Improving the bottom line through binding authorities
Coverholders and binding authorities are an ever more important part of the Lloyd’s and London market, but they can also be a huge benefit to brokers, as Martin Hughes, divisional director, non marine division, at LONMAR explains.
From Durham to Dubai, Lloyd’s is keen to further its access to the binding authority business via coverholders and they view the United Kingdom as a key area for that growth.
Currently, 30% of Lloyd’s business globally is accessed via coverholders. Of that figure, around 27% of UK business comes from coverholders, 40% of North America's and 45% of Australia's.
There are 3,900 coverholders globally, 1,600 of which are in UK. Despite being viewed as a mature market, this is still seen as an area of growth, which Lloyd’s is actively supporting via initiatives such as “meet the market” events, attended by brokers and capacity providers.
From Lloyd’s point of view, coverholders enable syndicates to underwrite locally without the need for expensive local infrastructure, which makes the whole proposition very appealing and is why it has become such an important part of the market.
The Lloyd’s syndicates, who are the ultimate capacity providers, rely on specialist brokers who have considerable expertise in particular niche products and can manage the process and develop new products in partnership with their specialist underwriters.
The benefits of becoming a coverholder are clear and they can provide solutions for regional brokers that can streamline processes and reduce costs.
As a coverholder, you have access to the entire Lloyd’s market and its financial security, coupled with its reputation for never having failed to pay a valid claim.
On a more practical level, the coverholder can find a home for its risks without the need for building complex and time-consuming consortiums across the wider market.
For example, a binding authority with delegated underwriting authority means that the coverholder can bring books of business that are spread across say 20 insurers into a single facility.
The coverholder is then able to reduce costs, issue their own bespoke policies with wider cover, increase earnings and have greatly improved management information, which was not possible before with so many relationships to manage.
Furthermore, the ability to issue their own policy wordings enables coverholders to improve customer service, and they also benefit from the London market's electronic claims settlement.
For regional brokers with a smaller account, it provides the opportunity to access markets they could not do otherwise, as some larger insurers look for minimum premium volumes to give a broker an agency.
What is more, the model is a proven one and a successful way of accessing the capacity and expertise within Lloyd’s. In today’s challenging market, this can be a potent weapon in a broker’s business strategy.
However, while the benefits are self-evident for the underwriter and broker alike, the process is far from simple given that Lloyd’s is hugely protective of its brand and reputation. While underwriters are happy to delegate their authority, they expect the highest standards from those who operate in their name.
The set-up and running of such facilities is not entirely straightforward to the uninitiated and firms wanting to enter this world, to improve their bottom-line, will have much to think about, from putting the right strategy in place to business planning and portfolio analysis.
Finding suitable rated insurers will also be vital to success, as more sophisticated customers will want to know that
high-quality security is in place should the worst occur and a major claim is reported.
There are also issues to overcome in today’s heavily regulated environment and, if Lloyd’s is the chosen market, there are processes specifically related to the provision of a delegated binding authority and Lloyd’s coverholder status.
This may be starting to sound like hard work, but with the right approach, firms can overcome all these issues as well as benefit from enhanced commission structures, including profit-based incentives which, in today’s tough trading environment, is an attractive proposition, whether a firm has an existing binding authority in place or not.
It is a real benefit if brokers already have an existing binding authority. We are currently in a very competitive market with insurers keen to attract new business. This brings excellent opportunities to explore options and gain better terms with wider coverage for customers, enabling firms to compete more effectively, to win new business and enhance customer retention.
Where companies already have a portfolio of homogenous business, or want to build one, particularly if it has high-volume low-premium risks, they are perfectly placed to set up a binding authority, to support their business development, including the development and offering of new specialist insurance products.
To maximise their opportunities to grow their business and enhance their profitability, firms will ideally need to work with a Lloyd’s broker or approved service company with specialist binding authority expertise, who will guide the regional brokers in the process and assist them in exploring their options.
In summary, binding authorities with delegated underwriting can not only increase ambitious coverholders’ earnings they can also reduce costs through enhanced operation efficiencies, as well as improving customer service and retention to improve the bottom-line.