Oversight and Monitoring of Contracts of Delegation of underwriting authority

Why guidance is needed

To ensure that managing agents achieve consistently effective oversight of contracts of delegation of underwriting authority through approaches that are proportionate to the nature, scale and complexity of the risks presented and aligned with Lloyd’s risk-based approach.

Lloyd’s requirements

Resource & expertise

 A managing agent must be able to demonstrate that it has sufficient knowledge, capability and resource to supervise contracts of delegation of underwriting authority effectively and manage the risks arising from them. The managing agent remains accountable for the effectiveness of its oversight arrangements, including where elements of due diligence, review or monitoring activities are performed by third parties. Appropriate internal expertise must be retained to provide challenge, exercise judgement and approve key decisions.

Governance and accountability

A managing agent must establish and maintain a governance framework that enables effective oversight of contracts of delegation of underwriting authority and supports timely, informed and accountable decision making.  Managing agents must design and operate oversight arrangements that provide assurance that delegated authority business remains within risk appetite, delivers sustainable performance, complies with applicable requirements and produces appropriate customer outcomes. Managing agents may determine how these outcomes are achieved, taking account of the nature, scale and complexity of each arrangement, but must be able to demonstrate that their approach is effective.

Continuous oversight and monitoring

Managing agents must maintain a programme of ongoing oversight that enables them to proactively assess whether contracts of delegation of underwriting authority remain effective and continue to operate within agreed parameters and risk appetite.

Monitoring should be proportionate to the nature, scale and complexity of the arrangement and should include the use of management information, performance indicators and other relevant measures to identify emerging risks, deteriorating performance and non-compliance.

The board, or an appropriately delegated governing body, should receive regular reporting that enables it to assess the effectiveness of delegated underwriting authority oversight and understand material risks arising from the portfolio.

Escalation and resolution of issues

Issues identified through oversight and monitoring activities should be recorded and reviewed in a timely manner to ensure that emerging risks, recurring weaknesses and material concerns are appropriately addressed.

Managing agents must ensure that:

• Material issues must be escalated to a level of authority capable of assessing the risk, determining the required intervention and ensuring that timely action is taken.
• Serious or repeated failures are addressed promptly through action proportionate to the risks presented and sufficient to prevent further harm, restore effective operation and reduce the likelihood of recurrence.
• Decisions, actions and outcomes relating to identified issues are appropriately documented.
• Remediation activities are monitored until there is sufficient evidence that the issue has been resolved, the relevant controls are operating effectively, and any continuing risk is within the managing agent’s risk appetite.

Additionally, managing agents should refer to the Third-Party Material Issues guidance to determine whether any flagged issues require notification to Lloyd’s.

Registration of contracts of delegation

All binding authority agreements, coverholder appointment agreements and service company agreements must be registered on Lloyd’s systems prior to inception.

Lead managing agents must ensure that all applicable contracts are:

• Fully registered before inception
• Contain correct and complete information
• Kept up to date throughout the life of the agreement
• Where the contract is non-Lloyd's led, the Lloyd’s lead will need to ensure it is registered.

Unless Lloyd’s has issued dispensation to say otherwise, managing agents, whether lead or follow, are responsible for ensuring their capacity is correctly registered on Lloyd’s systems. 

Whilst it is appreciated that there may be valid reasons why the contract cannot be registered prior to inception, in the absence of Lloyd’s dispensation, the managing agent should manage the message to the coverholder that they must not act on the authority granted until the contract has been successfully registered.

Lloyd’s expectations for managing agents

Oversight arrangements and record keeping

Managing agents must establish and maintain oversight arrangements, systems, records and management information that are sufficient to enable effective oversight of contracts of delegation of underwriting authority and the risks arising from them.

Examples of evidence may include:

• Written procedures
• Monitoring plans
• Management information
• Contract registers
• Credit control processes
• Oversight reporting

Records should provide reliable and accessible evidence that material decisions are informed, contractual obligations are understood, oversight is operating effectively and Lloyd’s requirements are being met.

The managing agent should ensure that information necessary for effective oversight is shared with relevant parties in a timely manner, taking account of the nature of the arrangement, the risks presented and each party’s responsibilities.

Monitoring and management of information

Managing agents should maintain monitoring arrangements that provide timely, reliable and meaningful information regarding the performance and operation of contracts of delegation of underwriting authority.

The nature and intensity of monitoring should reflect the risks presented by the arrangement and should be adjusted where changes in risk, performance or control effectiveness indicate that a different level or form of oversight is required.

Management information and performance indicators should be designed to enable a proactive review and provide assurance regarding matters including:

• Operational performance and service delivery
• Underwriting performance, profitability and sustainability
• Compliance with contractual, regulatory and Lloyd's requirements
• Quality assurance, control effectiveness and remediation activities
• Financial management, credit control and solvency considerations
• Data quality, reporting integrity and operational resilience
• Conduct and customer outcomes

Managing agents should be able to demonstrate that monitoring outputs are reviewed, challenged where appropriate and used to inform oversight activities and decision making.

Extended duration arrangements

Where contracts of delegation of underwriting authority that provide for a fixed period of delegation of authority are extended to remain in force beyond their original intended duration, [AB9.1][PC9.2]managing agents should consider whether the continued operation of the arrangement remains appropriate.

In doing so, managing agents should assess:

• The impact on underwriting strategy and business plans
• Any implications for year of account management or referral requirements
• Whether governance approvals remain appropriate
• The effectiveness of ongoing oversight arrangements
• Whether an alternative contractual structure would provide greater certainty, transparency or operational efficiency

The managing agent should be able to demonstrate that any decision to extend an arrangement is supported by evidence that the arrangement remains suitable, that material risks are understood and managed, and that the decision has been appropriately reviewed, challenged and approved.

Business continuity and run off planning

Managing agents should ensure the business is handled appropriately when exiting the contract of delegated underwriting authority. There should be a run-off plan in place to ensure each party involved is aware of what their expectations are covering the entire customer journey. 

If the third-party is unable or unsuitable to manage run-off (often due to financial deterioration), the lead managing agent, in collaboration with the follow market and broker, must transfer run-off responsibilities to another competent party.

When making the decision to transfer the run-off to another party, managing agents must satisfy themselves that:

• Relevant records, data and documentation remain complete, accurate, secure and accessible to the receiving party so that oversight, policyholder service and claims handling can continue without material disruption.
• A suitably experienced receiving party is appointed with the necessary capability, expertise and authority.
• Policyholder service and claims handling continue without material disruption, avoid unreasonable delay and remain subject to effective oversight throughout the transition.
• Customer outcomes and the reputation of both the managing agent and Lloyd’s is safeguarded
• Relevant Lloyd’s country managers or local regulators are properly informed
• Policyholders are notified of any transfer in services