Coverholder audit

An introduction into the coverholder audit. It explains what it is, why it’s required and what the coverholder needs to know.

Managing agents are required by Lloyd’s to have a consistent approach to the audits of all of the coverholders they have. To support and encourage consistency of the audits performed on behalf of the managing agents, Lloyd’s is working with the managing agents and has developed a menu of audit requirements called the audit scope.

  • What is the reason for the audit?

    Audit is one of the key assurance mechanisms used by managing agents to make sure that all aspects of the binding authority are operating effectively. Audits also raise areas where coverholders may be able to improve aspects of their business, either to reduce risk or improve efficiency.

  • What is the audit scope?

    Lloyd's is keen to promote both high standards and consistency in the audit of approved coverholders. To help meet these requirements a working party of managing agents developed an Audit Scope for coverholder audits. The scope provides a ’menu’ of audit requirements from which the managing agent is able to select the relevant sections for a particular audit.

    The Audit Scope helps facilitate the co-ordination of audit activity, whereby multiple managing agencies can audit the same coverholder at the same time, minimising the disruption to a coverholder’s business.

  • Is it mandatory?

    The Audit Scope is not mandated by Lloyd's. However, Lloyd's would want to be satisfied that where a managing agent does not use the standard Audit Scope, it has a suitably robust audit process.

  • Who selects the auditor?

    The managing agent selects the auditor from their panel of auditors.

  • Who decides and what are the timescales?

    The audit cycle for an individual coverholder is determined by the managing agent. Lloyd's encourages a minimum 24 month audit cycle. However, managing agents will determine audit frequency based on a number of factors. For example, this may be include class of business, premium income, level of underwriting and claims authority delegated and the ongoing level of compliance by the coverholder with the terms of the binding authority contract, such as reporting on risks and premiums payable.

  • What does the audit consist of?

    The audit consists of a suitably qualified person attending the coverholder’s offices and undertaking an assessment of the coverholders adherence to the terms and conditions of the binding authority as well as the suitability of the coverholder’s business systems, governance and controls over the risks.

    The areas that will be covered by the audit will include some or all of the following (subject to the managing agent’s decision):

    Areas covered What is it for? 
    Review of previous recommendations To establish that all previous coverholder audit recommendations have been addressed.
    Company To establish that the coverholder has a management structure in place which allows it to effectively identify and manage risks associated with Lloyd's binding authorities. 
    Reporting – aggregate, risk and premium bordereau analysis To establish that bordereau are produced and checked via a system which is fully integrated with the accounting systems or with clearly defined checks and responsibilities to negate the risk of error. 
    Underwriting authority To establish that the coverholder has acted within its authority and instructions given by the managing agent .
    Documentation To establish that documents produced by the coverholder are accurate, recorded, signed, produced and despatched in a timely manner and that any decisions taken counter to normal process are documented and managed appropriately. 
    Accounting and general financial To establish that the coverholder’s business is managed on a sound financial basis.
    Accounting transactions specific to file review To establish that transactions resulting from the relevant binding authorities are managed correctly with a clear audit trail.
    Claims To establish that the claims department and coverholder management act within their authority.
    IT and data security To establish that the coverholder has controls and processes to protect data which are to a standard as by the Lloyd's managing agent.
    Compliance and governance (including marketing and branding) To establish that the coverholder has the knowledge resource, controls and processes in place to ensure their Compliance meets the standards expected by Lloyd's and local regulatory authorities. 

  • What do I have to do?

    Notification of the audit will normally be via the Lloyd’s broker. The expectations are that the coverholder will make themselves, any key staff and files available. They will also have a room set aside for the Auditor to work in and to be as open and co-operative as possible.

  • What are the implications of a coverholder not allowing an audit to happen?

    If the coverholder did not allow an audit to happen, then Lloyd’s would review the coverholder’s ongoing approval.

  • Who has the key responsibilities?
    • The managing agent commissions, runs and sets the scope of the audit.
    • The auditor conducts the audit.
    • The Lloyd’s broker provides the interface between the managing agent, the coverholder and the auditor.
  • How are audits co-ordinated when the coverholder has several binding authorities?

    Lloyd’s actively encourages the co-ordination and sharing of audit activity by managing agents to minimise coverholder disruption, but does not mandate it.

    To facilitate this Lloyd’s provides each managing agent every quarter a list of the other managing agents (and the contacts therein) who have lead binder relationships with the same coverholders as them. When they arrange an audit Lloyd’s will encourage them either directly or via their Lloyd’s brokers to contact the other agents to give them an opportunity to join the audit.

  • Who provides the feedback and what happens next?
    • The auditor will normally give an overview of their findings and recommendations to the coverholder at the end of the audit to check for any immediate solutions. The auditor will then report back their findings and recommendations to the managing agent. The managing agent provides feedback to the coverholder usually via the Lloyd’s broker.
    • The Lloyd’s broker will provide the coverholder with the recommendations and the expected timescales for agreed actions to be completed by.
    • The coverholder will notify the managing agent in writing when the remedial actions have been completed

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Coverholder Toolkit | Coverholder Audit  pdf file
Chapter 11: Coverholder audit

This chapter gives an introduction into the coverholder audit.

Related Links

More on the audit scope and access to a copy