BY FELIX NOLAN

An earlier Thinking space article entitled Forced reform of delegated authorities speaks about the challenges created by new rules imposed by Lloyd’s on the delegated authority market. Delegated authority is when insurers agree to give authority to third parties, who then undertake duties that would usually be undertaken by insurers on their behalf, most commonly underwriting. When delegating authority, it is essential that Coverholders, the party to whom authority has been delegated, are properly monitored, with the result that new rules in the realm of delegated authority will continue to develop for the foreseeable future.

The introduction of new rules within the industry means that time and time again policies and procedures will have to be reviewed by members of the London insurance market.  This is not solely to remain compliant within the industry and satisfy the powers that be, but ultimately to have a higher level of protection and transparency within the market.  Therefore, it is essential that managing agents, brokers and syndicates deal with newly formed rules as and when they are introduced.

Lineslips

Lineslips are a form of delegated authority and one of the latest areas to be affected by new minimum standards introduced by Lloyd’s. A lineslip is a contract that is put together by an insurance broker. The broker will approach a variety of insurers, who are writing the same type of business and ask them to partake in the lineslip. Within a lineslip there will be a slip leader who has been delegated authority from the other partaking insurers commonly known as followers.  By participating in the lineslip the followers agree for the leader to write risks on their behalf. The benefit for the broker is that once the lineslip is in place, instead of having to go to lots of different insurers when looking to insure a client, they will only have to go to the slip leader, who agrees on behalf of the followers.  This is also beneficial for the followers as they don’t have any direct relationship with the broker. The leader will also benefit as they usually write the largest percentage of the risk, have a close relationship with the broker and have more control.

There are two types of lineslip: bulking and non-bulking.

  • A bulking lineslip is when “the premiums for individual declarations (risks) are combined for presentation and settlement to underwriters” [1]
  • A non-bulking lineslip is when “each individual declaration (risk) has to be presented separately”. A non-bulking lineslip therefore takes up more time.

Lloyd’s Minimum Standards MS-1.3 and Bulletin Y4991

After Lloyd’s completed a study on Market Lineslips in April 2016 they identified a number of issues that managing agents of syndicates are required to address. These are outlined in Lloyd’s Minimum Standards MS-1.3 and Bulletin Y4991. Lloyd’s has highlighted the importance of ensuring that the “MRC standard for lineslips is followed (as published by the London Market Group) and that the contract contains all relevant terms” [2].

There are five main areas that have been concerning Lloyd’s regarding lineslips.

  1. The extent of authority granted under a lineslip has to be clear with “the conditions, scope and limit” [3] of authority given to the leader clearly set out in the lineslip;
  2. For individual lineslip declarations the slip leader must also “be satisfied that they are provided with adequate information” [3];
  3. The lineslip must also “clearly specify the process for issuing contractual documents” [3] for risks relating to the lineslip;
  4. Lloyd’s also wants to make sure that followers are provided with an adequate amount of information so “that they are able to understand how the lineslip is being manged” [2];
  5. Finally, “changes to the lineslip must be specified and properly documented.” [2].

A further update to the delegated authority Code of Practice is expected to be released before the end of 2016 and there may be in depth Pre-Bind Quality Assurance (PBQA) checks to complete in order to make sure that lineslips are of an appropriate standard. The checks are becoming even more stringent and the introduction of these new standards will leave a number of lineslips in the market that will need attention.

Solving the problem

If lineslips have not been reviewed since April, when MS1.3 and Bulletin Y4991 were published, there is a significant danger that when Lloyd’s releases its updated minimum standards there will be thousands of lineslips that need to be reviewed . These will need to be checked thoroughly and updated in order to satisfy the Lloyd’s standards. This will involve making amendments to wordings, checking that all the correct fields are in place and ensuring that procedures are clearly documented.  It is essential that lineslips are reviewed sooner rather than later before the problem gets out of control.

A review of lineslips will lead to increased transparency, greater protection and provide clarity to participating members of the contract. In order to comply with these rules it will of course require time, effort and investment for those involved. However, the result will be seen market wide as there will be fewer contractual conflicts and a more open market. As Lloyd’s implements new standards year on year it is important to bear in mind the positive effects that they will have on the industry. Therefore, being compliant to these rules shouldn’t be deemed as an annoyance but something that in the long run is for the greater good.

 

[1] Delegated authority P66, Diploma in Insurance April 2015 Study text, The Chartered Insurance Institute 2015

 

 

[2]  http://www.lloyds.com/~/media/files/the%20market/operating%20at%20lloyds/minimum%20st andards/minimum%20standards%202/ms1_3%20%20delegated%20authority.pdf

 

 

[3] www.lloyds.com/~/media/files/the%20market/communications/market%20bulletins/2016/04/y4991.pdf