Lloyd's: Law and Practice

Julian Burling

• Publisher: Informa Law from Routledge
• Year: 2013
• ISBN:
  9781134501502
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto finanziario

The unique features of the Lloyd's Corporation and Market and their governing rules are complex and are often difficult to navigate even for the most seasoned practitioner. This book provides the reader with a definitive and detailed guide, and is essential for any practitioner dealing with Lloyd's Insurance.

After a brief historical account, the book provides a thorough legal description and analysis of Lloyd's, which includes topics ranging from the constitution and membership requirements of Lloyd's, UK and overseas regulation, the processes for placing and underwriting business and handling claims, chain of security, enforcement and disciplinary matters, compensation and the reconstruction and the renewal of the Lloyd's market between 1990 and 1996.

The book will be an invaluable reference tool for insurance practitioners and professionals dealing with Lloyd's.

Julian Burling is a barrister at Serle Court, and has been involved in advising on and implementing nearly all significant legal developments at Lloyd's in the last 25 years.

1. AN OVERVIEW OF THE CURRENT LLOYD'S MARKET

LLOYD'S

1.1 In general parlance, “Lloyd's” is an insurance market in Lime Street, London, where specialist brokers place risks with specialist underwriters acting on behalf of underwriting syndicates. The Lloyd's market has a history dating back to the late seventeenth century. Strictly speaking, however, “Lloyd's” is a statutory corporation, incorporated by a private Act of Parliament in 1871 by the name of Lloyd's.¹ Its main statutory objects are the carrying of insurance business by its members on their own account and the advancement and protection of those members in connection with the insurance business carried on by them.² Lloyd's does not itself carry on insurance business, nor is it authorised to do so, but it provides, and, through its governing body the Council of Lloyd's,³ regulates,⁴ a marketplace where its members each carry on insurance business on their own account. Lloyd's, i.e. the statutory corporation, is sometimes also referred to as “the Society [of Lloyd's]”⁵ or “the Corporation [of Lloyd's]”. Lloyd's Acts 1871 to 1982 themselves refer to members underwriting insurance business “at Lloyd's” as if it were a physical location or marketplace. Colloquially the expression “Lloyd's” is often also used to describe the market, or an aggregation of some or all of the members of Lloyd's.

MEMBERS OF LLOYD'S

1.2 It is the “underwriting members” of Lloyd's who are the insurers and carry the underwriting risk.⁶ Underwriting members may be individuals, i.e. natural persons (“Names”), or bodies corporate (including UK limited liability partnerships) or Scottish limited partnerships. Some corporate members are subsidiaries of listed companies, within internationally significant insurance and reinsurance groups. Although no new individual underwriting members have been admitted since 2003, some hundreds of individual members are still underwriting, as sole traders with unlimited liability. Many others have transferred their entire underwriting businesses to small companies, limited liability partnerships or Scottish limited partnerships, and such corporate or quasi-corporate entities are seen as appropriate vehicles for small-scale participation in the Lloyd's market. At the beginning of 2012 there were 2,305 corporate members, of which 1,576 were underwriting business on the 2012 year of account, and 1,821 individual members, of whom 585 were still underwriting.⁷ Corporate members represented 97 per cent of the underwriting capacity of the Lloyd's market for the 2011 year of account.⁸ Corporate members are prohibited by Lloyd's from carrying on any other activity than their underwriting insurance business at Lloyd's and activities directly ancillary thereto.⁹

1.3 Members of Lloyd's may be parties to insurance contracts only with several liability, each for their own part and not for one another, with the liability of each underwriting member accepted for their own account.¹⁰

SYNDICATES¹¹

1.4 Members of Lloyd's may accept insurance business only through a professional (corporate) underwriting agent.¹² For practical reasons, members of Lloyd's accept insurance business grouped as members of a syndicate¹³ managed by managing agent,¹⁴ which employs professional underwriting and other staff for that purpose. The managing agent is responsible for the determination of the underwriting policy and strategy of any syndicate it manages, determination of the syndicate's reinsurance programme, management of the syndicate's investments, maintenance of accounting records and calculation and estimation of reserves. Managing agents are required to have permission to manage a syndicate both from the Council of Lloyd's¹⁵ under Lloyd's Act 1982 and from the Prudential Regulation Authority (PRA) under the Financial Services and Markets Act 2000 (FSMA) Part 4A. The syndicate members enter into a standard form managing agent's agreement (prescribed by Lloyd's byelaws¹⁶) with the managing agent. They are required to delegate thereby absolute discretion to the managing agent as to what risks are to be written on their behalf and all other aspects of the management of the syndicate's business.¹⁷ Members may (and individual members must) participate in a syndicate through arrangements made by a members' agent, responsible for advising members on which syndicates to participate in and on the level of participation in such syndicates and for liaising with managing agents: see Chapter 9, Members' agents, below.

1.5 A managing agent is required to appoint an active underwriter for each syndicate managed by it.¹⁸ The active underwriter is “the individual at or deemed by the Council to be at, the underwriting box with principal authority to accept risks on behalf of the members of the syndicate”.¹⁹

1.6 Some syndicates may have a single corporate member but most have multiple members, sometimes over a thousand. Of the 92 syndicates underwriting in the Lloyd's market at the beginning of 2012, 46 could be described as “fully aligned”, i.e. they were syndicates all of whose (corporate) members are under common control with the managing agent.²⁰ Because members may underwrite only with several liability, when the managing agent underwrites insurance contracts, or places outwards reinsurance, on behalf of the syndicate it does so on behalf of each member severally, in shares determined by the syndicate constitution, or “stamp”, for the year. The slip subscribed by a syndicate is aptly described as “a bundle of contracts between the assured and a large number of individual underwriters”.²¹ A syndicate has no legal personality and is not a partnership: it is merely the administrative arrangement through which its members underwrite insurance risk. It is an annual venture in which the members participate for a calendar year at a time. Traditionally the accounts for each such “year of account” are closed after three years by “reinsurance to close” (RITC) of all outstanding liabilities placed with members of the same or another syndicate constituted for a later year of account,²² the reinsurers to close (through their managing agent) running off the reinsured business on behalf of the members for the closed year of account. But this annual venture aspect is less significant where, as increasingly often, a syndicate has a single, corporate, member identical from one year to the next, and a reserve is simply carried from year to year.

1.7 Members of a syndicate are entitled, but not obliged, under the standard managing agent's agreement to participate in that syndicate for the following year. In practice there is substantial continuity of membership from year to year but members wishing to relinquish or reduce their participation can obtain value for surrendering it in an annual auction process,²³ thereby enabling other members to gain access to the syndicate.

1.8 Individual syndicates in the Lloyd's market compete against each other but also co-subscribe larger risks, each syndicate taking a specified percentage or “line” of the risk.²⁴ Members may participate in more than one syndicate and were traditionally encouraged to do so to spread their risk. In recent years syndicates have consolidated, becoming fewer in number but with larger underwriting capacity, and transforming from single line to multiline businesses.

BROKER MARKET

1.9 An important feature of the Lloyd's market is that business generally (but with certain exceptions) comes to syndicates through professional insurance intermediaries: either “open market business”, transacted with managing agents of syndicates in the Underwriting Room at Lloyd's premises in London (or at the managing agent's office) by Lloyd's brokers or other intermediaries acting on behalf of the proposer/policyholder, or “coverholder” business underwritten on behalf of the syndicate members pursuant to a “binding authority” agreement.

1.10 Lloyd's brokers are intermediaries that meet certain commercial and regulatory standards and are accredited by Lloyd's to broke their clients' insurance business at Lloyd's.²⁵ The statutory monopoly of Lloyd's brokers on placing business at Lloyd's was ended by the Legislative Reform (Lloyd's) Order 2008 (SI 2008/3001), which repealed s. 8(3) of Lloyd's Act 1982. Other intermediaries placing business directly with managing agents of syndicates at Lloyd's on behalf of their clients have to meet equivalent standards.²⁶ Lloyd's brokers and such other intermediaries are discussed in Chapter 10.

1.11 Before accepting business from a particular Lloyd's broker a managing agent must, on its own behalf and on behalf of the syndicate members, enter into a terms of business agreement (TOBA) with that Lloyd's broker, setting out the basis on which it will accept business from the broker, including maximum payment periods for premiums and claims...