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Modernised syndication at Lloyd’s: how might it all work?

20 Dec 2019

By Sheila Cameron, Chief Executive, Lloyd’s Market Association

Released in September, the Future at Lloyd’s Blueprint One outlined proposals to modernise the way risk is syndicated within the market. The goals are clear: modernised syndication seeks to deliver best-in-class underwriting, by raising underwriting and claims standards for leaders. A secondary objective is to make following simpler and reduce market operating cost by removing duplicated effort, therefore providing a more efficient service at a reduced cost to customers.

In late 2018, Lloyd’s’ Chairman Bruce Carnegie-Brown spoke about how insurance is a non-correlated asset class with the bond and equity markets, and how non-traditional capital has already figured out how to leverage lead underwriters’ intellectual property through the ILS market. He stated that the market should create a new lead follow model that could create an alternative revenue stream for insurers through the fees associated with leading such a model, and that such revenue could then be recycled into innovation activities. This formed the foundation for modernised syndication in Blueprint One.

So how might a new lead follow model work in practice and how will it seek to raise standards? Leaders’ standards will focus primarily on the expertise and knowledge required to demonstrate best practice within underwriting, claims and compliance. Follower standards will be fewer in number and will focus on portfolio management; a skillset that both leaders and followers will be expected to evidence. Managing agents will choose, by class of business, which set of standards they wish to follow, self-attest at board level that they meet the chosen standards, and therefore define themselves as leaders or followers in each class of business they underwrite. Those who lead in a class can also choose to follow in that class. The Lloyd’s Market Association, together with Lloyd’s, is currently working on the definition of what those standards will look like. Leader standards will, in many cases, reflect the activities already undertaken by successful managing agents and each managing agency will make its own choices for the syndicates it operates.

Lloyd’s oversight will take place as part of both the business planning process and the standards attestation, just as it does today. Lloyd’s will use a range of inputs to assess leaders’ and followers’ ability to meet the required standards and will review the syndicate’s own self-assessment. As part of the business planning process, managing agents will submit business plans that clearly identify their strategy and appetite for writing business as leader and follower. Lloyd’s will approve or decline these plans in the same way Lloyd’s does today. It is important to note that the level of Lloyd’s oversight on leaders and followers will be proportionate to the risk they present, with greater oversight of leaders compared to followers.

But nothing will change overnight. A detailed design of leader and follower standards has begun, and a pilot will be run during 2020 to test the process and implement changes based on lessons learned. It is proposed that the 2021 planning process will include modernised syndication for the pilot class, which will go live in January 2021. The 2022 planning process may well include modernised syndication choices in some additional classes and / or methods of placement. The end state process will only become completely live once the Lloyd’s risk exchange and complex risk platforms are ready to use.

Until then, brokers will continue to place business, just as they do today. This will only change once the complex risk platform and risk exchange go online. We envisage followers’ risk appetite will then be contained on the platforms and, once a leader has been agreed, brokers can choose from a pool of followers whose risk appetite matches the risk on the platforms. Followers themselves can monitor such risks through their portfolio management expertise, and should they still wish to review a particular risk, they can always choose to do so.

Strong collaboration between underwriters is an important strength of the Lloyd’s market, as is the role of followers in performing checks and balances on leaders. Leaders will of course also be permitted to act as followers in classes where they have chosen to lead. A new, stronger and easier consortium model will enable smaller businesses to thrive within the Lloyd’s market.

The structure of leaders’ remuneration for other business remains to be worked out but will not come into play until the technology platforms are ready to go. Leaders will bear an as-yet undecided level of liability to followers just as they currently do under the Claims Scheme. Followers can choose to rely on the leader’s underwriting standards and risk data, or they can choose to review the risk themselves in their follow capacity.

Critically, the decision to lead or follow will always remain a choice. Providing the standards are satisfied, any syndicate, regardless of its size, will be able to remain or become an expert leader in its chosen classes, or follow recognised leaders when they choose to do so in either an active or passive manner.

Standards lie unashamedly at the heart of this model; with modernised syndication in place, all insurances underwritten at Lloyd’s will match the very high underwriting and claims standards that the world expects from our marketplace. Along the way, it will create greater choice for managing agents and their capital providers, and a much more efficient market for customers, who will no longer need to pay for the duplication of services by every participant on their risks.