Coverholders Playing Greater Role in Lloyd’s Global Expansion
Lloyd’s of London began and remains a specialized market (not an insurance company). It accepts risks that are too large, or too complex, or both, that do not lend themselves to coverage through more “normal channels.” Each policy resembles a “bespoke,” i.e. custom made, suit, tailored for the individual client that requires specialized coverage.
The Lloyd’s World
Placing specialized coverage requires both skill and experience. As Lloyd’s is a broker market, brokers who place coverage with a Lloyd’s syndicate must of necessity possess the needed skills. Historically, brokers waited in line at a syndicate’s box at Lloyd’s in London to present the proposed risk they hoped to place with an underwriter. Once given the opportunity to do so, they would present the risk to the underwriter, who would accept it, reject it, or ask for changes in terms and conditions.
To some extent that scenario still exists, but placements at Lloyd’s have become a good deal more complex, and are no longer limited to brokers with slipcases full of papers waiting to physically sit down with underwriters. As Lloyd’s syndicates now do business on a global scale, so do the brokers they deal with.
Brokers who act as coverholders are highly important in the placement process, as they are not only the agent of record for their clients, but also act on behalf of Lloyd’s syndicate underwriters. In other words they “have the pen,” i.e. they can bind coverage from a syndicate without going to London and waiting to see an underwriter at the syndicate’s box at Lloyd’s. This is extremely important for brokers in the United States, Asia, South America and other areas around the globe where Lloyd’s does business. It has made it possible to write insurance coverage on a global basis.
Lloyd’s defines a coverholder, or “designated authority,” as a “company or partnership authorized by a managing agent to enter into a contract or contracts of insurance to be underwritten by the members of a syndicate managed by it in accordance with the terms of a binding authority.”
What was once a rather loose understanding between a broker and a syndicate, has become a far more formal alliance, as Lloyd’s has tightened up on its syndicates underwriting requirements.
Since January 2003 managing general agents (MGAs) who manage the syndicates (there are now 95 of them) must present their business plan(s) annually to the Performance Management Director. The PMD heads a board that was “created to maintain a high degree of independence and accountability, to consciously reflect best practice on corporate governance,” according to Lloyd’s CEO at the time, Nick Prettejohn. He added that the “new structure provides rigorous oversight and clearly defined responsibilities.”
Rolf Tolle, the first “franchise performance director,” was succeeded by Tom Bolt in 2010. The board has been largely successful in reducing what Lloyd’s former CEO Richard Ward described as the “uncertainty and concern” in the market as to “what our role should actually be, and how we would work with the market.”
The risks a broker/coverholder wishes to place are therefore part of the overall requirements imposed by the performance management board. Brokers are thereby required to make sure that the risks they propose to the underwriters are in conformity both with Lloyd’s overall strictures and with the business plan of the syndicate they are dealing with.
The Coverholders’ Place
Coverholders have an enormous responsibility. Being a Lloyd’s coverholder is “based on a sense of trust,” said Lisa Doherty, the CEO of agent/broker Business Risk Partners (BRP) in Windsor, Connecticut. She and her sister, Linda Boborodea, founded the agency in 2000, and have never looked back.
BRP focuses on the specialty commercial liability insurance market. Doherty explained that she saw a need for small and medium sized service businesses (SMEs) to protect themselves through professional liability coverage, particularly errors and omissions (E&O) coverage.
BRP has expanded its offering into a number of related sectors. Its website now states that the agency has “underwritten and administered policies for 160-plus professions nationally. They’ve partnered with the best specialty carriers in the business. They’ve branched out into other types of specialty commercial liability insurance, including directors and officers liability, employment practices liability and fiduciary liability. And while BRP initially focused on businesses with up to $50 million in revenues, today it writes policies for companies of all sizes.”
BRP owes its success to the business acumen of its founders. Doherty began her career in insurance in 1987, and developed her skills in the specialty commercial insurance market for a number of major companies. Boborodea honed hers with major financial institutions. Finding a need and filling it is the classic formula for establishing a successful business, and when Doherty realized the need for professional liability coverage for SMEs that’s what she and her sister set out to do.
And 14 years later BRP is a well-established agency, operating as a program administrator, providing companies large and small with adequate professional liability coverage.
As a coverholder, BRP has arrangements with several Lloyd’s syndicates, notably Aegis, Atrium, Chaucer, Pembroke and, perhaps most importantly, several units of Liberty Mutual and Liberty International Underwriters (LIU).
“Certain lines have certain leaders,” Doherty explained. As a result BRP offers a wide range of coverages for a variety of people and businesses at risk from potential professional liability claims. In many cases the coverage is placed through a Lloyd’s syndicate, which means that BRP selects the appropriate syndicate for each client’s needs. As an example, Doherty pointed out that E&O policies for insurance agencies are different from D&O policies, which in turn aren’t the same as A&E (architects and engineers) E&O coverage.
BRP is also involved with the creation of new products by different syndicates, which broadens the scope of the programs it can present to its clients. Most recently data breach and privacy intrusions have grown exponentially in today’s computerized world and new coverage products are required to address their risks that are now a major problem for businesses. Lloyd’s underwriting expertise is a primary reason why coverage is placed there. Syndicate underwriters have the ability to create new types of coverage to address new types of risks.
This is a service that’s badly needed. BRP estimates that 60 percent of small and medium sized businesses lack any type of plan for responding to or reporting data breach losses. They are usually aware of the risks, as local newspapers and websites regularly publish reports of latest data breaches and the headaches they cause the businesses who get hit.
BRP’s website warns that “whether a breach is the result of a hacker accessing your system, or a simple mistake such as a lost or stolen lap top, any company can be at risk.” But finding the necessary protection isn’t that obvious. BRP said it “now underwrites privacy policies specifically for small to middle market companies. Our out-of-the-box underwriting offers solutions tailored to your client’s needs, including first- and third-party coverage options. The policy also features proactive loss mitigation services and an innovative first responder concept which provides a single point of entry to a myriad of services required in the event of a breach.”
Lloyd’s and Its Coverholders’ Future
As Lloyd’s moves further into the 21st Century, the need for more broker/coverholders to place business with its syndicates becomes ever more important. In restating its goals for the program for 2014-16 — Lloyd’s said its strategy outlines “how the corporation will maintain the flexibility and efficiency of the Lloyd’s platform through innovation, to ensure it remains attractive to insurers, brokers and policyholders;” adding that this is “one of its primary goals.”
Vincent Vandendael, Lloyd’s director of international markets, including North America, views underwriters as “experts in professional risk selection;” adding that working with coverholders assumes that the risk “is not ordinary business, but bespoke business tailored to the clients’ needs.”
He emphasized the necessity of establishing close working relationships between MGAs and coverholders, as “a large part of Lloyd’s business is in the United States and requires underwriting authority.” He acknowledged that MGAs “have to be very careful in deciding who gets that authority,” describing it as a “leap of faith based on trust” — almost the same phrase Lisa Doherty used in describing the relationship.
The strategy has served Lloyd’s well, and looks set to continue to do so. By expanding the products offered by the syndicates’ underwriters and taking advantage of the client relationships enjoyed by its broker/coverholders, Lloyd’s has been able to formalize a plan, Vision 2025, which aims at nothing less than making the London market more easily available on a global scale. Lloyd’s looks to be in a good position to achieve that goal.