Managing Agent Due Diligence of Third Parties and Contracts of Delegation

Why guidance is needed

The Intermediaries Byelaw states that managing agents shall take all reasonable steps to satisfy themselves that a third party is suitable to become a Lloyd’s entity and remains suitable.

This assessment must be undertaken prior to entering into a contractual relationship and maintained on an ongoing basis to ensure that the third party continues to be suitable.

Lloyd’s requirements

Governance
Managing agents must establish, implement, and maintain robust due diligence frameworks, approval processes, effective and ongoing oversight arrangements in respect of their coverholders, service companies and digital platform providers to ensure continued compliance with applicable regulatory, Lloyd’s requirements and the contract of delegation.

Lead and follow managing agents must ensure that appropriate levels of resource and relevant expertise are in place to support the consistent delivery of their internal business strategy and agreed business plan for delegated authority business.

Managing agents must clearly identify the individuals authorised to make final approval decisions regarding the establishment of a new third party or contract of delegation. The decision to proceed should be made either by the designated authorised personnel acting within their approved authority or through a formal meeting of a Delegated Authority Committee or any other relevant, appointed group. In all cases, the approval process must include independent challenge with at least one approver who is independent of the person responsible for introducing the entity.

Managing agents must establish, document and maintain records of the due diligence undertaken in respect of each entity. Such records must be retained and made available upon Lloyd’s request. 

Any material concerns identified as part of a managing agents ongoing due diligence that could impact the third-party risk profile or continued suitability as a Lloyd’s entity must be notified to Lloyd’s via TPMI@lloyds.com.

Third-party suitability
As part of applications or prescribed tasks submitted to Lloyd’s, managing agents are expected to provide formal attestations confirming that the following requirements have been met:

• The business proposed to be bound by the third-party is likely to support sustained long-term profitability based upon a realistic business proposal and is able to provide evidence to confirm this.
• Suitable enquiries regarding any prior performance of the business have been made.
• The third-party is not sub-delegating any of their underwriting abilities to another third-party other than with Lloyd’s agreement. For further information regarding sub-delegation please contact coverholders@lloyds.com. 
• Commissions are fair and reasonable, and the link between remuneration and profitability is strong and interests are aligned.
• Fees are transparent and are proportionate with services delivered.
• The third-party will provide a valuable product/service for the intended policyholders.
• The third-party and its key personnel have the experience, level of skill and understanding to carry out their duties.
• The third-party holds the correct licences or authorisations required to trade and conduct the proposed activities that will be granted to it and have sufficient knowledge of local laws and regulations. 
• The third-party has suitable and effective systems and can provide the managing agent with data that enables adequate assessment of ongoing suitability and allows the managing agent to meet any appliable Lloyd’s data requirements.
• Insurance documents and any marketing/website materials have been vetted/approved in line with any applicable Lloyd’s and other legal and regulatory requirements. Please see the Lloyd’s branding guidelines to ensure compliance.
• The third-party has an appropriate level of operational resilience. 
• The third-party has in place all necessary policies, procedures, controls and governance. Specific information regarding financial crime can be located on our webpages.
• The third-party has in place appropriate financial controls and banking arrangements.
• Where the third-party will have claims handling authority, they have the claims resources, systems, processes and controls to ensure a consistent and effective claims service will be provided. For further information in relation to requirements regarding delegated claims handling please visit the delegated claims guidance.

Contract of delegation
All managing agents, whether lead or follow must check the contract of delegation to ensure it sets out what is expected of the third-party as per the managing agent’s risk appetite and meets Lloyd’s and regulatory requirements. 

Lead managing agents must ensure that each contract of delegation complies with Lloyd’s Pre-Bind Quality Assurance (PBQA) standards prior to inception. Some tools to help are as follows:

Quality Assurance Tool

• Designed to assess contract structure and wordings
• Provides checklists and guidance for identifying Lloyd’s requirements

Contract Confidence Tool

• Uses advanced search to detect errors and discrepancies
• Reduces manual checking time for underwriters, compliance, and management teams

Lead managing agents must ensure:

• Contracts are accurate, clear, and contract certainty-compliant
• Wordings meet quality assurance standards
• The managing agent and broker play key roles in achieving PBQA

Lloyd’s expectations for managing agent oversight

Governance
Each managing agent is responsible for assessing risk and maintaining proportionate, efficient processes for the onboarding and ongoing oversight of third parties, ensuring effective governance and compliance throughout the relationship lifecycle.

To support consistency and reduce duplication in entity level due diligence checks, Lloyd’s encourages managing agents to adopt a risk-based approach where appropriate and, where feasible, to rely on the overall lead managing agent.

Formal signoff of third-party appointments should demonstrate cross-functional involvement, either through direct participation in the approval process or by providing evidence that comprehensive cross-functional due diligence has been completed.

The documentation and evidence of supporting due diligence should be proportionate to the materiality of the risks being addressed.

Appointing a new third-party
When sponsoring a new third-party application to Lloyd’s, the sponsoring managing agent is responsible for conducting thorough and proportionate due diligence to assess the suitability of the proposed entity.

When entering a new relationship with an existing Lloyd’s entity, managing agents should not rely on Lloyd’s approval or prior audits as a substitute for their own assessment. Managing agents must undertake proportionate due diligence to assess the proposed entity’s risk profile and suitability.

Due diligence and obtaining any necessary Lloyd’s system permissions must be obtained prior to inception of the contract of delegation.

Where a jurisdiction operates an Appointed Representative (AR) regime, managing agents should consider whether due diligence should be carried out not only on the AR but also on the principal entity for which the AR acts. As part of this assessment, managing agents should consider reviewing the contractual arrangements between the principal and the AR in order to understand the scope of the principal’s responsibilities and the allocation of regulatory and operational obligations.

Other contractual considerations

If an AR is being utlised, the managing agent may want to specify certain terms within the contract of delegation where things might need to be handled by the principal rather than the AR. For example, money handling.