lloyd’s china handbook

Lloyd’s China Handbook

A handbook for managing agents November 2011

Key Contacts Eric Gao CEO Lloyd’s China Telephone: +86 21 6162 8200 [email protected]

John Threshie Manager of Market Development Asia Telephone: +44 (0) 20 7327 5472 [email protected]

Disclaimer Lloyd’s provides the material contained in this Handbook for general information and reference purposes only. The information set out in the Handbook is to the best of Lloyd’s knowledge correct as at the date of publishing, but may change over time. Lloyd’s accepts no responsibility, and shall not be liable for any loss which may arise from reliance upon the information provided. No responsibility or liability is accepted by the Society of Lloyd’s, Lloyd’s China, the Council, or any Committee of Board constituted by the Society of Lloyd’s or the Council or any of their respective members, officers, or advisors for any loss occasioned to any person acting or refraining from action as a result of any statement, fact, figure or expression of belief contained in this Handbook. The Handbook is intended for Lloyd’s managing agents only and should not be further copied or broadcast in any media to any other person without Lloyd’s express written consent.


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Contents

1 INTRODUCTION 4

2 WHAT IS THE LICENCE SCOPE? 4

3 HOW DO MANAGING AGENTS PARTICIPATE ON THE PLATFORM? 5

4 WHO PAYS FOR THE PLATFORM? 8

5 HOW DOES BUSINESS REACH LLOYD’S CHINA? 9

6 HOW ARE RISKS UNDERWRITTEN? 11

7 HOW ARE CLAIMS HANDLED? 13

8 HOW IS MONEY MOVED AROUND? 14

9 IMPORTANT INFORMATION 16


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1 Introduction

1.1 Lloyd’s in China The Lloyd’s market has provided offshore reinsurance capacity to the Chinese insurance market since the 1970s for a diverse range of risks. Over the decades a relationship of mutual support has developed and in 2000 Lloyd’s opened its representative office in Beijing. Further development in China was regarded as a long-term strategic investment by Lloyd’s to give the market onshore access to the rapidly growing Chinese insurance market. Therefore, in 2007 Lloyd’s Reinsurance Company (China) Limited (hereafter referred to as Lloyd’s China) was established in Shanghai as a subsidiary of the Lloyd’s corporation and a regulated Chinese reinsurance company. As far as possible, Lloyd’s China replicates the unique features of the Lloyd’s marketplace, allowing Chinese policyholders to benefit from the diversity of the Lloyd’s market within a corporate structure which meets local regulatory requirements. In May 2010, the China Insurance Regulatory Commission (CIRC) extended Lloyd's China’s licence to include non-life direct insurance in the Shanghai region. In October 2010, the company name was changed to Lloyd’s Insurance Company (China) Limited to reflect its expanded business scope. The extended licence became operational in September 2011. Lloyd’s China’s reinsurance business has grown rapidly to USD 46m in 2010.1 While the direct licence will allow Lloyd’s syndicates to access a wide range of specialty insurance business, reinsurance is expected to continue to be Lloyd’s China’s primary business in the medium term. At the beginning of 2011 22 syndicates managed by 16 different managing agents participated on the Lloyd’s China platform. Six managing agents have nominated underwriters to Lloyd’s China in Shanghai. Lloyd’s China holds the same ratings as the Lloyd’s market: A+ (strong) from Standard & Poor’s and Fitch Ratings, and A (excellent) from A.M. Best.

1.2 The handbook This document provides a summary of the structure, features and processes of Lloyd’s China. It is intended to allow managing agents to understand the platform, and its operation, so that they can decide whether participating in Lloyd’s China is right for their business. This handbook does not contain detailed explanations of Lloyd’s China’s processes, and managing agents should refer to the documents listed at the back of the handbook for further information. Sections 1-4 explain how Lloyd’s China works and the ways in which managing agents can participate. Sections 5-8 outline the main processes involved in the day-to-day business of Lloyd’s China. Finally, section 9 provides a quick reference for relevant documents, contacts and a glossary.

1 Lloyd’s China’s GWP figures

2 What is the licence scope?

Details are provided below regarding Lloyd’s China’s licence scope. Existing laws and regulations are not clear on certain issues. Therefore in order to protect Lloyd’s China’s licence, consultation with Lloyd’s China, or an external legal opinion, may be required in certain circumstances. Lloyd’s may elect to restrict which classes of business are written through Lloyd’s China for operational reasons. Lloyd’s China will review participating syndicates’ business plans, and discuss the cost-benefit case for each class of business and corresponding product. Please contact LITA or the Lloyd's China Compliance Department for further information.

2.1 Direct insurance Lloyd’s China is licensed to write the following classes of business in the Shanghai municipality’s administrative region, where Lloyd’s China is located2:

> general insurance business such as property, casualty, credit, surety insurance, etc;

> short-term accident and health insurance

In addition, Lloyd’s China is able to write master policies, large commercial risks and international marine, aviation and cargo transportation insurance (MAT) outside of Shanghai under certain circumstances. The detailed requirements should be discussed with the Lloyd’s China Compliance Team during product development.

2.2 Reinsurance Lloyd’s China can write Chinese non-life reinsurance business nationwide, retrocession business and international reinsurance business from territories which permit reinsurance to be freely transacted on a cross-border basis. Lloyd’s China cannot, however, lead on treaties.

2 Excluding compulsory lines such as motor third party liability insurance, liability insurance of the driver and carrier of buses and other commercial transportation vehicles


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3 How do managing agents participate on the platform?

3.1 New entrant process In order to access business under Lloyd’s China’s direct licence, managing agents need to participate on the Lloyd’s China platform and meet the requirements established by Lloyd’s and CIRC in order to access business through Lloyd’s China. Admission to Lloyd’s China is subject to a thorough approval process, taking into account past and present performance and Lloyd’s China business plans. This process ensures that managing agents’ plans are suitable for the managing agents and for Lloyd’s China’s strategic aims, that access to the platform is managed and that the participants meet the specific standards of CIRC. Syndicates must be approved for the platform by Lloyd’s China and Lloyd’s Performance Management Directorate (PMD). The entry process is made up of two stages:

3.1.1 Initial evaluation During this stage the managing agent engages in dialogue with Lloyd’s China and PMD surrounding the proposed nature of participation, classes of business, volume, distribution, resources and, in the case of syndicates planning to participate in direct business, the external reinsurer and products to be offered.

3.1.2 Making it happen This stage involves approval by PMD and Lloyd’s China of the business plan, the organisation of all practical arrangements, final approval by the CEO of Lloyd’s China and related party approval by CIRC.

3.2 Types of participation Managing agents can participate in Lloyd’s China either as a represented syndicate or as a non-represented syndicate.

3.2.1 Represented syndicates Represented syndicates nominate underwriting staff to Lloyd’s China in Shanghai. These underwriters have their own office space within the Lloyd’s China office, which helps to facilitate direct access to Chinese business. As a result these syndicates have written the greater proportion of Lloyd’s China’s business to date. Represented syndicates may elect to participate in direct business or reinsurance business, or both.

3.2.2 Non-represented syndicates Non-represented syndicates do not have nominated staff in Shanghai. Currently only a small proportion of Lloyd's China business is written by non-represented syndicates. It is a useful access route for syndicates who want to learn more about the Chinese market and may later consider nominating an underwriter. Non-represented syndicates are supported in China by the Non-represented Underwriting Department (NRUD). Due to

the onerous requirements associated with writing direct business, non-represented syndicates are currently only able to participate in reinsurance business on this platform.

3.3 The divisional structure Lloyd’s China’s business model was designed to reflect Lloyd’s unique market structure within the confines of People’s Republic of China (PRC) law. Thus, a divisional structure was established with each participating syndicate being allocated an underwriting division within Lloyd’s China. Participation is achieved by means of annual reinsurance and/or retrocession contracts between Lloyd’s China and each participating syndicate, ceding the entire book of risks underwritten by the corresponding underwriting division. Each risk or portion thereof that Lloyd’s China accepts will be accounted for to the corresponding underwriting division of the syndicate that accepts the reinsurance or retrocession of that risk. Each syndicate’s profits or losses through Lloyd’s China will therefore reflect the performance of their corresponding underwriting division within Lloyd’s China. This model was created to achieve the following objectives:

> To reflect Lloyd’s market structure by allowing underwriting divisions within Lloyd’s China to compete with each other

> To avoid risk retention in Lloyd’s China

> To ensure that policies underwritten by Lloyd’s China enjoy full access to the Lloyd’s Chain of Security

> To ensure that Lloyd’s China enjoys the same rating as the Lloyd’s market

The high level business models are described below and represented diagrammatically on the following page.

3.3.1 Reinsurance business model Quota share treaty retrocession contracts are put in place between the syndicate in London and Lloyd’s China in respect of the entire book of business underwritten by that syndicate’s underwriting division. 100% of both premium and risk is transferred to the relevant Lloyd’s syndicate.

3.3.2 Direct business model Under PRC law up to a maximum of 80% of each risk can be reinsured with any one carrier or any one related party. In interpreting this law the Lloyd’s market is considered to be a single reinsurer. Therefore a maximum of 80% of any one risk underwritten by a Lloyd’s China underwriting division can be reinsured to the corresponding Lloyd’s syndicate or syndicates in London (by means of an annual treaty). The remaining 20% of a risk allocated to a specific underwriting division must be reinsured outside of the Lloyd’s market, either with a company that is part of the same group as the relevant syndicate or with a third party reinsurer (also by means of an annual treaty). This entity is known as the external reinsurer and is represented by Company A or B in the diagram on the following page.


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Reinsurance business model Direct business model The external reinsurer must meet the following minimum requirements established by CIRC:

> At least one of the following ratings: S&P BBB, AM BEST B++, Moody's Baa, Fitch BBB

> Paid in capital of no less than CNY 200m

> Compliance with the solvency requirements in its home country

> No major non-compliance issues in the past two years

The direct business model includes an indemnity which must be given by the relevant syndicate in favour of Lloyd’s China, the purpose of which is to transfer the credit risk of the external reinsurer from Lloyd’s China to the syndicate. A separate indemnity will be required in respect of each reinsurance agreement between Lloyd's China and an external reinsurer, which will be entered into on an annual basis. A demand under the indemnity would be triggered whenever a claim under the reinsurance was payable and the external reinsurer failed to respond.

3.3.3 Agreements In order to participate on the Lloyd’s China platform, managing agents must sign the following agreements with Lloyd’s:

> The Participation Agreement, which sets out the basis on which a managing agent participates in Lloyd’s China, and provides for the creation of an underwriting division specific to each participating syndicate and the option for the secondment or nomination of staff to an underwriting division

> For reinsurance business, the Retrocession Agreement, which sets out the terms on which 100% of an inwards reinsurance policy written by Lloyd’s China will be retroceded to the participating syndicate

> For direct business, the Reinsurance Agreement, which sets out the terms on which up to 80% of an inward direct policy will be reinsured by the participating syndicate

> For direct business, the Deed of Indemnity, which transfers the credit risk of the external reinsurer from Lloyd’s China to the syndicate, protecting Lloyd’s China in the event that an external reinsurer fails to meet a claim under a reinsurance agreement with Lloyd’s China

Lloyd’s

Syndicate A

Lloyd’sChina

Division A

Division C

Division B

Cedant 1

Cedant 3

Cedant 2

Cen

tral

Res

ourc

es o

f the

So

ciet

y

CHAIN OF SECURITY

Syndicate Assets C

Syndicate Assets B

Syndicate Assets A

Member’s Assets C

Member’s Assets B

Member’s Assets A

Syndicate B

Syndicate C

Reinsurance contract



Retro contract

Retro contract

Retro contract

Lloyd’s

Syndicate A

Lloyd’sChina

Division A

Division C

Division B

Cedant 1

Cedant 3

Cedant 2

Cedant 1

Cedant 3

Cedant 2

Cen

tral

Res

ourc

es o

f the

So

ciet

y

CHAIN OF SECURITY

Syndicate Assets C

Syndicate Assets B

Syndicate Assets A

Member’s Assets C

Member’s Assets B

Member’s Assets A

Syndicate B

Syndicate C




Retro contract

Retro contract

Retro contract

Lloyd’s

Syndicate A

Lloyd’sChina

Division A

Division B

Client 1

Client 2

Cen

tral

Res

ourc

es

of th

e So

ciet

y

CHAIN OF SECURITY

Syndicate Assets B

Syndicate Assets A

Member’s Assets B

Member’s Assets A

Syndicate B

Insurance contract

Insurance contract

RI contract

Company A

20%

Company B20%

80%

80%

RI contract

Indemnity

Indemnity

Lloyd’s

Syndicate A

Lloyd’sChina

Division A

Division B

Client 1

Client 2

Cen

tral

Res

ourc

es

of th

e So

ciet

y

CHAIN OF SECURITY

Syndicate Assets B

Syndicate Assets A

Member’s Assets B

Member’s Assets A

Syndicate B

Insurance contract

Insurance contract

RI contract

Company A

20%

Company B20%

80%

80%

RI contract

Indemnity

Indemnity


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3.3.4 E&O cover The standard form Participation Agreement, Reinsurance Agreement and Retrocession Agreement include clauses that restrict the ability of a reinsurer to avoid liability on the grounds of misrepresentation or non-disclosure by Lloyd’s China. In view of the above, Lloyd’s has purchased errors and omissions insurance for the benefit of participating managing agents and external reinsurers. The policy protects the managing agent and external reinsurer in the event that the negligence of Lloyd’s China’s staff gives rise to a loss which, but for the terms of the above Agreements, the syndicate would be entitled to avoid. The policy does not respond in the event that the loss is caused by the underwriters nominated or seconded by the managing agent. The limit of cover is GBP 10,000,000 for any one claim and in the aggregate including costs and expenses.

3.4 Annual approval process

3.4.1 Syndicate Business Forecast (SBF) Commencing from the 2012 Year of Account, all participating syndicates are required to complete the China section of the SBF return for business written on the Lloyd’s China platform. This, together with the qualitative information provided to the Lloyd’s China team, will allow Lloyd’s China to clearly assess the participating syndicates’ strategies for Lloyd’s China and to accurately report projections to CIRC where required for solvency and other regulatory purposes. This requires all participating syndicates to provide information on:

> Classes of business to be written on the platform (Form 51)

> Underwriting Performance Forecast (Form 105)

> Summary of Technical Accounting (Form 100)

The China portion of the SBF will be reviewed and approved by Underwriting Performance, working closely with Lloyd’s China’s Underwriting Supervisor. The Supervisor will have responsibility for overseeing the underwriting activities of Lloyd’s China in order to ensure that both CIRC and Lloyd’s requirements are met and that underwriting is consistent with Lloyd’s China’s overall strategies and business plan. Participating managing agents will also be expected to detail their Lloyd’s China business on their regular reporting to PMD, i.e. via the quarterly QMB returns and monthly PMDr.

3.4.1.1 Non-represented syndicates Non-represented syndicates principally rely on reinsurance of business identified and placed through Lloyd’s China. These syndicates consequently have less detailed data at the planning stage when completing the SBF and in addition their scale of activity is limited. Therefore a reduced set of reporting requirements is acceptable, limited to Form 51 for Lloyd’s China business (and included in the “London” distribution channel). Non-represented syndicates wishing to complete the SBF as usual for Lloyd’s China business are free to do so.

3.4.2 Related party approval Each participating syndicate requires annual related party approval from CIRC. CIRC will look at the current underwriting performance and capability to control risks of the participating syndicate, as well as its past performance (over approximately the last three years). The Lloyd’s China New Entrant Process has been designed to minimise the risk that a syndicate which is approved for entry is subsequently not approved on a related party basis by CIRC. In the unlikely event that CIRC refuses the application or advises Lloyd’s China to withdraw the application, Lloyd’s will temporarily withdraw the application and review with the managing agent.

3.5 Interaction with regional service companies

Managing agents may have underwriting, claims or line management expertise located elsewhere in the region (for example, in Hong Kong or Singapore) which they may wish to utilise to support business written by either a represented or a non-represented division of Lloyd’s China. This offers several advantages in terms of time zones, language ability, understanding of the local market and ability to travel to China on a regular basis. If this approach is taken, the managing agent should take professional advice to ensure that that they are complying with tax obligations in all countries. They should also consider the regulatory implications and should consult Lloyd’s global trading information in Crystal, available on http://www.lloyds.com. Even if the managing agent chooses to make arrangements with regional offices, the risks must still be underwritten through Lloyd’s China and reinsured/retroceded to the syndicate in London, and should not be closed through the books of the relevant service company.


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4 Who pays for the platform?

4.1 Summary As Lloyd’s considers a presence in China to be strategically important in the long term, all costs relating to the protection, maintenance and enhancement of Lloyd’s China’s licence will be borne by Lloyd’s centrally. However, Lloyd’s China is moving towards a user-pays model in line with Lloyd’s other platforms.

4.2 Capital Lloyd’s Corporation has funded Lloyd’s China’s fixed regulatory capital of CNY 200m. There are currently no variable capital requirements.

4.3 Central and development costs Lloyd’s has paid all the costs involved in developing the platform and will continue to pay all central costs associated with the protection, maintenance and enhancement of Lloyd’s China’s licence, including central overheads relating to:

> General management

> Finance including regulatory reporting and oversight

> Local compliance, internal control and human resources

> Market development

> IT infrastructure, environment and software licences to support central services required for Lloyd’s China

> Portion of rentals and related on-costs that is not charged to managing agents

4.4 Variable costs

4.4.1 Direct attributable expenses

4.4.1.1 Represented syndicates Direct expenses which vary depending on the level of activity and are essentially incurred at the request of a syndicate are reimbursed at cost (subject to any transfer pricing considerations).

Represented syndicates’ expenses include:

> Nominated employee costs - salary and benefits

> Direct costs - personal expenses, telecommunication, travel, marketing and promotion specific to the nominated employee or underwriting division. Lloyd’s China communicates these costs through quarterly expense statements, and these expenses are collected through Central Accounting

> Per workstation charge - a fixed charge per workstation per annum to recover a portion of rental and related costs, space renovation costs and IT costs (i.e. those costs directly relating to the number of nominated employees). This charge is CNY 100,000 per workstation per annum from 1 July 2011

4.4.1.2 Non-represented syndicates From 2012 an annual charge for each non-represented syndicate will be introduced to contribute to the costs of the Lloyd’s China team who are responsible for binding the risks which are retroceded to the non-represented syndicates. The charge has been calculated on the same basis as for represented syndicates, to include a workstation charge and a recovery of the direct costs of employing the Lloyd’s China team. The charge will be CNY 60,000 per non-represented syndicate per annum with effect from 1 January 2012. This charge will be reviewed annually.

4.5 Business tax When making charges to syndicates, represented or non-represented, Lloyd’s China is required to account for business and other tax to the tax authorities at 5.65% on top of the base charge. With effect from 1 January 2011 this cost was incorporated as part of the charge made to syndicates by increasing the charge to 5.99%. This is added to the flat fee charges described above so that after Lloyd’s China pays the tax the net amount received is the base charge. If Lloyd’s China is able to receive a recovery of the business tax paid, the benefit will be passed back to syndicates.


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5 How does business reach Lloyd’s China?

5.1 Business development

5.1.1 Managing agents’ business development Managing agents are responsible for developing their business in China. Their business development plans will form an integral part of Lloyd’s China’s planning process. Represented syndicates, in particular, should have their own plans for business development. However, non-represented syndicates are also expected to play a proactive role in the business development activities of NRUD, as described below, as well as enhancing their profile in China through regular visits.

5.1.1.1 Recommendations and restrictions While they are employees of Lloyd’s China, seconded underwriters are able to market only the products and services of their particular underwriting division within Lloyd’s China. It is important, however, that underwriting divisions are branded using Lloyd’s China branding, as opposed to managing agent’s own branding. Visits and other market development events in connection with Lloyd’s China should be co-ordinated with Lloyd’s Market Development in Shanghai to avoid confusion and repetition for the local market.

5.1.2 Support from Lloyd’s The Market Development teams based in London and Shanghai provide support to all participating syndicates on the Lloyd’s China platform, and work with NRUD with regards to non-represented syndicates.

5.2 Distribution channels The principal distribution channels of Lloyd’s China are:

5.2.1 Local brokers (direct and reinsurance) Local brokers are those entities licensed as brokers in China, including the local subsidiaries of large global brokers such as Aon, Marsh and Willis. Local brokers are expected to be the main distribution channel for Lloyd’s China business. While in principle Lloyd’s supports the use of Terms of Business Agreements (TOBAs) in all markets, these are not widely used in China and there is no expectation that Lloyd’s China will attempt to sign TOBAs with brokers in the initial stages.

5.2.2 International brokers (reinsurance only, except in the case of MAT insurance)

Currently some of Lloyd’s China’s reinsurance business is placed by brokers operating from outside of mainland China. While this is expected to continue for reinsurance business, direct business must be placed by a locally licensed broker. According to the China WTO Commitment, overseas brokers can also place MAT business offshore. Therefore, Lloyd’s

China could accept MAT direct insurance from international brokers.

5.2.2.1 London-broked business Should a managing agent be approached by a London broker in respect of a Chinese risk, it may be possible for that business to be first written by Lloyd’s China and then retroceded to the syndicate. In addition, it may well be that business that is currently written in London may migrate to Lloyd’s China, possibly because the cedant wishes to place the business with a local reinsurer.3 This business must be bound by Lloyd’s China, and the syndicate must contact NRUD in China before attempting to arrange for the risk to be written.

5.2.3 Cedants (reinsurance only) Reinsurance risks may be placed directly with Lloyd’s China by the cedant either through an existing relationship between the cedant and a particular underwriting division or through a general enquiry by a cedant to Lloyd’s China.

5.2.4 Local agents (direct only) Corporate agents are an additional possible distribution channel not currently used by Lloyd’s China. The use of agents carries additional regulatory requirements, since Lloyd’s China is ultimately responsible for the agent’s conduct. Therefore, Lloyd’s China has no immediate plans to appoint corporate agents to act on its behalf.

5.3 Non-represented syndicates NRUD performs the following functions on behalf of the non-represented syndicates:

> Distributing general enquiries to non-represented syndicates by e-mail based on their knowledge of syndicate risk appetite

> Maintaining class of business forms so that risks are only marketed to the underwriters that have an interest in that class

> Proactively co-ordinate with brokers to avoid approaching participating syndicates with risks already brought to them in the open market

> Supporting represented syndicates with targeted risks where additional non-represented syndicate capacity is required

> Liaising with Chinese brokers/ceding companies during specific risk negotiations

3 Rule 15 on CIRC’s Solvency Report Formulation provides that ceding companies will be subject to a 10% discount in valuation of reinsurance assets when the reinsurer is located outside China. For this purpose Lloyd’s China qualifies as a local reinsurer.


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> Binding risks on behalf of non-represented syndicates once syndicate underwriters have agreed to accept the retrocession of the risk

> Liaising with Underwriting Services team for efficient reporting/accounting of bound risks

> Providing analysis of enquiries to support non-represented annual SBF reporting

Where enquiries are complex or urgent, they may be communicated directly to participating underwriters in London by the Manager of Market Development Asia on Lloyd’s China’s behalf. Decisions on which syndicates to approach with each enquiry will be taken on the basis of syndicates’ SBF returns and NRUD’s and the Manager of Market Development Asia’s own understanding of each syndicate’s interest and risk appetite.


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6 How are risks underwritten?

6.1 Product filing for direct products with CIRC

The wordings and rates of all direct insurance products underwritten in China must be filed with CIRC. Certain products must be filed and approved by CIRC before being used. These are known as approved products and include insurance products which CIRC consider to be in the public interest and compulsory insurances which are excluded from Lloyd’s China’s licence scope. Therefore these products are unlikely to be developed by Lloyd’s China. All products expected to be underwritten by Lloyd’s China fall in the category of post filing products, which must be filed with CIRC within 10 days of being used. An annual product development plan for each underwriting division will be required from 2012 to allow Lloyd’s China adequate time to prepare to meet the operational requirements for new products. Lloyd’s China’s Underwriting Supervisor will work with the relevant underwriting division to ensure the products meet local requirements before submitting them for filing with CIRC. The key aspects of the regulatory requirements for product filing:

> Insurance policies must be in Chinese and comply with PRC laws, regulations and CIRC’s requirements

> The policy wordings of all Lloyd’s China insurance products will be publicly available on Lloyd’s China’s website (lloyds.com.cn) and the Insurance Association of China’s website (www.iachina.cn)

> For post filing products, rating tables setting out the range of rates at which insurance products may be sold need to be filed with CIRC, but are not publicly available. (For approved products rating tables are published together with the wording)

> Endorsements that change the liabilities or rights and/or obligations of the policy holder or the insurer must be filed with CIRC but are not publicly available

> Lloyd’s China’s Legal Responsible Person and Appointed Actuary are responsible for and need to certify the documents filed with CIRC. This includes certifying that:

> The policy wording is in compliance with insurance law and CIRC requirements

> The actuarial assumptions and methodology are in line with generally accepted actuarial principles and CIRC requirements and that the premium rate is reasonable

Lloyd’s China products may be filed as:

> Generic products, which may be used by all underwriting divisions

> Underwriting division specific products, which may only be used by the underwriting division that developed them (Lloyd’s China system controls will ensure that specific products may only be used by the appropriate underwriting division).

It is possible that two or more underwriting divisions may have specific products within the same class of business. To file policies for such products, Lloyd’s China will need to

demonstrate that the products are different from each other in terms of coverage and exclusions. Lloyd’s China will ensure individual underwriting divisions do not block the market by filing a standard market wording (a generic product) as a specific product.

Managing agents may be able to protect their intellectual property by filing standard wordings for both specific and generic products, and then using endorsements to make their products bespoke. This will also allow managing agents to retain flexibility in underwriting and keep much of the ‘market’ element within the rate and file system. The product’s rating table may also be updated during this process. However, if CIRC interpret endorsements as effectively creating a new product, CIRC may require the product to be re-filed. The legal reviews of the syndicate and Lloyd’s China will identify where this is the case. Please see the Product Development and Filing Manual for more detail on the requirements and process.

6.2 Underwriting procedures The Lloyd’s China Underwriting Operations Manual provides detailed guidance for nominated underwriters and Lloyd’s China’s staff on Lloyd’s China’s procedures for handling enquiries, quoting, binding and closing risks. The key guidelines are listed below:

> Risks should be underwritten in accordance with the managing agent’s guidelines and should also adhere to the Lloyd’s minimum standards for underwriting

> Risks may only be bound by a duly authorised employee of Lloyd’s China (i.e. a nominated underwriter or NRUD)

> Where a risk is subscribed to by more than one underwriting division, it will be treated as a single risk by Lloyd’s China with all terms, conditions, rates and subjectivities applied to Lloyd’s China’s entire share

> Underwriting divisions may compete for business and multiple quotes may be issued to a client. Lloyd’s will step in, however, if the situation is likely to cause confusion to the client and risk Lloyd’s China’s licence or reputation in the market

> All risk information has to be entered onto Lloyd’s China’s underwriting system (Sollyd) by the nominated underwriters or NRUD on behalf of non-represented syndicates. This is to ensure compliance with local requirements including the ability to report to CIRC on business written

> For direct risks, it is a regulatory requirement that a policy is issued to the client by Lloyd’s China from Sollyd. For reinsurance risks, evidence of cover is usually in the form of a broker or cedant produced slip which the nominated underwriters will stamp with the signature chop on behalf of the relevant underwriting division of Lloyd’s China

> Compliance with the underwriting procedures will be monitored by the Underwriting Supervisor and any compliance failures will be escalated to the relevant managing agent

Lloyd’s China provides managing agents with monthly bordereaux detailing risks written.


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6.3 Processing through Xchanging All Lloyd’s China business is processed through Xchanging (XIS and XCS) to allow managing agents to receive the same electronic messages (USMs and SCMs) for Lloyd’s China business as they would for open market business. Lloyd’s China has been assigned a producer number and all premium and claims will be processed on an individual basis as non-cash entries. Individual risks are now closed to Xchanging on a monthly basis regardless of whether the premium has been paid, so that the process is “de-linked” from cash movements. The actual movement of cash will be achieved separately and is discussed under section 8. The standard Xchanging service levels and charges are applicable for Lloyd’s China business. Please note that it is the retrocession or reinsurance contract between Lloyd’s China and the syndicate that will be closed through Xchanging. As a result, reinsurance business written by Lloyd’s China will be retroceded to the syndicate in London and therefore closed as retrocession business, and direct business will be reinsured to the syndicate in London and therefore closed as reinsurance business.

6.3.1 Identifying Chinese business While data from Xchanging will not drive any regulatory reporting, there will be two unique identifiers which will indicate Lloyd’s China business. Firstly, all business will be processed under Lloyd’s China’s producer number (CSN), which is LRC 1818. In order to facilitate the business processes, managing agents are requested to add this number to their systems. Secondly, FIL codes have been developed for Chinese business. They are as follows: FIL code Market Code Definition CAD2 CJ Direct business written by Lloyd’s

China and reinsured to Lloyd's syndicates

CAR2 CJ Facultative reinsurance business written by Lloyd’s China and retroceded to Lloyd's syndicates

CAR3 CJ Excess of loss treaty reinsurance business written by Lloyd’s China and retroceded to Lloyd's syndicates

CAR4 CJ Proportional treaty reinsurance business written by Lloyd’s China and retroceded to Lloyd's syndicates


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7 How are claims handled?

7.1 Regulatory requirements It is a regulatory requirement that Lloyd’s China has a department or function in the office responsible for the handling and settling of claims, and all claims activities must be executed under the name of Lloyd’s China except for delegated third parties in some limited circumstances. Lloyd’s China’s claims processes are designed to meet Chinese regulatory requirements and many of these processes require managing agents, where they are exercising claims handling authority, to also operate within these requirements. For example, managing agents must conform to specific timeframes in responding to claims, in particular to ensure that direct insurance claims are agreed and paid within the regulatory timescales. The processes are also designed to enable Lloyd’s China to meet Lloyd’s Claims Management Principles and Minimum Standards.

7.2 Approaches to claims handling In line with the regulatory requirements, three different approaches to claims may be adopted depending on the class of business:

> Reinsurer Claims Approach – managing agents hire and provide claims personnel who are employed by and operate in the offices of the managing agents in London or in Asia, but not within Lloyd’s China premises. These claims personnel and managing agents’ staff will take the claims handling decisions (i.e. in relation to reserving, investigations and settlement), whilst elements of the claims function and controls will remain with Lloyd's China for regulatory purposes.

> Divisional Approach – managing agents hire or provide claims personnel who are seconded to Lloyd’s China or are nominated for employment by Lloyd’s China and operate within the underwriting divisions of Lloyd’s

> There is an option for the managing agent to decide for the Lloyd’s China claims team to exercise claims handling

authority for the claims related to their underwriting division.

Where specifically agreed with the managing agent, Lloyd’s China can exercise claims handling authority. All managing agents exercising their own claims handling authority must have staff with the appropriate skills to handle claims. This includes language skills appropriate to the languages of the policies which have been issued by the managing agent’s corresponding division of Lloyd’s China.

7.3 Lloyd’s China’s role Where Lloyd’s China does not exercise claims handling authority, it plays an administrative role in handling Lloyd’s China claims. This involves Lloyd’s China receiving notification of claims, communicating these to the managing agent and in turn communicating the managing agent’s response or queries to the insured, reinsured or broker Performance oversight of Lloyd’s China’s claims function will sit with Lloyd’s Performance Management Department in London. Lloyd’s China has its own claims system for the recording of claims information and also uses the London Market systems for claims handling, in particular the ECF system. On a monthly basis claims bordereaux are prepared and provided to claims managers at the managing agents and monthly production details are provided to finance contacts at the managing agents.

7.4 Claims Process Manual The Claims Process Manual sets out the claims processes in more detail. It is vital that managing agents read this in detail to fully understand their role in the processes. The manual is regularly reviewed and managing agents are invited to submit their comments and suggestions.


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8 How is money moved around?

8.1 Principles and structure

8.1.1 Bank accounts Lloyd’s China will open and maintain sub-bank accounts in China for each underwriting division in the currencies in which it is trading (usually USD and CNY). While these bank accounts are held in the name of Lloyd’s China they allow for segregation of funds between the participating syndicates. Premium funds for the division will be paid into and retained in those accounts until they are remitted to the syndicate or external reinsurer, or are required for claims payments. Due to resource constraints in Lloyd’s China, these funds are not actively managed or invested. Interest accrued on those accounts is payable to the managing agent. Where a division is participating in direct business, the same bank account will be used for reinsurance and direct business (assuming both types of business are written). Funds held in that account will be owed to both the syndicate and the relevant external reinsurer. Interest accrued on that account will only be payable to the managing agent, however, as Lloyd’s China is unable to account for it separately. The finance team is responsible for monitoring the bank accounts and Lloyd’s China provides regular reporting and reconciliation for those accounts to managing agents.

8.1.2 Managing agent access to information The authorised finance contacts of managing agents are able to acquire detailed cash movements, cash statements and the balance of their sub-account from the Lloyd’s China finance team at any point in time. Control over the funds in these accounts will reside with the administrators of Lloyd’s China’s main bank account who are the CEO, Deputy General Manager (Finance) and Chief Financial Officer. All premiums due to syndicates, claims reserves and cash movements and balances will be communicated to managing agents by quarterly bordereaux. In addition, finance contacts will be informed of risks through monthly production details.

8.1.3 Controls Lloyd’s manages all premium and claims funds in China in accordance with best practice and the relevant regulatory requirements. The following controls are built into the process:

1 Lloyd’s China will only accept cash transfer instructions from the authorised personnel of the managing agent. Written requests in electronic or paper form are required for audit trail purposes

2 Lloyd’s China will check their own records to ensure that the funds have expired their agreed retention period

3 Citibank will only accept fund remittance instructions from authorised personnel of Lloyd’s China. Dual authorisation is required for all bank account operations

4 Periodic reconciliations are carried out between the accounting records and bank statements

5 Annual audit confirmation and bank confirmation are required in the statutory audit

8.2 Flow of premium funds

8.2.1 Receipt of premium Lloyd’s China finance team will manage the premium receipt process including issuing debit notes and statements, monitoring the Lloyd’s China central premium account, allocating premium and transferring it to the relevant sub-bank account. The finance team will work with the nominated underwriters and NRUD to manage the credit control risk.

8.2.1.1 Premium refunds Where a premium refund is owed to the client either due to a cancelled policy or an endorsement, Lloyd's China will pay this from the relevant underwriting division's sub-bank account. If sufficient funds are not available, the managing agent will be asked to remit additional funds to Lloyd's China.

8.2.2 Premium retention Under the Reinsurance and Retrocession Agreements 100% of premium is payable to the syndicate and external reinsurer (as appropriate). The agreements, however, also provide for Lloyd’s China to retain in China up to 50% of premium income for one year in order to facilitate the easy payment of claims. This is a Lloyd’s requirement not a regulatory one and Lloyd’s China may waive this requirement under special circumstances and at the request of a managing agent. As CNY is not fully convertible (meaning currency conversion carries an administrative cost associated with regulatory administration) and is generally appreciating managing agents may elect to retain additional premium income in China.

8.2.3 Cash remittance Subject to meeting the requirements above, a managing agent may elect how frequently they wish to remit funds to the UK. The process is as follows:

> Authorised personnel within a managing agent send a written request to Lloyd’s China’s finance team for funds to be transferred

> Lloyd’s China’s finance team checks that funds are available to be released and then prepares a credit note to meet local compliance requirements to support the cross border settlement

> Lloyd’s China authorises Citibank to remit the funds to the assigned bank account in the UK

The external reinsurer will have premium automatically remitted to them on a quarterly basis subject to the premium retention requirements above.


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8.3 Flow of claims funds Upon authorisation from the claims department for claims settlement, Lloyd’s China’s finance team will obtain cash from the divisional sub-bank accounts to transfer to the Lloyd’s China claims account in the following order (only moving to the next option where funds available are insufficient):

1 50% retention amount for the relevant policy

2 Cleared funds remaining in the sub-account of the relevant syndicates (pro-rata in relation to its share of the risk)

3 Direct remittance from the syndicates (and external reinsurer)

The Lloyd’s finance team will then set up the claims payment and inform the cedant or broker as well as the relevant syndicate claims manager and/or underwriter.

8.3.1 Cash calls The Reinsurance and Retrocession Agreements allow for Lloyd’s China to request a loss reserve or to make a cash call should a claim exceed the funds held in China. For managing agents this will be handled by Lloyd’s Settlement & Trust Fund Office using Central Accounting.


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9 Important information

9.1 Key documents and where to find them All agreements and manuals listed below can be found at http://www.lloyds.com/China

9.1.1 Agreements Pro forma versions of the following agreements are available on the website. Bespoke versions for execution are prepared by Lloyds for each managing agent.

> Reinsurance Agreement

> Retrocession Agreement

> Participation Agreement

> Deed of Indemnity

> Outwards Reinsurer Security Information Form

9.1.2 Manuals

> Claims Operations Manual

> Compliance Manual

> Entry Guide for Lloyd’s China

> Money Movement Manual

> Product Development and Filing Manual

> Underwriting Operations Manual

9.2 Website More information can be found on the Lloyd’s website at: http://www.lloyds.com/China These pages can also be accessed in Chinese at: http://www.lloyds.com/Lloyds/Offices/Asia/China-in-Chinese

9.3 Contact details

9.3.1 Lloyd’s China CEO – Eric Gao ([email protected], +86 21 6162 8200) DGM – Philip Jones ([email protected], +86 21 6162 8203) Underwriting Supervisor – Richard Zhang ([email protected], +86 21 6162 8232) Chief Compliance Officer – Maggie Zhu ([email protected], +86 21 6162 8211) Manager of Market Development – Christina Xu ([email protected], +86 21 6162 8217)

Manager of Non-represented Underwriting Department – Tom Birbeck ([email protected], +86 21 6162 8207) Appointed Actuary – Emma Yan ([email protected], +86 21 6162 8239) Chief Financial Officer – Wenxian Zhu ([email protected], +86 21 6162 8209) Claims Manager – Helen Ashenden ([email protected], +44 (0) 20 7327 5781) Claims Handler – Jennifer Fan ([email protected], +86 21 6162 8227)

9.3.2 PMD Please contact your managing agent’s usual UP Executive

9.3.3 International Markets Manager of Market Development Asia – John Threshie ([email protected], +44 (0) 20 7327 5472)

9.3.4 International Regulatory Affairs Senior Manager – Andrew Gurney ([email protected], +44 (0) 20 7327 6194) Lloyd’s International Trading Advice (LITA) ([email protected], +44 (0) 20 7327 6677)

9.3.5 Lloyd’s legal team Solicitor - Simon Hardy ([email protected], +44 (0) 20 7327 5264) Head of Legal & Compliance – Peter Spires ([email protected], +44 (0) 20 7327 6170)

9.4 Glossary of terms relating to Lloyd’s China

Lloyd’s Insurance Company (China) Ltd (Lloyd’s China) – Lloyd’s subsidiary in Shanghai, licensed to write direct business within the Shanghai region and reinsurance business nationally Represented syndicates – Syndicates who have seconded or nominated staff to their corresponding underwriting divisions in Lloyd’s China’s office in Shanghai Non-represented syndicates – Syndicates participating in Lloyd’s China who do not have seconded or nominated staff in their corresponding underwriting divisions of Lloyd’s China in Shanghai. They are supported by NRUD Underwriting division – Within the structure of Lloyd’s China, each participating syndicate forms an underwriting division, which writes direct or reinsurance business that is ceded to the respective syndicate via a retrocession and/or reinsurance arrangement


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Non-Represented Underwriting Department (NRUD) – The department within Lloyd’s China with responsibility for supporting non-represented syndicates Performance Management Department (PMD) – The department in Lloyd’s in London with responsibility for monitoring the market’s performance and approving business plans

Market Development – The function in both London and Shanghai that works to increase business in to Lloyd’s China and to raise its profile China Insurance Regulatory Commission (CIRC) – the regulator for the insurance industry in China

lloyd’s china handbook

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