Oversight changes for Lloyd’s managing agents in Canada

Since 2004, Lloyd’s has operated under a series of standards, which have evolved in depth and complexity over time to the point that there were more than 750 requirements for syndicates and MGAs to meet in 2021. The oversight process was cumbersome, with Lloyd’s requesting an attestation from syndicates and MGAs against those requirements every year.

The new principles-based approach to oversight has been developed with input from multiple stakeholders, including the Lloyd’s Market Association (LMA). It is intended to create a more efficient and joined-up approach to provide the conditions for the best businesses to thrive and drive decisive interventions for underperforming businesses.

“We’re not creating more work for anyone, but neither are we lowering the bar on oversight,” stressed Peter Montanaro, head of market oversight & delivery at Lloyd’s. “We are introducing a model that is more flexible to the risks and requirements of managing agents’ businesses, focusing on what is material, and defining what the outcome should be, rather than being prescriptive in how to reach those outcomes. That creates more freedom for managing agents to build an optimum oversight framework for their business.”

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The new oversight framework is based on a suite of 13 principles, which articulate the fundamental responsibilities expected of all managing agents in order to support the market’s overall performance, capital strength, financial and reputational credibility. The principles are outcomes-based and allow for more differentiation according to syndicate materiality.

The 13 principles revolve around performance (underwriting profitability, catastrophe exposure, outwards reinsurance, claims management, customer outcomes, reserving), solvency (capital, investment, liquidity), and operational responsibilities (governance risk management and reporting, regulatory and financial crime, operational resilience, and culture).

“Our expectations around controls and competencies in place for each business will be governed by the materiality of each particular aspect to your business and to Lloyd’s,” explained Montanaro. “We will assess businesses against those expectations and categorize them [the managing agents] accordingly. There are five categories ranging from unacceptable through to outperforming. Categorization of the syndicate will then drive interventions to remediate challenges for poorly performing syndicates, and for good performing syndicates, it will drive Lloyd’s support on development initiatives together with a reduction in our oversight activity.

“Our assessments of syndicates will be driven by both quantitative and qualitative data, and will be completely open and transparent to the syndicate. Our new framework will help us to ensure that we are consistent in our approach to categorizations and interventions. And I should point out that the categorization for a syndicate will not be shared with anyone other than the relevant managing agent and the regulator.”

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In an effort to roll this innovative oversight framework out successfully, Lloyd’s is conducting a “soft launch” through the first half of 2022. As part of the soft launch, MGAs are not required to submit the usual minimum standard attestation in 2022. However, Lloyd’s is requesting that companies provide a “best efforts” self-assessment against the new principles by the end of April 2022.

The oversight letters sent to syndicates and MGAs in December 2021 listed the 13 principles and summarized each business’s materiality against those principles. Lloyd’s also shared expectations in terms of controls for those materiality levels with some further guidance.

“Now, we may not agree on everything, but it’s important that everyone can understand the logic behind the assessments that Lloyd’s makes,” said Montanaro. “The categorization will then drive the level of oversight we will give through the planning process. There will be opportunities to appeal against our assessments, although I expect and hope that there will be no surprises. A good business under the minimum standards regime is likely to still be a good business under the new principles-based regime, and similar for businesses with challenges.

“We do ask that boards carry out a self-assessment against the principles at the end of the first quarter 2022 in order to help to get used to the new principle-based approach and our expectations. But the first time that we’ll ask a board to attest against the principles will be in March 2023. We want to engage as closely as we can with all managing agents to ensure that the transition is as painless as possible, and that everyone benefits from the new oversight regime.”