an insurer, it will be
party to the contract of insurance.
Let us consider what could possibly go wrong should the contract for insurance not be clear
about the terms. The following table provides some examples. Can you think of others?
Chapter 5
Term Result of lack of clarity
Period of authority Risks bound later than expected
Maximum risk size Larger risks accepted than desired
Types of risks that can be accepted Risks outside the insurer’s appetite accepted
Reporting detail or frequency Inadequate information received by insurers for their onward
reporting
Territories allowed Risks accepted in territories where the insurer is not licensed
Wording necessary Contracts issued to clients with key clauses missing
C6A Value of model wordings

As with any insurance contract, it is always possible to start with a blank piece of paper when
putting together the contracts for and of insurance. However, within the London Market, life
is made a little easier by the availability of model wordings and template documents.
Model wordings and template documents assist both insurers and brokers to ensure that
contract certainty, and any overseas regulations, are satisfied in the insurance contracts
issued to clients.
The London Market has formatted templates for the creation of binding authorities, lineslips
and lineslip declarations (i.e. where the individual risks are presented to the lineslip leader
for binding).
Activity
Use this link to find copies of the standard binder and lineslip templates: lmg.london/
document-library/.
If you work for an insurer or broker, find out whether templates are used for risks handled
by your organisation.
Be aware
New templates exist for Lloyd’s Brussels (LBS) arrangements where any existing Lloyd’s
coverholders have to obtain new Coverholder Appointment Agreements (CAAs) with LBS
for EEA risks to be written.
In LM2 the template for an open-market reform contract (MRC) was considered. Here we
look more closely at the template for the schedule to a binding authority only, which will have
what are known as non-schedule agreements attached to it. These are almost identical to an
open-market MRC without the risk section at the start.
The schedule
Agreement Number: This is a unique number given by the broker or the insurer to this contract. It
does not have to follow a particular format.
Unique Market Reference The Unique Market Reference (UMR) is generated by the broker. It is used for
Number: all risks in the London Market, not just binding authorities and always follows
the same format:
B/four-digit broker code/broker policy reference.
Outside the London Market the agreement number may be the only
referencing used.
The Coverholder: Name of the organisation to which delegated authority is being given under this
contract. It might be an individual operating alone, but is more likely to be an
organisation.
Address:
The [Lloyd’s] Broker: A broker is often involved in a binding authority, sitting between the insurer and
the coverholder. Many different brokers (i.e. not just the broker who sets up the
agreement) can present risks to the coverholder once it has delegated
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authority.
Address:
AGREEMENT SECTION NARRATIVE

NUMBER
Section 2 PERIOD: What is the period of the agreement, i.e. for how long does the
delegated authority last? As with any other policy, it is good practice to enter a
time zone as well as a date and time in this section for both the start and end of
the period of authority.
Sub-section 3.1 If cease to be employed insurer should be informed

THE PERSON(S) RESPONSIBLE FOR THE OVERALL OPERATION AND
CONTROL:
This is an individual employed by the coverholder. If they cease to be employed
by the coverholder during the binding authority period, the insurer should be
informed and the contract updated.
Sub-section 3.2 THE PERSON(S) AUTHORISED TO BIND INSURANCES:

This might be a different individual to the one(s) named in sub-section 3.1.
They exercise the authority and agree or bind business under the contract. As
indicated above, if they cease to be employed by the coverholder during the
binding authority period, the insurer should be informed and the contract
updated.
Good practice is to have deputies identified for all the key roles captured within
this document (underwriting and claims). The insurer should, however, consider
all the personnel involved as they might want to be made aware of situations
where the deputy was effectively the person doing the majority of the work.
This might not have been part of the original underwriting strategy and might
lead at a minimum to concerns about how the authority is being used.
Sub-section 3.3 THE PERSON(S) WITH OVERALL RESPONSIBILITY FOR THE ISSUANCE
OF DOCUMENTS EVIDENCING INSURANCES BOUND:
This might be a different individual to the one(s) named in sub-sections 3.1 and
3.2. Their role is not to agree any insurances but to administer documentation.
Again, if they cease to be employed by the coverholder during the binding
authority period, the insurer should be informed and the contract updated.
Sub-section 3.4 THE PERSON(S) AUTHORISED TO EXERCISE ANY CLAIMS AUTHORITY:

Again, this might be a different individual to the one(s) named above –
particularly since it would be preferable for them not to be the individual with
underwriting authority. Not every binding authority has claims authority given to
the coverholder and in some cases the authority might be:
• retained with the insurer so that the broker has to visit them each time;
• given to the coverholder but only up to a certain financial limit and
excluding certain types of claims; or
• given to another party altogether such as a loss adjuster.
Sub-section 6.1 OTHER CONDITIONS AND/OR REQUIREMENTS RELATING TO THE

OPERATION OF THE AGREEMENT:
This section can be used to include any further terms relevant to the delegated
authority agreement which do not concern any risks that might be bound by the
coverholder.
Section 7.1 AUTHORISED CLASS(ES) OF BUSINESS AND COVERAGE(S):

This identifies the nature of the business that the coverholder can write. This
can be as wide or narrow as the insurer wants, subject to any other terms,
conditions, exclusions and limitations of the Agreement.
The binder schedule has to be read in conjunction with a wording to which
these various sections refer.
Sub-section 8.1.5 OTHER EXCLUDED CLASS(ES) OF BUSINESS OR COVERAGE(S):

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As stated earlier, the binding authority contract consists of this schedule, the
wording and the non-schedule agreements (similar to the Market Reform
Contract (MRC) used in the London Market). Within the wording there are
some standard exclusions, i.e. types of risk that the coverholder cannot write
(and, because we are using a US template as an example here, subject always
to the provisions of the US General Cover Conditions).
Note: the US General Cover Conditions identify a number of criteria set out by
various US state regulators which restrict the business that coverholders in
certain US states can write.
Sub-section 9.1 RISKS LOCATED IN:

Is there a geographical limitation regarding the location of the risks?
Sub-section 9.2 INSUREDS DOMICILED IN:

Is there a geographical limitation regarding the domiciled location of the
insureds?
Sub-section 9.3 TERRITORIAL LIMITS:

Is there a geographical limitation on the extent of the insurance that can be
written by the coverholder? Can the policies provide worldwide coverage for
the insureds even if there are restrictions on the domiciled location of the
insureds?
Section 10.1 MAXIMUM LIMITS OF LIABILITY/SUMS INSURED:

Limits apply to the size of policy that a coverholder can write. For example, for
contracts using this template, this could perhaps be a policy limit of £50 million.
If a risk is presented to a coverholder that exceeds its limit, there is nothing to
stop the coverholder referring it to the insurer for its direct agreement.
Sub-section 11.1 BASIS FOR THE CALCULATION OF GROSS PREMIUMS:

This section allows confirmation of whether any fees or charges can be
deducted from gross premiums (which are the premiums paid by the insured
before the broker deducts their brokerage).
Sub-section 11.2 DEDUCTIBLES AND/OR EXCESSES:

Any standard deductibles or excesses to be applied to the risks being accepted
by the coverholder are captured here.
Sub-section 12.1 GROSS PREMIUM INCOME LIMIT:

The insurer puts a limit or total on the amount of premium that the coverholder
can accept, which is a way of controlling the amount of risks that are being
written.
Sub-section 12.2 NOTIFIABLE PERCENTAGE OF THE LIMIT NOT TO EXCEED:

When the coverholder reaches this ‘trigger point’ (which might be, say, 80% of
the limit not to exceed), it must warn the insurer. However, the insurer should
also monitor the coverholder’s activity and be aware that it is approaching the
notifiable percentage.
Sub-section 13.1 PERIOD OF INSURANCES BOUND:{ } months

This section states the duration for which the coverholder can accept policies.
Generally this is 12 months with a maximum of 18 months. This information is
included in this section under the next heading of ‘Maximum period of
insurances bound’. For some risks the duration might be extended beyond this
period to, say, 36 months – for example in the case of construction contracts.
MAXIMUM PERIOD OF INSURANCES BOUND:{ } months including odd time.
The concept of odd time is to allow policies to occasionally run for periods other
than normal month increments usually to try to align them to common renewal
dates or with applicable reinsurances.
Sub-section 13.3 MAXIMUM ADVANCE PERIOD FOR INCEPTION DATES:{ } days

If a policy is due to incept on 1 January, this section puts a limit on how far in
advance the risk can be accepted (for example, no earlier than October the
previous year). This prevents issues with changes in the risk between
agreement and inception.
Sub-section 14.2 AMENDMENTS:
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Sub-section 16.1 THE COVERHOLDER’S COMMISSION:
Commission can be earned for writing business, or as shown below for making
a profit. Commission is usually calculated as a percentage rather than a
flat fee.
Sub-section 16.2 CONTINGENT OR PROFIT COMMISSION:

This section allows the underwriters granting the delegated authority to indicate
if any profit commissions will be earned by the coverholder on the basis of the
profitability of the business and on what basis they will be calculated.
Section 19 APPLICATIONS OR PROPOSAL FORMS:

Depending on the class of business, these may not be used. However, if they
are to be used, they can be referred to here – and attached to the agreement, if
necessary.
Sub-section 19.6 VARIATIONS TO THE STATED PROCEDURE IN RELATION TO COPY

DOCUMENTS:
Generally, the coverholder has to keep copies of all documents and send them
to the insurer, if requested.
Sub-section 20.1 WORDINGS, CONDITIONS, CLAUSES, ENDORSEMENTS, WARRANTIES

AND EXCLUSIONS APPLICABLE TO INSURANCES BOUND:
This is an important section as it makes clear to the coverholder any specific
terms and conditions which must form a part of any risk that it underwrites and
binds to this binding authority. Different parts of the world and different classes
of business have requirements in this area (e.g. war exclusions are generally
attached).
Section 20.5 FORMAT OF CERTIFICATES:

At Lloyd’s generally, certificates should follow a market standard – if a different
document is required, it must be approved by Lloyd’s. Any certificate must
satisfy all the requirements of any countries from which business may be
written.
All insurers should consider the formatting and content of documents going to
clients and should ensure they comply with regulatory requirements in the
client’s location. For example, this might mean using the local language.
Sub-section 20.6.9 SEVERAL LIABILITY NOTICE:

Several liability is the concept of each insurer not being liable for any more than
its agreed share.
Section 20.8 COMBINED CERTIFICATES

This section is included because we are following a Lloyd’s template as an
example. It relates to certificate issue where the market on the binder is not just
Lloyd’s and requires the other insurers to be identified
Section 21.1 PROCEDURE FOR THE HANDLING AND SETTLEMENT OF CLAIMS:

This section states whether the coverholder has to report claims to the insurer,
as well as the coverholder’s authority level (either financial or factual).
Sub-section 23.1.2 RISKS WRITTEN REPORTING INTERVALS:
Sub-section 23.2.1 BASIS OF MONITORING AGGREGATE EXPOSURES:

Aggregates enable the insurer to monitor not only the risks it is writing directly,
but also those being written under delegated authority contracts. The basis and
method of reporting can be decided between the parties, as can the reporting
intervals and any maximum aggregate exposures that the coverholder can
accept.
Sub-section 23.2.3 MAXIMUM TOTAL AGGREGATE LIMIT(S):
Sub-section 23.3 STATISTICAL INFORMATION REQUIRED BY THE UNDERWRITERS:

Data is hugely important to the insurer and, as well as the monthly bordereaux,
it can request other information from the coverholder and set out the details in
this section.
REPORTING INTERVAL(S): *monthly/quarterly.
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*(Delete as applicable)
MAXIMUM NUMBER OF DAYS
Sub-section 24.2 PREMIUM BORDEREAUX INTERVAL:

*monthly/quarterly.
Sub-section 24.3 CLAIMS BORDEREAUX (PAID AND OUTSTANDING) TO BE PRODUCED BY

THE COVERHOLDER:
*Yes/No.
CLAIMS BORDEREAUX INTERVAL:
*monthly/quarterly.
*(Delete as applicable)
Bordereaux (French for ‘forms’) are used by the coverholder to send
information to the insurer on a regular basis (usually monthly, but can be
quarterly). These forms set out all the risks that have been written (with the
premium charged) and the claims that have been submitted during the period.
Sub-section 24.4 MAXIMUM PERIOD FOR SUBMISSION OF BORDEREAUX:{ } days

The number of days that the coverholder has to submit its bordereaux to the
insurer after the end of the month.
Sub-section 24.6 MAXIMUM PERIOD FOR REMITTANCE OF SETTLEMENTS:{ } days

The time limits for submitting monies either from the coverholder to the insurer
or vice versa.
Sub-section 24.7 FEES AND CHARGES TO BE DEDUCTED BY THE COVERHOLDER:
Sub-section 36.1.1 NUMBER OF DAYS NOTICE OF CANCELLATION:{ } days

This applies to the cancellation of the binding authority, not the individual risks
attached to it.
Section 42.1 JURISDICTION AND GOVERNING LAW STATE:

This section indicates where any dispute between the insurer and the
coverholder might be heard. As this is a US binding authority agreement, it is
important to indicate which individual state’s laws will apply – usually this is
where the coverholder is based.
Agreement Number: The same agreement number as we saw at the beginning of the contract
appears here.
Unique Market Reference The same UMR as we saw at the beginning of the contract appears here.
Number:
This last section is where the coverholder and the insurer both sign the agreement setting out the terms of the
delegated underwriting agreement between them.
SIGNATURE OF THE COVERHOLDER

In accordance with Section 1 of LMA3114, the Agreement is signed on behalf of the Coverholder as acceptance of
the terms and conditions of the Agreement inclusive of any attachments identified in the Schedule.
Signed and accepted on behalf of the Coverholder
Name and Position of Signatory
Date of Signature
ACKNOWLEDGEMENT OF THE UNDERWRITERS
Signed and accepted on behalf of the Underwriters
Date of acknowledgement
Activity
Speak to colleagues who handle either lineslips or binding authorities and get their views
on how having templates helps them do their job.
Consortium wordings tend to be more bespoke, although should still set out the extent of the
authority very clearly.
Chapter 5
All of these contracts between insurers, or between insurers and their coverholders, will form
the basis of any audit or formal dispute resolution. It is, of course, much easier to measure
someone’s performance if the performance standards are clearly set out.
The contracts for insurance should be subject to the same quality control/contract certainty
checks as an open-market risk.
Be aware
As part of the digitisation work in the London Market there is a project to deliver a digital
binding authority prototype.
Click here to read more and to have a go on the prototype contract builders:
www.lmadare.co/.
www.lmadare.co/prototype.
On the Web
To see the Lloyds Binding Authority QA Tool, visit: bit.ly/2C9rEWd.
What about the contracts of insurance, i.e. those issued under the authority given by the
insurers? If the delegation is a lineslip or consortium, then the documentation will often be
similar to that issued under open-market placements and consist of a copy slip or possibly a
formal policy, if required by the insured.
However, for binding authorities, certificates are often issued and it is very important,
particularly where Lloyd’s security is involved, that the certificates satisfy certain
requirements.
There is flexibility for the coverholder to devise the format of certificates, provided they
contain the information mandated by Lloyd’s requirements, and comply with the terms of the
binding authority and any local stipulations for insurance documents.
The format of the certificate issued by the coverholder must be agreed with the underwriters
– this is good practice and should be the case irrespective of who the insurers are.
All contract documentation issued by a Lloyd’s coverholder should contain three things:
• A ‘jacket’ (wrapper) cover – this is optional and could be one of the following:
– One of Lloyd’s model certificate jackets (depending on the territory for which the
contract documentation is being issued) or the LMA3136J.
– A wrapper branded with the coverholder’s logo (as agreed by underwriters).
– A mixture of the above whereby the coverholder uses its own branding but includes
the term ‘Coverholder at Lloyd’s’ (if agreed by the underwriters).
NB For combined certificates (i.e. not 100% Lloyd’s placement), the Lloyd’s crest, logo or
wrappers cannot be used, nor can the coverholder use the term ‘Coverholder at Lloyd’s’.
• A schedule or declarations page – although there is no requirement for a schedule/
declarations page to be included as part of the certificate. In the majority of cases it will
be appropriate to provide this as a way of bringing policyholders’ attention to the main
terms and variable information.
• A full product wording – this should set out all the terms of the contract with the
underwriters, including any mandatory terms, clauses or conditions for the class of
business, and any mandatory notices for the territory where the policyholder and/or risk is
located. It is important to ensure that the wording and schedule are consistent. If the full
wording includes a schedule, then only one should be used to avoid duplication or errors.
Activity
Chapter 5
If you work for an insurer, find out what certificate format is being used on one of your
binders. Do you have a sample certificate on file, as you should?
Consider what might happen if a document is issued to the client which does not include a
key clause? This might lead them to believe that their cover is wider than it actually is and
result in a complaint to the insurers, should there be a claim which then raises the
question of coverage.
Consider the impact on the different stakeholders of a poorly drafted contract, either of
delegation or of insurance.
Insurer Coverholder Insured
Wider cover has been granted than Finding authority narrower than Claims delayed because of queries
desired. expected. over coverage.
Unclear termination provisions can If insurance is one that is compulsory,

leave insurers on risk for longer such as third party motor or
than expected. employers’ liability, there might be
legal ramifications for not having the
correct insurance in place.
Reputational impact if coverholder Reputational impact of insurers

acts outside authority. withdrawing authority or taking
longer over claims because of
queries over wording.
Having to deal with claims. Finding delegated contracts being

cancelled if insurers are not
confident that insurance contracts
can be put together properly.
Regulatory issues if documents are

not clear to the ultimate clients.
Penalties if taxes and charges are

not paid because it is unclear
who had responsibility.
Failing any contract

certainty checks.
Question 5.4
For what key reason is it important to read both the schedule and the binder wording
together?
a. The schedule contains specific contract information and adds to the generic □
wording which contains gaps.
b. The wording contains the specific contract information and the schedule is a □
generic document.
c. The schedule contains all the pricing information whereas the wording just □
contains the risks that can and cannot be written.
d. The wording has everything and can be read easily without reference to the □
schedule.
C7 Management and monitoring

We have already seen how important it is to choose the party to which authority of any type
might be delegated with care, and then to set up a detailed and clear contract to ensure that
both sides know their rights and obligations.
Having done the work upfront, it is therefore not a good idea to leave the contract to roll on of
its own volition. In the FCA’s thematic review, this was what they found to be happening in
some cases, where the insurers had put effort into setting it up but then did nothing to
monitor its ongoing performance, relying solely on an annual audit to highlight any issues.
Chapter 5
So what do we mean by monitoring?
Within the agreement there will normally be reporting requirements, which should be clear as
to who is doing what, to what standard and when.
Monitoring should take place from the very start of the contract, for example as follows:
Area What to monitor What it might suggest
Premium/risk bordereaux • Are they being received If late, is the coverholder not organised?
on time?
Why can the data not be provided? The ability
• Do they contain all the to report to the required level should have been
necessary information? part of the original due diligence.
Premium • Is it being received on time? If not, why not? Is it late from the original
• Does it match in cash terms clients?
what is expected from the Is the coverholder not identifying tax properly?
bordereaux information Is there a danger that they are not doing
provided? regulatory returns correctly (which are
• Is the premium matching the sometimes the coverholder’s responsibility).
coverholder’s business plan in
If the premium is lower than expected, was the
terms of business being
coverholder’s plan a bit overconfident?
written? Or is there more or
less than expected coming If the premium is higher than expected, should
through? consideration be given to offering higher
capacity, or alternatively is the business of the
right quality?
Document issuance • Are documents being issued to If not, is the coverholder disorganised?
clients in a timely fashion?
If not correct, what is the exposure to insurers
• Are they compliant with for disputes?
contract certainty and any other
regulatory standards?
Referrals/quotes • Are they being handled in Good customer service is a key driver for
accordance with any agreed delegated underwriting but the speed of
service levels? turnaround also applies to the insurers too.
Risks written outside • Check all elements of risk Wrong territories, wrong class of business, line
authority details against authority. too large.
With lineslips which are placed via a broker, it might be very easy for a leader to fall into the
trap of assuming that the followers are receiving all the information from the broker.
However, this is not always the case and leaders should still take responsibility to make sure
that everything necessary is done, even if they themselves are not doing it.
Consider this…
If you work for an insurer, do you know what happens to the information contained in any
risk or claims bordereaux that you receive? Do you use any technology to harness and
extract that data and create reports or link up with open market data?
If you are a broker, are you using any systems other than the central market processing
systems via Xchanging to present bordereaux information to insurers?
Use these links to find out more about:
• Delegated Data Manager – already mandatory for Lloyd's Brussels business and which
is a platform into which bordereaux can be loaded, mapped and the data extracted as
reports by any stakeholders: www.lloyds.com/conducting-business/delegated-data-
manager.
• DA claims status tracker – this allows any stakeholder to monitor the progress of a
claims bordereaux through the current London Market process: www.lloyds.com/about-
lloyds/future-at-lloyds/our-solutions/claims.
C7A Regular review

Chapter 5
A review of the data submitted by a coverholder, consortium leader or lineslip broker is the
easiest way to spot issues early, and then to follow up and find out why something appears
to differ from the expected criteria. For things such as risks written outside authority, they
might be quite obvious on a binder. However, issues with rolling premium income not being
as expected might take longer to become apparent. An insurer writing through any form of
delegated underwriting must absorb the data relating to those risks, alongside the risks
written on an open-market basis, to ensure that the data being reviewed from a management
perspective reflects the total exposures of the organisation.
Activity
If you see bordereaux under binders for example, have a look at some and see if they
appear to be different in structure. Consider how complicated this makes it to absorb the
data into the insurers’ own underwriting systems.
Look at the Lloyd’s coverholder reporting standards and see how set bordereaux formats
are the target for that Market: www.lloyds.com/conducting-business/delegated-authorities/
compliance-and-operations/reporting-standards.
C7B Audit
An audit, either annual or less frequently depending on requirements, is a key part of
insurers’ monitoring and management of a delegated underwriting contract or TPA/DCA
arrangement.
Audits are a regular part of binder management but traditionally have not been done on
lineslips and consortia to such a great degree, though perhaps this will start to change.
Followers have to have enough information about the lineslip, and how it is operating, to be
able to justify how and why they are writing the business. Lloyd's has Principles on
monitoring and reporting on business written, which do not only apply to open-market risks.
However, at this point, there does not appear to be any move towards third party auditing of
lineslip leaders being required.
The starting point of an audit is the contract itself, which is used to ensure that the holder of
the delegated authority is performing in accordance with it. Any insurer can put together its
own audit framework, however, for those within the Lloyd’s Market, Lloyd’s has an audit
template. Lloyd’s also offers audit coordination services – for cases where one coverholder
holds separate authorities from multiple insurers – to try and minimise the burden on the
coverholder, while not lessening the breadth of the review undertaken.
On the Web
A copy of the audit template and more information about the coordinated audit service can
be found here: www.lloyds.com/conducting-business/delegated-authorities/compliance-
and-operations/audit.
www.lloyds.com/conducting-business/delegated-authorities/systems-and-tools/delegated-
audit-manager.
Typical topics that should be addressed by auditors include:
Theme Question topics
The company • Details about the people involved in the contract.

• Attrition.
• Training.
• Controls, if not everyone is in the same office.
• Any outsourcing, use of call centres.
• Monitoring of external producers.
• Conflict management – both in terms of file handling and the wider
business, such as bonuses and management links with other
organisations.
• Any investigation of the company by regulators.
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• Any litigation against the company.
• Any E&O notifications in the last three years.
• Any E&O insurance renewals declined.
Accounts • How will funds be held?

• Investment.
• Processes for authorising transactions.
• Reconciliation processes.
• Credit control processes.
• Tax and regulatory compliance, including processes for ensuring correct
taxes and charges payable for insurers if the coverholder has the
responsibility.
Information technology • Details of systems being used, including where they are external systems
rather than in-house.
• Any system failures in the last year?
• Backup processes.
• Anti-virus/spam protection, including controls over own devices used
by staff.
• Data protection policies, including details of any data security breaches in
the last year.
• Use of internet trading.
Business continuity • Business continuity plan and details and evidence of testing.
Compliance • What is the approach to compliance?

• How is information shared with staff about changes?
• Knowledge of the Fair Treatment of Customers.
• Complaints handling.
• Branding, marketing and promotional materials – use and understanding of
UK and international regulations.
• Is it doing consumer business?
Financial crime • Anti-money laundering – procedures and training.

• Anti-bribery and corruption – procedures and training.
• Sanctions – procedures and training.
Contract specific • Consider the underwriting and claims process in detail for individual
binders.
• Check understanding of and compliance with reporting requirements.
• Check transactions accounted for.
After the audit has been done, then what? Feedback is given to all parties, which is
important whether the findings be good or bad, and particularly if they are bad, an action
plan should be put into place.
Options following a poor audit include:
• Making recommendations and scheduling a re-audit in a number of months to see
whether the recommendations have been put into practice.
• Changing the authority – moving back from full authority to that agreed using a rating
matrix, if the issue is possibly one of pricing.
• Termination – this is a worst case scenario and might be an immediate termination or a
natural run to expiry with no renewal offered.
If a binder ends, either naturally or because it has been cancelled, the insurer must always
remember that there will be live risks, which have been bound, and will have a number of
months to run off. Insurers should take steps to manage their ongoing exposures, particularly
if the relationship between the insurer and holder of authority has become strained because
of problems leading to a cancellation.
The insurer should therefore consider the following things:
• What controls are there in place to prevent coverholders binding risks after their authority
ends? If they can issue electronic documentation how does the insurer stop them?
• How will coverholders continue to manage live risks? Will they still be diligent? One area
Chapter 5
of particular importance to insurers is tacit renewals, which occur in some territories

whereby insurances are automatically renewed if specific cancellation procedures are not
followed. A coverholder no longer particularly interested in the business might not be
diligent in following these procedures, thus exposing insurers to longer risks than
originally anticipated.
• How will the coverholder handle any claims. Does it still have the insurer’s money to pay
claims in its account? Should claims handling perhaps be taken over by someone else?
Key points
Different ways of writing business
• Insurers have a number of different ways in which to write business, including as:
– a subscription market insurer/reinsurer;
– a reinsurer, if access to the direct market is not possible; and
– part of a delegated underwriting arrangement of some type.
• The business planning process should include not only the business targeted but also
the methods of writing to be used, the details of the appetite such as line size, and
preferred location on layered programmes etc.
• Controls should be in place and individual underwriters should each have
clear authority.
• Peer review is an important part of the systems and controls function.
Distribution methods
• Insurers have to consider various distribution methods to best access the targeted
business, such as:
Chapter 5
– overseas offices, including Lloyd’s platforms in Singapore and Dubai;
– using affinity networks to target clients;
– partnering with other insurers; and
– partnering with other organisations to which authority to accept risks can
be delegated.
Delegated authority management
• There are a number of risks and benefits when delegating authority to another insurer,
a broker or a third party:
– operating costs might be lower but acquisition costs might be higher; and
– control is lost over the decision to accept individual risks. However, business that
would not be cost effective to write as individual risks can be targeted.
• Care should be taken in choosing a partner, deciding what authority to give and setting
up the agreement:
– model wordings will assist in producing the contract.
• All delegated underwriting arrangements should also be managed and monitored.
• There will be regulatory oversight of delegated underwriting both from the FCA and,
where appropriate, from Lloyd’s.
Question answers
5.1 a. The reinsurers have complete visibility of the original risks being written by
the cedant.
5.2 c. To reduce operating costs for followers.
5.3 c. Price variability.
5.4 a. The schedule contains specific contract information and adds to the generic
wording which contains gaps.
Chapter 5
Self-test questions
1. What is meant by the term subscription market?
a. When one insurer takes 100% of the risk. □
b. When the risk is only written in the London Market. □
c. Where the risk is shared between insurers in different proportions. □
d. Where a broker is used. □
2. Why might a London Market insurer have to use a fronting company?
a. Where there are sanctions in place in the country in which the risk is located. □
b. Where the insurer does not have permission to write business on a direct basis in □
that country.
c. Where the client wants to use their captive insurer. □
d. Where a syndicate does not have permission from Lloyd's to write that class of □
business.
Chapter 5
3. Why is it important that underwriters know and abide by their own levels of authority?
a. To maximise the chance of a bonus. □
b. To ensure there are no problems with pricing. □
c. To mitigate against insurance and operational risks to the business. □
d. To ensure no fines are imposed by Lloyd's. □
4. Why would an insurer based in the London Market choose to set up an office in
another country?
a. To reduce claims costs. □
b. To reduce distance between them and clients/producing brokers. □
c. To reduce salaries. □
d. To reduce taxes. □
5. What benefit does setting up a group or affinity programme give an insurer?
a. No brokerage payable. □
b. Very low loss potential. □
c. Guaranteed profits. □
d. A pre-established client base. □
6. Identify the key benefit to the broker of setting up an ordinary lineslip.
a. A pre-set group of insurers whose capacity can be accessed by visiting a single □
leader.
b. Increased commissions through delegation of authority to the broker. □
c. Greater brokerage to cover extra work being done. □
d. Always requires less administrative work. □
7. Explain the role of an MGA.

a. A party whose role is to introduce business to insurers. □
b. A party whose role is to front for insurers who cannot write business in a particular □
territory.
c. A party to whom authority is given under a binding authority. □
d. A party who is involved in running the day-to-day work of a syndicate. □
8. Identify the key risk that insurers should consider if using a broker as a coverholder.
a. Higher brokerage being charged. □
b. Conflict of interests. □
c. Authorities not being followed. □
d. More capital loading from regulators. □
9. What is the most practical issue impacting customers that insurers should consider in
the sales risk element of the product risk equation?
Chapter 5
a. Length of the distribution chain. □

b. Amount of deductions that are made to the gross premium. □
c. Whether coverholders/MGAs are involved. □
d. Whether the business is written in the Lloyd's or company market. □
10. Which of these is not one of the three normal levels of underwriting authority that
might be given under a binding authority?
a. Prior submit. □
b. Pre-agreed rates. □
c. Full authority. □
d. Renew only as last year. □
i
Chapter 1
self-test answers
1 c. A domestic market's clients tend to be only from their territory but a global market
can have an international client base.
2 a. A client might want to show some loyalty to their domestic market for at least some
of their insurance needs.
3 c. Money is deemed received by the insurer as soon as the broker receives it.
4 a. Mutuals.
5 b. MGAs.
6 b. To obtain a return on investment/equity.
7 c. Overseas markets taking a larger share of premiums.
8 d. Receptionist/facilities manager.
9 c. Certification function.
10 a. Division of responsibilities/remuneration.
ii LM3/October 2023 London Market underwriting principles
Chapter 2
self-test answers
1 d. Tax authority.
2 a. A joint policy treats the insured as a combined unit and a composite policy treats
3 b. Specifically contract out of the Act's terms.
4 c. Both parties have agreed on the terms.
5 a. To check for catastrophe exposure.
6 a. Brokers do not have to provide track changed versions of clauses they have
changed, just a list of changes made.
7 c. Yes, if it has been centrally registered and has an LSW or similar code.
8 a. Clear/fair/not misleading.
9 b. Assisting with pricing.
10 b. Ensuring that contract certainty is achieved.
iii
Chapter 3
self-test answers
1 b. Unacceptable premium rates.
2 d. One that was unpredictable, massive in impact and had shock impact.
3 a. A measure of the likelihood of a recurring particular event.
4 a. Syndicate business performance team/executive committee.
5 a. There might not be enough business to go around so at least one organisation will
fail to meet its plan.
6 d. To ensure that problems can be quickly identified and action taken.
7 a. The quantity of capital an insurer needs to provide protection for the next year
against a 1:200 year event.
8 b. Management accounts are used internally for forward planning, while financial
accounts are for external use.
9 d. Tax return.
10 a. It has assets but they are not held in a form that is easily convertible to cash.
iv LM3/October 2023 London Market underwriting principles
Chapter 4
self-test answers
1 c. Aviation hull and liabilities.
2 a. Rank the numbers in order and the median is the one halfway through the list.
3 d. The data is very spread out from the average.
4 c. The risks are constantly moving around.
5 d. Antarctic ice cap melting.
6 b. 1 July.
7 d. Proximity to a river.
8 c. Potential for more taxes to be paid.
9 d. Premiums compared to claims and all expenses net of reinsurance.
10 b. Giving a robust basis from which to overlay individual pricing for a risk.
v
Chapter 5
self-test answers
1 c. Where the risk is shared between insurers in different proportions.
2 b. Where the insurer does not have permission to write business on a direct basis in
that country.
3 c. To mitigate against insurance and operational risks to the business.
4 b. To reduce distance between them and clients/producing brokers.
5 d. A pre-established client base.
6 a. A pre-set group of insurers whose capacity can be accessed by visiting a single
leader.
7 c. A party to whom authority is given under a binding authority.
8 b. Conflict of interests.
9 a. Length of the distribution chain.
10 d. Renew only as last year.
vii
Legislation
C
Consumer Insurance (Disclosure and
Representations) Act 2012, 2B10
Consumer Rights Act 2015, 2B10, 2C1
Contracts (Rights of Third Parties) Act 1999,
2A4B
E
Enterprise Act 2016, 2B5, 2C3
F
Financial Services and Markets Act 2023,
1B1, 1C, 1C2B, 1C3, 2C4, 3A2C, 3C5
I
Insurance Act 2015, 2B5, 2B10, 2C1, 2C3
Insurance Distribution Directive 2016/97/EC
(IDD), 1D1
Insurance Mediation Directive 2002/92/EC
(IMD), 1D1
M
Markets in Financial Instruments Directive
(MiFID) 2004/39/EC, 3C2
R
Road Traffic Act 1988, 2A1
S
Solvency II, 1C3A, 3A2C, 3C5, 3D9B
T
The Solvency 2 and Insurance (Amendment,
etc.) (EU Exit) Regulations 2019, 1C3
Third Party (Rights against Insurers) Act
2010, 2A4A
U
Undertakings for Collective Investment of
Transferable Securities Directive (UCITS),
3C2
viii LM3/October 2023 London Market underwriting principles
ix
Index
A distribution methods, 5A3, 5B
going to the customer, 5B1
access to contract, other parties, 2A4 linking into pre-existing networks, 5B2
accounting, equation, 3D6 linking into pre-existing networks via group/
accounts, 3D affinity programmes, 5B2A
financial, 3D linking into pre-existing networks via master
management, 3D2, 3D8 policies, 5B2B
assets and liabilities, 3D5 partnering with other insurers, 5B3
authority, 5C5 partnering with other insurers in a consortium,
delegated claims administrators (DCAs), 5C5B 5B3B
document issuance, 5C5C partnering with other insurers using lineslips,
third party administrators (TPAs), 5C5B 5B3A
underwriting, 5C5A using partners to attract business, 5B4
drivers to purchase insurance, 2A1
B
E
binding authority, 2B4, 5B4, 5B5B
black swan, 3A2B enterprise risk management (ERM), 3A2A
burning cost, 4B4A environmental, social and governance (ESG),
business plan, 3B, 5A5C 3A4
monitoring and reporting, 3C establishment basis, 1C
business planning, 3D8, 5A3 expenses, 4B2
business planning and capital, 3B4C
byelaws, 1C4A
F
C facultative reinsurance (Fac RI), 5A3
financial accounts, 3D7
capital, 1B, 3A, 3D4 balance sheet, 3D3, 3D7B
capital requirements cash flow statement, 3D3, 3D7C
monitoring, 3C5 income statement, 3D3, 3D7A
catastrophe, events, 4A1G Financial Conduct Authority (FCA), 1C
catastrophe, modelling, 4A3 frequency, 4A1A
CII Code of Ethics, 1C2A frequency distributions, 4A1D
client money, 1D2 fronting, 2B9, 5A2
combined ratio, 3D10
conditions precedent to liability, 2B11
conduct risk, 2B10, 5B2A, 5B5A
G
consensus ad idem, 2B1 General Accepted Accounting Principles
consortium, 5B5B (GAAP), 3D
consumer clients, 2B10 General Underwriters Agreement, 5B5C
Consumer Duty, 1C2A, 2B10, 5B5A
contract, 2A, 2B
contract certainty, 2B3, 5C6 I
Contract Certainty Code of Practice, 2B3
ICOBS, 1C2A
contract, interpretation, 2C
indexation, 4B1E
contract, the parties, 2A2, 2A3
Insurance Conduct of Business (ICOBS),
contracts, broker-drafted, 2B6
1C2A
coverholder, 5B4
intermediary, 1D
customer
interpretation, 2C1A, 2C2
commercial, 1D3
consumer, 1D3
wholesale, 1D3 L
law of large numbers, 4A1A, 4A1E
D layers, 5A4
lineslip, 2B4, 5B5B
delegated authority, 5C
liquidity, 3D7C
binding authority, 5C2
Lloyd’s
consortium, 5C2
as regulator, 3B3B
lineslip, 5C2
special provisions, 1C2C
Delegated Contract and Oversight Manager
Syndicate Business Forecast (SBF), 3B4A
(DCOM), 5C3
syndicate business planning, 3B4
delegated underwriting, 5C6
Lloyd’s future plans, 1B2
contract for insurance, 5C6
Lloyd’s regulation, 1C4
contract of insurance, 5C6
London Market, investments, 1B1
deterministic calculations, 4A3A
x LM3/October 2023 London Market underwriting principles
loss ratio, 3B4A ratios (continued)

liquidity, 3D9C
productivity, 3D9B
M profitability, 3D9A
management accounts, 3D8 realistic disaster scenarios (RDSs), 4A4
managing general agent (MGA), 5B4 regulation
managing general underwriter (MGU), 5B4 EU, 1C3
market reform contract (MRC), 2B4 Financial Conduct Authority (FCA), 1C2A
market, domestic, 1A1, 1A2 Lloyd’s, 1C4
market, global, 1A1, 1A2 other international, 1C1B
market, regulation, 1C Prudential Regulation Authority (PRA), 1C2A,
mean, 4A1B 1C2B
median, 4A1B regulatory oversight, 5C4
mode, 4A1B FCA, 5C4A
monitoring, 3C, 5C7 Lloyd’s, 5C4B
audit, 5C7B reinsurance to close (RITC), 3D
regular review, 5C7A return on capital employed (ROCE), 4B3
return period, 3A3, 4A1F
risk adjusted rate change, 4B5C
N risk appetite, 3A2, 5A4
risk appetite and company strategy, 3A4
Navigators Insurance Co Ltd and others v
risk premium, 4A3, 4B1
Atlasnavios-Navegação Lda (Supreme
risk transfer, 1D2
Court) (2018), 2C1A
role of, broker, 1D4
role of, intermediary, 1D
O
one in two hundred (1 in 200) year event, 3A2 S
open market, 2B4
Senior Management Arrangements, Systems
Own Risk and Solvency Assessment (ORSA),
and Controls (SYSC), 3C2, 5C4A
3A2C
Senior Managers and Certification Regime
(SM&CR), 1C2B
P services basis, 1C
severity, 4A1A
partner, approval, 5C3 side letters, 2B8
partner, selection, 5C2 solvency, 3D7C
plan solvency capital requirement, 3C5
business, 3B4A stakeholder responsibilities, 5B5C
changing, 3C4 statistical tools, 4A
external, 3B4B statistics, interpretation and use, 4A2
monitoring and reporting, 3C subscription market, 5A1
policy, composite, 2A2A, 2A3 Syndicate Business Forecast (SBF), 3B4A
policy, joint, 2A2A, 2A3 syndicate in a box, 1B
Positive customer outcomes, 1C2A
premiums, calculating, 4B4
burning cost, 4B4A T
rating models, 4B4C
triangulations, 4B4B
triangulations, 4B4B
trust accounts, 1D2
pricing, 4B
pricing, regulatory oversight, 4B5
pricing adequacy and rate change monitoring, U
4B5C
pricing methodology, 4B5B UK Corporate Governance Code, 1C2D
Principle 1 – Underwriting profitability, 4B5A UK regulators
Principles for Businesses (PRIN), 1C2A, 5C4A FCA, 3B3A
Principles for doing business at Lloyd's, Lloyd’s as regulator, 3B3B
1C4B, 2C4 PRA, 3B3A
probability, 4A1E underwriting platform, 1A3
profit, 3D3, 3D7A, 3D7C underwriting, controls, 5A5
Prudential Regulation Authority (PRA), 1C higher level controls, 5A5C
individual authorities, 5A5A
individual risk controls, 5A5B
R peer review as an individual risk control, 5A5B
rating factors, 4B1D
rating models, 4B4C V
ratios, 3D9
activity, 3D9D variance, 4A1C
combined, 3D10 vulnerable customers, 1C2A
gearing, 3D9E
xi
W
wordings, from outside the London Market,
2B11
wordings, libraries, 2B5
wordings, model, 5C6A
wordings, reverse engineering, 2B9
wordings, specialist, 2C3
wordings, specific, 2B7
xii LM3/October 2023 London Market underwriting principles
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© Chartered Insurance Institute 2023
Ref: LM3TB4

LM3-2024

Uploaded by

LM3-2024

Uploaded by

London

Updates and amendments

© The Chartered Insurance Institute 2023

Reviewer (first edition)

Using this study text

Activities: reinforce learning through Key points: act as a memory jogger at

Consider this: stimulating thought Reinforce: encourages you to revisit a

Examples: provide practical illustrations Sources/quotations: cast further light

Summary of learning outcomes Number of questions in the

1. Understand the framework within which business is conducted in the London 5

2. Understand the role, purpose and implications of policy wording in practice. 16

4. Understand the pricing of risk at an individual and at a portfolio level. 12

5. Understand the various methods of writing business and distribution. 24

Published October 2023

1. Understand the framework within which Reading list

Published October 2023 2 of 3

Exam technique/study skills

Published October 2023 3 of 3

Exam guidance and

2: The role of policy wording

3: Business planning and capital setting

Byelaws Client money Domestic market Establishment

A Global and domestic markets

Region 2010 2020

North America 30% 38%

Central and South America 6% 5%

Europe and Middle East 15% 12%

Location Percentage of 2021 premium

Europe (not UK/Ireland) 11

Location Percentage of 2020 premium

Central Asia and Asia-Pacific 10

Rest of the World 4

A2 Why might a client choose a domestic market over a

A3 Why might the client have no choice about using the

A5 Types of insurer operating in the London Market

Location Sources of capital by percentage

Private capital, limited and unlimited 9.2

Rest of the world insurance 10.5

Worldwide non-insurance industry 8.3

Middle and Far East 5.4

B1 Why invest in the London Market?

B2 Lloyd’s plans for the future

Society of Managing Members’ Lloyd’s

C1 UK insurers’ reaction to Brexit

Where Lloyd’s syndicates had outsourced underwriting to coverholders/managing general

FCA ICOBS – Insurance Conduct of Business

FCA Consumer Duty

7. make appropriate disclosures to the FCA/PRA; and

C2B Senior Managers and Certification Regime (SM&CR)

C2C Lloyd’s – special provisions

C2D UK Corporate Governance Code

Audit, risk and Composition,

Internal model A risk management system developed by an insurer to analyse their

Insurers’ assessment of risk and capital requirements

Principle Key contents

Underwriting profitability • Business strategy.

Catastrophe exposure • Manage cat exposure to risk appetite.

Claims management • Wider sharing of claims information within the business.

Customer outcomes • Conduct culture promoting good customer outcomes.

Reserving • Governance and ownership of reserves.

Capital • Maintain an internal model.

Investment • Clear investment objectives and risk appetites.

Liquidity • Identify and assess key sources of risk.

Governance, risk management • Suitable board and committee structure.

Principle Key contents

Regulatory and financial crime • Transparent culture of compliance.

Operational resilience • Prioritise resilience of the most important services.

Culture • Foster an inclusive high-performance culture.

Strategy Underwriting strategy Underwriting strategy Underwriting strategy Regular horizon-

D Role of the intermediary

Type Principal Notes

Single-tied agent Insurers Will only be able to offer customers the

Multi-tied agent Insurers Can offer customers different products but

Independent broker Insured These intermediaries are not tied to any

Managing general agent Insurers These entities have been delegated

Type Principal Notes