The wholesale story

UK regional brokers can access the Lloyd's market in a number of ways but, in most instances, the Lloyd's broker is the first port of call.

Lloyd's brokers are able to set up guarantee agreements to provide access to Lloyd's underwriters. For high-volume, low-premium business, they can arrange binding authority with an underwriter. Brokers also can enter into a sub-agency arrangement via a Lloyd's wholesale broker, which will negotiate with underwriters on their behalf.

However, in order to bypass the Lloyd's broker route, brokers may go direct to service companies. These provide access to various underwriters and can offer a full service, from issuing documentation and accounting, to claims settlement.

While the arrival of service companies was widely expected to signal the death of the wholesale Lloyd's broker, the market has in fact adapted.

This is partly due to Lloyd's wholesalers having access to the entire Lloyd's market and their ability to place difficult risks.

One such broker - Folgate London Markets - focuses on UK commercial property and liability risks. Martin Hughes, managing director of FLM, said: "In the past, brokers could only access the Lloyd's market by going through a Lloyd's broker. But, the emergence of large managing agents moving into the retail market by opening service companies has changed the face of wholesale broking. Lloyd's brokers are no longer the only route to the Lloyd's market."

"As a result, Lloyd's wholesale brokers have become more specialist, placing cover for high-risk trades such as builders, contractors, roofers and steel erectors, whereas standard business now goes through the service companies," he adds.

Andrew Holman, chief executive of wholesale Lloyd's broker Holman's, argues that the emergence of service companies has not significantly changed the market. He says: "When the changes came through, enabling syndicates to set up service companies, everyone was worried that it would cut out the Lloyd's wholesale broker but it has not really had much impact."

Holman believes one of the advantages of using a Lloyd's wholesale broker is the ability to provide a range of quotes. He continues: "Lloyd's wholesalers broke the risk in the Lloyd's room rather than just place it. A lot of brokers go to Lloyd's wholesale brokers because they can provide a choice of quotes from a range of underwriters, whereas service companies and brokers with delegated authority just offer one."

Hughes says wholesalers are also in demand from overseas brokers, as they have no option but to go through a Lloyd's broker.

"Lloyd's brokers have been good at developing links with brokers overseas and are able to feed business back into the London market. As a result, wholesale brokers can be seen as quasi-marketing tools. Service companies would have to open offices in overseas territories and build a network of offices, which would be expensive."

Lloyd's brokers have considerable experience in standard and specialist risks and usually handle documentation and accounting. As a result, a number of syndicates do not have service companies and prefer to deal exclusively with Lloyd's brokers," Hughes adds.

New operations

Another sign that the wholesale market is still buoyant is the emergence of wholesale broking operations.

Camberford Law has set up Camberford Law London Insurance, complete with new offices in the City. CLLI has received provisional accreditation as a Lloyd's broker and it estimates that 50% of its business will be wholesale.

Richard Sheikh, chairman and chief executive officer, explains: "A lot of our commercial business is done face to face in London, so it made sense to set up a City office. Lloyd's is more flexible than other markets and provincial brokers can come to us with difficult and unusual risks."

Lloyd's broker Howden has also launched a new division, Howden UK, to provide a wholesale and retail brokerage for professional indemnity and directors' and officers' risks. In particular, it will target the small to medium-sized enterprise market and non-standard professional risks.

Kevin Culliney, executive director of Howden UK, says the new wholesale division will offer provincial brokers choice and service that has been lacking in the sector. He says: "We will offer multiple quotations and a service to back it up in terms of claims and technical advice. We will look after the business and do not just offer one quotation from one market."

Culliney adds: "Brokers tend to shy away from D&O because it can be quite technical, which is why it is ideal for wholesale. D&O has been undersold in the UK. You only have to open the newspaper to read about companies in trouble for decisions made by board directors, particularly the exposure of non-executive directors. The big firms tend to have been catered for but with SME business, D&O is the last thing on the agenda."

Culliney adds that he expects Howden to place at least 50% of its business at Lloyd's and will favour the market because it has the right type of specialist underwriters.

For Hughes, the key value of Lloyd's in the last few years has been its ability to provide capacity and cover for risks that the composite insurers abandoned. For example, roofers and scaffolders risks with heavy employers' liability exposures.

Hughes says: "The Lloyd's market was particularly important following the terrorist attacks of 11 September 2001 and the collapse of Independent Insurance. Although this is starting to change as the market cycle begins to ease, Lloyd's remains more flexible.

"Lloyd's underwriters have no users' manual to follow. It is still about face-to-face negotiations and placing business is down to the skill of the broker and the knowledge of the underwriter."

He continues: "Despite all the talk about the internet and technology changing the way in which cover is placed, for large specialist covers the ability for face-to-face negotiation is always going to be valuable. For property liability, marine and aviation and heavy EL exposures, the way business is placed at Lloyd's has not really changed much in the last 30 years. However, the back-office systems have become more efficient."

Holman's offers a number of non-standard and high-risk covers. Holman believes the Lloyd's wholesale market will increasingly be used for placing PI, motor fleet, high-risk business, property and liability. More than 50% of its business is written at Lloyd's and Holman believes it is becoming more mainstream.

Streamlining business

He explains: "Lloyd's used to be considered as a last resort but now it is competing on its own terms with the major composites."

"Improvements in technology have meant that placing business at Lloyd's has become more streamlined. Syndicates are also realising that there is a lot of commercial business in the regions that they can tap into."

Regulation by the Financial Services Authority will also step up the demand for wholesale brokers, according to Holman.

"The FSA requirement to find the best deal for their client will increase demand for wholesale business. We have access to the full range of markets.

As a wholesale broker you have to provide some benefit to the broker either in terms of service, for example, turning business around quickly with fewer mistakes than an insurer. Or by providing regulatory services such as completing the necessary forms and reducing the broker's administration."

As the insurer market continues to consolidate, insurers are likely to continue to cull agencies further and, as a result, smaller brokers will find it harder to place business and will increasingly need help from wholesalers, Holman argues. By contrast, wholesalers have a huge amount of business that goes through their books and do not have to worry about engaging an agency.

He continues: "For example, with professional indemnity business we benefit from volume. We do not have any minimum premium requirements so any broker can come to us."

Culliney points to consolidation of the broking community. He says there is less choice available to regional brokers from the wholesale market following consolidation - especially following the purchase of Dickson Manchester by insurer HCC.

Security

Concern about the number of schemes and facilities offered by wholesalers that fail to provide adequate cover has led the Institute of Insurance Brokers to launch statute reports - the first of which are due to be published later this year.

The reports aim to provide information on insurance schemes and facilities offered by UK wholesale intermediaries. Firms that decline to co-operate will be listed as such.

Andrew Paddick, director general of the IIB, says: "Point-of-sale brokers are increasingly using wholesalers but often they do not know anything about the wholesaler with which they are dealing."

He adds: "There is no register of wholesale brokers and most brokers are not able to thoroughly check out the credentials of wholesalers."

However, Holman argues the IIB's reports will not take off because the IIB expects the wholesaler to pay. He acknowledges that wholesale brokers have had bad press because of a few high-profile collapses, leaving large debts. But he points out that, unlike some wholesalers, Lloyd's wholesale brokers are subject to strict Lloyd's regulations.

He continues: "The FSA will take over the regulation of Lloyd's brokers but we have always been more heavily regulated than other UK brokers."

Holman also argues that Lloyd's brokers have in-depth knowledge of the syndicates and, as a result, are able to deal with potential problems more effectively.

"Lots of brokers are setting up with service companies, which is fine until the service company withdraws leaving the broker having to find a new market," he states, adding: "A Lloyd's broker can provide warning if a syndicate or service company is in trouble and will be able to place the business with another syndicate in time to avoid problems. Lloyd's brokers have a close relationship with the syndicates in the same way that the retail brokers know their clients."

And with the ability to place difficult risks, provide multiple quotes and an efficient service, perhaps provincial brokers should also look to building closer relationships with Lloyd's wholesalers.