The road best travelled

The accreditation route was introduced in 2001 and, last year, Lloyd's announced changes aimed at easing the way for brokers choosing this path. The new procedures were designed to encourage the quick and efficient processing of applications. They also aim to help provisionally accredited brokers achieve full accreditation.

However, even with the new procedures in place, becoming an accredited broker is no simple task. Newcomers to the concept may not realise, for example, that brokers need to retain the provisional accreditation status for around three years before Lloyd's will review a second application to move to full accreditation.

Lloyd's says the process would begin with an informal discussion to gain a 'feel' for the business and experience to be offered to the franchise. If Lloyd's considers that the broker has made a case to pursue an application, it asks the broker to make a more formal presentation to a pre-application forum, which includes representatives from Lloyd's, the Lloyd's Market Association and Xchanging.

Feedback is offered, usually within two working days. A 'red light' means the forum feels the broker is not ready to progress with a Lloyd's application, while an 'amber light' shows the forum considers the broker will be able to meet the entry requirements but needs to improve certain areas to achieve this. A 'green light' would mean that the forum considers the broker satisfies accreditation application requirements and is invited to submit an application. A spokesperson for Lloyd's adds: "While some areas may need improvement, Lloyd's is happy in principle for the broker to apply immediately."

Giles Insurance was among the first brokers to achieve provisional accreditation under the new procedures. Chief executive Chris Giles says he found no problems with the process and there were certainly no unpleasant surprises. "It was everything they said it would be and was as thorough as I would have expected," he comments.

The Broker Network became fully accredited in December 2005. Chief executive Grant Ellis says that, while three years sounds like a long time to move from the provisional status: "The way the market operates, it is in fact about right."

So why would a broker choose to embark on a journey to become accredited rather than, for example, using a wholesale broker or acquiring an established Lloyd's broker? The spokesperson for Lloyd's points to the ability to deal directly with niche specialist underwriting expertise. The spokesperson also highlights, among other points, access to new market capacity, policyholder security through mutuality and the New Central Fund, as well as expansion and development plans for existing firms.

For some, the disadvantages to acquisition centre on the idea that the broker being acquired may bring its own baggage or legacy issues - for better or for worse. Giles comments: "We felt that starting from scratch was the right way to go," while Ellis observes that: "There isn't a magic formula. Our view was to do it slowly and with no great fanfare. We decided that the slow-burn approach was probably the more appropriate."

John Lincoln, managing director of the Cobra Network, summarises some of the advantages of acquisition: "Acquiring our own Lloyd's broker provided the Cobra Network with immediate and direct access to the full market from an established and well-known wholesale broker (GAL). In addition to the immediate access to the market, the main benefits to the network include working with an existing team of experienced brokers who had strong relationships with all the key underwriters in the core business classes. We are able to take full advantage of these relationships to develop a number of products exclusive to the Cobra Network."

Personnel and, in particular, staff retention, is a significant issue in any acquisition process. However, where Lloyd's is concerned, it can be vital to keep hold of the brokers that have already built long-standing relationships with underwriters. Andrew Holman, chief executive of Holmans Insurance Brokers, explains: "The idea is that, when you buy the Lloyd's broker, you buy the relationships as well as the accreditation." He warns, however, that: "People do have a habit of jumping ship once their operation gets taken over."

In addition to retaining people within the acquired firm, it would also be advantageous for the acquirer itself to have some background in the market. The Cobra Network was able to benefit from the experience of Lincoln, who began his career in Lloyd's. He explains: "My experience of the market does help us trade with underwriters. This knowledge stretches back over 30 years and helped us to identify a partner for the Cobra Network. We have an intimate knowledge of the business processes and the various idiosyncrasies involved in dealing with specialist underwriters. I believe my relationships within Lloyd's will remain and I am able to assist both our members and brokers (within Cobra GAL) when appropriate."

Challenges

There are a number of challenges and hurdles that are common to all routes into Lloyd's - from accreditation to acquisition. The main issue for most new brokers is how to convince Lloyd's underwriters to trade with them. As Ellis warns: "Just because you have a licence does not mean that anybody will actually trade with you." Ellis adds: "In the same way you would approach any business relationship, you have to develop a trusting relationship between you, the broker and the underwriter."

Giles is keen to take on the challenge. He observes: "Clearly, the syndicates have a number of Lloyd's brokers that have supported them for many years with profitable business and they are very much treating us on approval. We are expected to provide a lot of good-quality business before we are taken seriously. It is sometimes something of a 'chicken and egg' situation."

Hard work and a good helping of patience should pay off, however. "It has taken three years, but we now have agencies with some good underwriters. The trust is coming to the fore now, so more and more people are willing to talk and trade with us," explains Ellis.

Another challenge for most newcomers, regardless of how they access Lloyd's, is a certain culture shock. Ellis points in particular to the submission process and to the practice of queuing to talk to underwriters. Holman comments: "It is one of the great strengths of Lloyd's in that business is actually underwritten by a human being and they are willing to take risks."

For those looking to enter Lloyd's this year, Holman also points to the particular challenge of contract certainty. "The London Market is plunging headfirst into the whole contract certainty issue. So, this year is going to be extremely turbulent because it is going to represent a fundamental change in the way business is processed."

Ellis believes that, as new brokers continue to come in from outside, they will invariably bring their own experiences and methods into Lloyd's, although he warns against trying to change hundreds of years of tradition. The Broker Network has made use of technology to make life easier for its members. It has created a quote-tracking system, which means members can log on and view the status of their own quotes at any given time.

Wholesalers

Of course many of the challenges and obstacles represented by the Lloyd's market can be overcome by choosing to access Lloyd's through a wholesaler, which already has the necessary experience and the relevant connections. Giles comments, however: "We are already pushing a reasonable amount of money through Lloyd's and, obviously, you lose out on the income advantages by having to slice the cake with another broker."

Holman points to some of the main advantages of going through a wholesaler. "They have expertise - the in-depth understanding of the market and of particular underwriters within that market." He says that, without tapping into this kind of expertise, brokers will inevitably come up against costs. "There are costs involved in gaining that expertise. And there are costs involved in setting up the systems to be able to cope with London Market placements."

Holman explains that brokers that choose to access Lloyd's through a wholesaler are then free to focus on their core business. "The way we operate is that our brokers do what they are good at, which is dealing with clients, dealing with their problems and being the client-focused end of the chain. And we will do what we are good at, which is dealing with the underwriters and placing the business in Lloyd's."

There is no denying that Lloyd's has been opening its doors to increasing numbers of brokers from across the UK in recent years. However, trading in this market remains a complicated business and those wishing to do so should not expect an easy ride, whichever road they choose to take.

MINIMUM ENTRY REQUIREMENTS

'Hard fact' entry requirements:

- Brokers registered in the UK must be approved by the Financial Services Authority; non-UK-registered brokers must be approved by the relevant regulatory authority.

- Minimum of £50,000 (or currency equivalent) paid up share capital.

- Professional indemnity cover up to a limit of a minimum of four times net retained income.

- PI excess maximum: 25% of the net assets of the firm. Note: There is no difference in these requirements for provisionally or fully accredited brokers.

- Sign-off from Xchanging to confirm the broker is able to meet entry standards for submission/presentation of London Market Principle-compliant slips, premiums, claims and reinsurance transactions.

- The applicant must have at least two letters of support from managing agents, signed by a senior individual, that they will offer a terms-of-business agreement with the applicant once provisionally accredited.

OTHER CONSIDERATIONS:

- Lloyd's requires applicants to prepare and submit a comprehensive three-year business plan and detailed cash-flow forecasts. There is no minimum turnover threshold - if the business plan is robust and the business is sustainable, Lloyd's will give due and proper consideration. Small brokers, however, need to be able to demonstrate that they are capable of meeting possibly disproportionate costs (for example, PI cover, IT systems enhancements)

- Lloyd's expects brokers to produce business to Lloyd's through being accredited. Lloyd's accreditation is not given lightly, nor as a marketing tool for firms that have no intention or capability to place business.

- Applicants need to demonstrate that they are committed to reforming business processes in areas such as contract certainty, electronic accounting and claims handling.

Source: Lloyd's.