Making a low key entry

Four months ago, Japanese insurer Mitsui Sumitomo launched its own Lloyd's managing agent, an event that was remarkable for two reasons. Mitsui had become not only the first Japanese insurer to set up at Lloyd's, but it was the first 'turnkey' operation to mature and attain independence from its custodian, Chaucer.

For seven years, Chaucer managed the Mitsui syndicate, helping the Japanese insurer negotiate the complex Lloyd's landscape while it grew from a modest £18m stamp capacity to a size where it could stand on its own. By January 2007, when Mitsui broke away from Chaucer, its underwriting capacity was over £300m.

Turnkey services, where a managing agency provides management services to a third party's syndicate to allow that syndicate to underwrite without having to put in controls immediately, is a growth area at Lloyd's.

According to Lloyd's, eight turnkey operations have been established to date, with the latest being Bank of America's syndicate, Pembrace, managed by Spectrum, which started trading in February. And experts predict there are likely to be more, as underwriting capital ' ' from America, Bermuda and the Far East looks for ways to enter Lloyd's.

The turnkey approach enables small underwriting vehicles to access Lloyd's without the time and cost of establishing a full-blown managing agent. For a fee, an established managing agent provides the financial, actuarial, legal and regulatory controls required by Lloyd's and the FSA, along with infrastructure and other technical support.

While the turnkey syndicate must still obtain approval from Lloyd's, which will want to ensure the business plan and management team meet the required standards, it is not required to have the same controls in place that it would do if it were setting up a managing agency.

For its part, the third party resources the capital, underwriting expertise and the product.

"[The turnkey model] makes an awful lot of sense for new entities joining Lloyd's," says Ewen Gilmour, chief executive of Chaucer. "It takes a lot of effort to develop the team and the business plan and set up a fully-fledged managing agency. You can start small and build up, and as you get bigger, you can split off."

Chaucer was the first Lloyd's managing agent to offer turnkey services. Its first client was Mitsui, which it started working with in 2000.

Gilmour says Chaucer's decision to offer turnkey services was "opportunistic", with Mitsui being introduced by a broker. "In 2000 we were a small-to-medium sized managing agency looking to expand. Turnkey gave us non-cyclical fee income from the managing operations and it enabled us to spread the cost of our overheads."

In the intervening seven years, Chaucer's turnkey operation has developed from something that, to quote Gilmour, was done in the company's "spare time" to what is now a significant part of the business with a dedicated team of three people.

Chaucer currently manages three syndicates, with a combined capacity of £220.6m for the 2007 year of account. The latest addition was ICM syndicate 4242 for US insurer ICAT Holdings, which was set up last November.

Chaucer's other operations are Broadgate Syndicate 1301 for Israeli insurance group Clal Insurance Enterprises, and Pembroke syndicate, backed primarily by Bermuda-based Quanta.

Despite the apparent success of its turnkey business, Chaucer was for many years the only managing agent offering this type of service. Gilmour attributes this to the relatively few opportunities available. Recent years, however, have seen a surge of interest from both underwriting entities looking to access Lloyd's and other managing agents looking to muscle in on Chaucer's monopoly and diversify their income streams.

This year saw Spectrum introduce Bank of America's syndicate Pembrace to Lloyd's, while Argenta has two third party syndicates on its books: its marine syndicate 1965 was launched in 2005 and operates out of Singapore, and Syndicate 3334, was set up last year for Australian insurer Sportscover.

Gilmour says Chaucer now has a lot of opportunities to provide turnkey services. It had around 10 discussions "of varying degrees of seriousness" last year. "A lot of people are looking to take advantage. We will do more in 2007 if the right one comes along," he says, adding that there is only scope to undertake one new turnkey operation each year.

Greater flexibility
For underwriting vehicles, the strength of Lloyd's coupled with its world-renowned brand and global distribution channels make it an attractive market in which to operate. Bank of America cited these factors in its decision to create the Pembrace syndicate, but it also noted that Lloyd's had a greater "flexibility" than its rival Bermuda which, it said, was important for Pembrace's casualty business.

Lloyd's is keen to attract new capital into the market and sees turnkey business as an important contributor. Sean McGovern, Lloyd's director, general counsel, who oversees the authorisation of new business into the market, says the experience of the turnkey model to date demonstrates that it works.

"The fact that eight have been established shows that this method has been successful," McGovern says. He highlights Mitsui ("which came out the other end" and achieved independence as a stand-alone managing agent) and the recent ICAT and Bank of America syndicates as prime examples.

"Lloyd's is pretty flexible in terms of what we are looking for. We are open to both new managing agents and turnkey operations. We need to be sure that the business plan and management meet certain standards."

McGovern says he cannot see any disadvantages from the turnkey model, save for the need to negotiate a fee with the sponsoring managing agent.

Significant advantages
Although McGovern will not make predictions as to how many more turnkey operations will be launched in 2007, he accepts that there are "opportunities".

"We know of a number of managing agents who are looking at this. There are significant advantages for them in doing it," he says. "Lloyd's needs to ensure they are not overstretched. There are a relatively small number who could offer this."

McGovern rejects suggestions that turnkey capital poses a greater risk to the Lloyd's Central Fund than traditional syndicates. "The managing agent has ultimate responsibility for running the syndicate. You could argue that the overall level of control and oversight of syndicate is higher as there is no alignment of interest in terms of capital and management."

Gilmour adds that using an established managing agent "knows its way around Lloyd's, knows some of the pitfalls and can buy reinsurance protection".

Lloyd's also stresses that the growth in turnkey operations is not a threat to its efforts to control capacity growth. Turnkey represents only 1.8% of Lloyd's total capacity. "It is a small part of overall market capacity," says McGovern.

Despite the turnkey's relatively small role in the Lloyd's market it is growing. It has enabled a diverse range of capacity to enter the market and, as in the case of Mitsui, grow to be significant players.

Many more insurers will be looking to take advantage of this doorway into Lloyd's in the coming years. IT