market bulletin

Ref: Y4931

Title

Binding Authority Agreements – Multi-Year Contracts

PurposeTo notify changes to Lloyd’s requirements to allow multi-year binding authority
agreements of up to 36 months

Type

Event

From

Peter Montanaro, Head of Delegated Authorities
Performance Management Directorate

Date

15 October 2015

Deadline

Immediate

Related links

www.lloyds.com/coverholders

Lloyd’s is announcing that with effect from the 2016 year of account, managing agents may
enter into binding authority agreements of up to 36 months (‘multi-year binding authorities’).
Presently, managing agents may only enter into binding authority agreements of up to
18 months and in most cases binding authorities are annual.
This bulletin explains the process managing agents must follow where they wish to enter
into multi-year binding authorities. As Lloyd’s syndicates are annual ventures, thesearrangements are to ensure that business is allocated correctly across different years ofaccount.
•

New model wordings have been produced for multi-year binding authorities.
These must be used and contain the necessary provisions to allow for thetransfer of binding authorities between different years of account.

•

Managing agents will be required to confirm annually, on the formation of the
new syndicate years of account, that their syndicates agree to the transfer of themulti-year binding authorities.

The new arrangements are intended to support long term relationships with coverholders
and to make it easier to do business at Lloyd’s. The new arrangements ensure that no
additional burden is placed on coverholders or their brokers.

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Lloyd’s is authorised under the Financial Services and Markets Act 2000

MARKET BULLETIN

Appendix 1 provides a simple outline of the process for writing multi-year binding authorities
and should be read in conjunction with the LMA guidance note LMA015-055-AG.
Supporting long term relationships
Coverholders are a valued and important part of the Lloyd’s market. Feedback fromcoverholders has emphasised the value coverholders place on long-term relationships withmanaging agents.
To support the writing of coverholder business at Lloyd’s, Lloyd’s has therefore changed its
requirements to allow managing agents to enter into binding authorities of up to 36 months.
While multi-year arrangements may not be appropriate in every case (and they presently
remain out of scope for certain arrangements – see below) where used they will allow forsignificantly longer term deals. As they will only need to be renewed every three years thisshould also reduce the level of administration required. This change has been discussedwith the LMA, LIIBA and the AAMGA.
Changes to Lloyd’s Requirements
To date, Lloyd’s has required that all binding authority agreements should be no longer than
18 months from the date of inception. This is provided for by paragraph 10(e) of theRequirements made pursuant to the Intermediaries Byelaw.
To allow for multi-year binding authorities, the Requirements made pursuant to theIntermediaries Byelaw have been amended so that the period of binding authorities may
now be up to 36 months.
36 months is intended to operate as an upper limit for the use of multi-year binding
authorities and cannot be further extended. It is still possible to have multi-year binding
authorities for shorter periods of, say, 24 months and in many cases this will be appropriate.
(Note that where the proposed period is between 12 and 18 months then a multi-yearbinding authority may still be appropriate but in this case managing agents continue to havethe option of following the process for annual binding authorities – see further below.)
Lloyd’s is presently limiting multi-year binding authorities to a maximum of 36 months as
Lloyd’s believes that all binding authorities should be revisited at least once every three
years to ensure that the terms remain appropriate.
New arrangements for multi-year binding authorities
Where syndicates write multi-year binding authorities, it is important that the business isproperly allocated across the different syndicate years of account. However, as a matter ofcontract law, since Lloyd’s syndicates operate as annual ventures, all business written
under a binding authority must be allocated to the year of account of the syndicate thatentered into the binding authority agreement. There is no automatic right to allocate risks
bound under a multi-year binding authority to following years of account unless appropriate
steps are taken to provide for this.

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MARKET BULLETIN

To address this Lloyd’s has, with the assistance of Leading Counsel, developed thefollowing arrangements for the annual transfer of multi-year binding authorities. Managing
agents must decide whether it is appropriate to enter into any multi-year binding authority.
If the managing agent does wish to enter into a multi-year binding authority it must ensurethat they comply with these arrangements.
•

New multi-year versions of LMA3113, LMA3114 and LMA3115 have been
prepared: LMA3113M, LMA3114M and LMA3115M. In particular, a clause has
been included which provides for the agreement by coverholders to the annualtransfer of the binding authority to the next year of account of the subscribing
syndicates. This clause is numbered/referenced as 37A and under nocircumstance should that clause be amended. These model wordings must be
used for multi-year binding authorities unless agreement has been obtained from
Lloyd’s. A version of LMA3113M showing the changes from LMA3113 can befound at www.lloyds.com/coverholders;•

As the multi-year binding authorities will usually be concluded at a time when thefollowing syndicate year of account has not yet been formed, Leading Counsel has
advised that, once formed, the new years of account must confirm their agreement
to the transfer to them of the multi-year binding authorities. Lloyd’s will therefore
operate a simple annual procedure to confirm the election by the new syndicate
years of account, once formed. In November or December each year, Lloyd’s will
send to managing agents a form requesting the appropriate confirmation. Notethat the transfer of the individual binding authorities to the new year of account will
only take place at the anniversary of the inception dates of each binding authority;•

On the transfer of the multi-year binding authority to the following year of accountat the anniversary of the binding authority inception date, managing agents will be
expected to confirm the transfer to the coverholder by way of a new endorsement
wording prepared for this purpose (LMA5237). This endorsement also includes
details of the syndicates’ new reference numbers and is therefore important toallow for the proper allocation of risks, premium and claims to the new year ofaccount. Failure to provide this endorsement will, however, not invalidate thetransfer but will represent a breach of Lloyd’s requirements.

The new transfer arrangements do not require any action by the coverholder or broker otherthan agreement to use the new multi-year model wordings and the assistance of the broker,
where appropriate, to facilitate the endorsement confirming transfer and any premium
processing required. In all other respects, multi-year binding authorities can be placed in
the same way as annual binding authorities are currently placed at Lloyd’s.
The required model wordings have been agreed with the LMA, which has issued thewordings under LMA015-055-AG. LMA015-055-AG also provides an LMA guidance note
which sets out additional practical details, agreed with Lloyd’s, on the use of the new model
wordings.

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MARKET BULLETIN- Compliance with the arrangements for multi-year binding authorities
Note that failure to implement suitable arrangements for the transfer of binding authorities
between different years of account may mean that all business written under the binding
authority has to be allocated to the original year of account. Accordingly, Lloyd’s requiresthat all binding authorities which are more than 18 months must follow the arrangements set
out above. Where managing agents fail to follow the processes provided for then Lloyd’s
may prevent the syndicates in question from entering into multi-year binding authorities.
Binding authorities with periods of 12 months to 18 months can either:•

continue to be entered into using the current process for annual contracts. In thatcase, all the business must be allocated to the syndicate year of account thatenters into the binding authority; or•

syndicates may elect to follow the process for multi-year binding authority
arrangement outlined in this bulletin, in which case the business bound on or after
the anniversary of the inception date must be allocated to the following year ofaccount of the participating syndicates.

Arrangements for processing multi-year binding authorities
In entering into multi-year binding authorities managing agents and brokers are asked tonote that certain processing changes are required to support the arrangement. Appendix 1
gives a one page summary of these changes and Appendix 2 sets out in more detail thetechnical processing requirements.
Carrying out compliance and due diligence
Lloyd’s expectations for managing agent compliance and due diligence in respect of binding
authority business are set out in the Minimum Standards for Delegated Authorities and
Lloyd’s Code of Practice – Delegated Underwriting. Many managing agents address theannual elements of this compliance and due diligence at the time of renewal of their annual
binding authorities. Lloyd’s believes that best practice is achieved where compliance anddue diligence is continuous and addressed throughout the year to avoid unduly
concentrating the process at renewal. Addressing matters at renewal only can lead todelays and increases the burden on coverholders.
With multi-year binding authorities, as renewal will now only occur up to once every 36
months, it is all the more important that managing agents ensure they have suitable due
diligence and compliance processes in place that are not tied to the renewal of the binding
authority.
Lloyd’s will be monitoring managing agents’ approach to due diligence and compliance inrelation to multi-year binding authorities to ensure they meet the standards set in the
Minimum Standards.

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MARKET BULLETIN

Scope
The new arrangements for multi-year binding authorities may be used for all binding
authorities with the following exceptions for which multi-year binding authorities presently
remain out of scope due to the technical processing complexities that would be involved:•

Binding authorities where the coverholder has authority to bind risks with periods
greater than 18 months•

Master binding authority arrangements

Implementation
The arrangements for multi-year binding authorities can be adopted by managing agentswith effect from the 2016 year of account. Existing binding authorities should be allowed to
run to expiry before adopting the new multi-year arrangements at renewal. The multi-year
wording must not be endorsed to existing binding authorities.
Managing agents that wish to enter into multi-year binding authorities must ensure they
comply with this bulletin and have regard to the guidance note issued by the LMA with
LMA015-055-AG.
Further Information
Lloyd’s will be holding a Town Hall meeting in the Lloyd’s Building on the 11th Floor on 4
November 2015 at 3pm where details of the multi-year binding authority arrangements will
be presented. This will include a Q&A session. Invitations to register for the event will besent on Wednesday 21 October. Please note spaces will be extremely limited.
If you have any questions on the new arrangements or any aspect of this bulletin you areinvited to contact coverholders@lloyds.com.

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MARKET BULLETIN

Appendix 1
Summary of process for writing multi-year binding authorities••

Enter into appropriate multi-year binding authority agreement using model wordings:
LMA3113M, LMA3114M or LMA3115M
oPeriod can be up to 36 months.

oEnsure Gross Premium Income Limit (Section 12.1) and Maximum Total
Aggregate Limit (Section 23.2.3) are annual figures. Should the parties wish tochange these following the first annual period or at any time, this can be done byagreement between the parties following current market practice.

o

New model wording includes Section 37A which includes Coverholder
agreement to transfer of binding authority to following years of account ofparticipating syndicates.

In November/December each year Lloyd’s will issue a letter asking each managing
agent to confirm on behalf of the syndicates they manage, that the new years ofaccounts elect to accept the transfer of the of multi-year binding authorities entered intoby that syndicate in the previous year of account.
oEach managing agents signs and returns the letter to Lloyd’s.

•

The transfer of all multi-year binding authorities written by the syndicates to the newyear of account takes place automatically at the anniversary date of the inception ofeach multi-year binding authority•

An endorsement is issued by the broker, where appropriate, and signed by theunderwriters, for information purposes only, noting the change of syndicate year ofaccount and each syndicate’s new references. The new references will allow for theproper allocation of risks, premium and claims.

•

With effect from the anniversary date, all business (including premium and claims
relating to (re)insurances bound) is legally allocated to the new year of account. All
business written in the prior year continues to be allocated to the outgoing year and theoutgoing year can continue to enforce the binding authority for the business written byit. Managing agents must make sure that the risks, claims and premium are allprocessed appropriately to reflect this – in particular, it is important that managing
agents take steps to ensure that bordereaux identify the year of account to which they
relate.

•For multi-year contracts with periods of more than 24 months, the process is repeated
for the transfer at the second anniversary of the date of inception.

•

Any mid-term changes (including to the participating syndicates or their participations)are addressed in accordance with usual market practice (by endorsement).
Syndicates wishing to cease their participation on the binding authority mid-term cangive notice in accordance with the terms of the binding authority.

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MARKET BULLETIN

Appendix 2
Arrangements for technical processing of multi-year binding authorities via
Xchanging
Who

When

What

Broker/managing Prior toagent
inception•

Places binding authority contact with 3 year periodusing model wordings for multi-year

Managing agent
either directly or
via broker•

Registers draft binding authority contract for 3 years
on BARS
Obtains coverholder agreement to appropriate multiyear model wording
Registers fully the binding authority contract for 3
years on BARS
Submits to Xchanging on the IMR with LPAN(s) for
year 1

Prior toinception•••

Xchanging

As and
when

•
•
•

•
Broker/managing As provided
agent
for

•
•

Xchanging

As and
when

•
•
•
•

Lloyd’s/
Managing agent

November/
December••

Checks binding authority for use of multi-year wording
and completion
Allocates FDO SNAD(s) using year 1 references
agreed in MRC signed into year 1 year of accountGenerates Underwriters Signing Message (USM) to
managing agents including period, year 1 year ofaccount, and year 1 references.
Issues signed and sealed binding authority if required
Submits premium and claims bordereaux. Format toinclude the year of account to which they relateEnters year 1 FDO SNAD(s) on LPAN(s) and LCCF or
into ECF
Checks bordereaux ensuring that risks are within
territorial scope etc.
Checks for year of account allocation
Signs premium, returns and claims to year 1 FDO
SNADGenerates USM or Claims Signing Message (SCM) to
managing agents based on year 1 FDO SNAD.
Lloyd’s issues form to all managing agents to besigned confirming agreement by new syndicate yearsof account to transfer of multi-year binding authority.
Managing agent signs on behalf of each syndicate inrespect of all multi-year binding authorities.

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MARKET BULLETINManaging agent
either directly or
via broker

Prior to firstanniversary••

Completes endorsement confirming transfer ofbinding authority to new year of account. Includes
new syndicate references.
Asks broker to make any necessary changes to BARS
under existing BARS number and date and checks
this has been completed.

Broker/managing Prior to first
agent
anniversary••

Submits to Xchanging under existing UMR on the IMR
Submission includes endorsement confirming transfer
to new year of account and new syndicate references,
LPAN(s) for year 2

Xchanging•

Checks binding authority, including any endorsementof changes, to ensure that any changes in Lloyd’s
regulatory or overseas legislative requirements havebeen endorsed.
Checks endorsement confirming transfer to new yearof account and new syndicate reference numbers checks the syndicate numbers are the same as theoutgoing syndicates.
Checks BARS has been updated where necessary
Allocates new FDO SNAD(s) using year 2 references,
signed into year 2 year of accountGenerates USM to managing agents including period,
year 2 year of account, and year 2 references.
Issues signed and sealed binding authority
endorsement if a signed and sealed binding authority
was required

As and
when

•

•
•
•
•

Broker/managing As provided
agent
for

•
•
•

Xchanging

As and
when

•
•
•

•

Submits premium and claims bordereaux. Format toinclude the year of account to which they relate.
Provides separate bordereaux for each year ofaccount
Enters year 1 and/or year 2 FDO SNAD(s) on
LPAN(s) and LCCF or into ECF as applicable
Checks bordereaux ensuring that risks are within
territorial scope and correct year of account.
Checks that year of account on bordereaux matches
the FDO SNAD provided for on the LPAN(s) etc.
Signs premium, returns and claims to year 1 and/or
year 2 FDO SNAD as provided for within thebordereaux and LPAN(s) etc.
Generates USM or SCM to managing agents basedon the appropriate year 1 and/or year 2 FDO SNAD.

The above process is repeated as appropriate for the transfer to year three.

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