Setting up in Lloyd's and turnkey operations



17 September 2020 – Lloyd’s has traditionally been the centre of insurance underwriting in London for over 300 years. Despite some difficulties in the last two decades, the Lloyd’s brand remains strong.

It is internationally respected, has franchises in over 80 countries and is licensed to conduct business in every US state. Lloyd’s also carries a strong rating with the major rating agencies, and all underwriting is backed by the New Central Fund as maintained and held by Lloyd’s itself. Being able to take advantage of this franchise removes a considerable amount of time and cost to setting up around the world.

There are two aspects to undertaking business within Lloyd’s; acting as an underwriting agent and providing underwriting capital and accepting risk. The former requires the regulatory approval of the FCA and Lloyd’s, whereas the latter only requires the approval of Lloyd’s, albeit that the FCA are consulted by Lloyd’s in this respect.

Understandably, Lloyd’s and the current market players are keen to protect this strong brand, and not to allow any dilution of it. Thus, to create a Lloyd’s managing agency anew is extremely difficult. However, to introduce new underwriting capacity is generally less difficult providing that it is seen that there is a strong business plan and that the capital provider can demonstrate that their participation in Lloyd’s adds to the strength of the market.

As a result, many new capital providers start simply by providing capital to the Lloyd’s market, and then gravitate to owning their own agency through a 'turnkey structure'.

At the outset, it must be understood that this process takes a considerable amount of time, and the difficulty and related expense should not be underestimated. There are many idiosyncrasies to the Lloyd’s market that make it a unique market place, and these need to be explained and understood fully.

This note explains some of the basic aspects of the process of setting up in Lloyd’s, and is certainly not an exhaustive explanation of the whole process or all the issues that will be faced.

The provision of underwriting capital

Underwriting capital, better known as Funds at Lloyd’s (FAL), can be provided directly by individual underwriting members, or more likely nowadays, through corporate members. These corporate members may be owned by one or more shareholders, although each shareholder will need to be approved by Lloyd’s as a 'controller'.

The FAL is made available to support the underwriting of risks within a Lloyd’s syndicate. The FAL must be put into Lloyd’s by the 'coming into line' date every year, usually around the middle of November, and can be put in by way of:

  1. cash

  2. letters of credit, from Lloyd’s approved bank and in Lloyd’s standard form

  3. approved investments

What type of syndicate do you wish to support?

Syndicates are not legal entities as such and do not carry the risks themselves. The risks are carried by the underwriting members themselves that sit behind the syndicate. A Syndicate may have one or more underwriting members, each accepting several liability for their agreed proportion of syndicate risks.

There are various ways in which underwriting members may participate in a syndicate. These principally are through:

  1. an existing syndicate – the underwriting member provides FAL to an existing syndicate. The issue here is to ensure that such FAL cannot be used to support prior years’ underwriting result especially if there has been a loss

  2. a new standalone syndicate – there is no risk of bearing past year losses, but this does require the creation of a separate new business plan that needs the scrutiny and approval of Lloyd’s

  3. A parallel syndicate – this is a new syndicate set up in parallel with another existing syndicate and writes the same risks as the primary syndicate on a co-insurance basis. It can be of a whole or partial account basis

  4. A Special Purpose Arrangement (SPA) – these are syndicates that do not accept primary risks, but accept risks by way of reinsurance from another syndicate. This reinsurance could be on a whole or partial account basis. The SPA only underwrites one contract in the form of a quota share. This is the reinsurance of an existing syndicate known as the 'host'

  5. Syndicate reinsurance – this is not a participation within Lloyd’s although it will need to be approved by Lloyd’s. This is an option for an insurer who wishes to be involved in the Lloyd’s market without setting up within Lloyd’s, and the cost and time issues that go with this. This may be a first viable option.

Key features of a Special Purpose Arrangement (SPA)

In addition to the components of a SPA mentioned in point four above, the following are also key features:

  • SPAs supported by a single corporate member can commence trading at any time during the year, whereas an SPA supported by private members can only start to accept business under the quota share on 1 January, 1 April, 1 July and 1 November.

  • SPAs are usually of a short term nature of no more than two years or a rolling two year arrangement. In light of this, SPAs are not viewed as an appropriate structure to reinsure accounts with a material long-tail element.

  • Business plans are required to be submitted yearly and there is no guarantee that Lloyd’s will agree the SPA business plan for the following year, even if this is the parties intention.

  • SPAs can only accept business on a quota share basis. 

  • The Lloyd’s non-refundable application fee for a SPA is £50,000.

  • The SPA members’ Central Fund (CF) levy will be charged to the host. New members supporting the SPA will be charged at the higher rate of 1.4% on gross premiums for three years.

Whichever participation option is considered best, detailed discussion with Lloyd’s is required at an early stage. For investors already familiar with the Lloyd’s market and the book of insurance risks that they wish to place through their syndicate, then a new standalone syndicate is perhaps preferable. However, an SPA can form a useful vehicle for those coming into Lloyd’s and simply wishing to understand how the market works before committing themselves to separate underwriting.  

So which type of syndicate would one choose?

The factors that should be considered when choosing a syndicate include:

  • all syndicates bear risks but none are legal entities

  • SPAs only reinsure risks – the others are direct risk bearers

  • a standalone syndicate writes and controls its own risks – parallel syndicates and SPAs do not

  • SPAs are much cheaper to run and they only underwrite one reinsurance contract

  • SPAs are much simpler and easier to run. They do not need Terms of Business Agreements with brokers, do not need to be registered with Xchanging for settlement of premiums and claims monies, do not issue policies, regulation is lighter, and the application process to Lloyd’s is easier.

Application Process

The application process is not especially difficult but can be time consuming. It is important that Lloyd’s are fully involved.  The usual chronological order is as follows:

  1. Initial discussions with Lloyd’s.

  2. Initial discussions with franchise board.

  3. Franchise board and Lloyd’s executive team approve the application 'in principle'.

  4. Formal application, fee paid and syndicate business plan submitted.

  5. Formal approval by franchise board.

  6. Submission of forms to Lloyd’s Chatham.

  7. Submission of FAL, for example a deposit of letters of credit to Lloyd’s Chatham.

  8. Authorisation.

Setting up and owning a Lloyd’s managing agency

Many parties interested in having a Lloyd’s platform wish to own their own agency. They consider this to be where the real value is within the Lloyd’s market. Indeed, having seen some of the pricing of recent merger and acquisition transactions in this market, this is undoubtedly true.

How does one set about owning a Lloyd’s managing agency?

The simplest and quickest route is by acquisition. This is not without difficulty, cost and time. The regulatory hoops must not be underestimated, one example of this is that the managing agent needs to demonstrate that there are no unresolved minimum standard issues. Additionally, the likely multiples to be paid by way of price should be considered.

Further, there are simply not many agencies for sale at any one time, and competition can be fierce to acquire those that may be for sale. The other aspect of buying an agency is the need to take on the run-off of the past liabilities for the syndicates on whose behalf it has underwritten. The time and expense of this can be considerable.

The alternatives are simple to start up from scratch, or to operate under a Lloyd’s agent providing turnkey solutions. The former will take a considerable period of time and cost, and require detailed planning. There is also the likelihood that Lloyd’s will refuse to agree – Lloyd’s has publicly stated that it does not wish for further agents to be authorised in its market.

The received wisdom is therefore that a hosting or 'umbrella' arrangement under a turnkey agent is the better way to proceed. In essence, the turnkey agent agrees to warehouse the new agent under its own Lloyd’s permissions, with the usual intent that the new agent will apply for its own Lloyd’s permission within three to five years. This is all managed under a Third Party Syndicate Management Agreement (TPSMA).

There are some disadvantages of the turnkey structure. It isn't simply a 'plug in and play' solution – there are many aspects, such as, relating to tax, financing, and employment that must be dealt with. The costs are also not perhaps as low as setting up outside Lloyd’s. There is a heavy need for the host agent to provide actuarial support, which often is not readily available.

The principal Turnkey documents

Depending upon which type of syndicate is chosen, over 50 documents can be expected. The principal documents are as follows:

  • Application and controller forms – to the FCA and Lloyd’s.

  • TPSMA – this is the main agreement between the host and new agent.

  • Member’s agreement, a standard Lloyd’s form – between Lloyd’s and the corporate members of the syndicate.

  • Managing agent’s agreement (MAA) standard Lloyd’s form – between the host managing agent and the corporate members of the syndicate.

  • Bespoke addendum to the MAA – this sets out the bespoke specific details of commissions and fees payable to the host agent, and other variations to the standard MAA.

  • Shock loss agreement – this is simply a funding contract whereby the capital provider agrees to provide short term funding of its corporate member in the initial period underwriting by that corporate member. This is to protect against unexpected losses and cash flow losses that may arise before reserves have been built up.

  • Reinsurance contracts (at syndicate level) – these reinsure the risks underwritten by the syndicate, and are subject to notification and approval by Lloyd’s.

  • Qualifying quota share agreements (at corporate member level) – these reinsure a proportion of the result of corporate member. These are not subject to approval by Lloyd’s but carry many tax issues, such as transfer pricing, that need detailed consideration.

The Third Party Syndicate Management Agreement

The TPSMA is the most important agreement in any turnkey operation. It sets out the liabilities, duties and responsibilities of the parties in managing the syndicate. A diagram of the typical structure for the operation of a turnkey set up can be seen at the bottom of this article.

The TPSMA requires the approval of Lloyd’s. The format of the TPSMA usually follows:


  • underwriting and named underwriter

  • reinsurance to close – this is the closing of the syndicate results at the end of the third year

  • audit – the right to audit is important

  • investment – this may be done by the capital provider or the host agent

  • actuarial – this is fundamental, especially with the current Solvency II projects

  • service standards

  • contingency and disaster planning

  • client and independent audit.


  • records – requiring updating and safe keeping

  • data protection – noting 'safe harbour' provisions

  • confidentiality

  • charges

  • syndicate costs – it is important that these are clearly defined

  • syndicate business planning – a syndicate must submit its business plan to Lloyd’s for approval

  • payment terms.

Effecting Outwards Reinsurance Programme

This will need the approval of Lloyd’s

Professional Indemnity Insurance

This insures against the agent’s errors and omissions.

Substitution of Agent

This is necessary if the host agent fails or is otherwise unable to perform.

Contract Management

This content is three elements:

  1. Client relationship management.

  2. Dispute resolution.

  3. Change of control provisions.

Term and Termination

This can occur in many ways, and the effects of each must be anticipated and dealt with:

  1. Termination by corporate member.

  2. Termination by agent.

  3. Migration – if the initial syndicate is an SPA or parallel syndicate, there is a need to anticipate how each will migrate to a standalone syndicate.

  4. Cessation of syndicate – it should be noted that a corporate member cannot be wound up by way of insolvent liquidation.

  5. Effects of termination and run-off.

  6. Reinsurance to close – the corporate member may wish to prescribe how this process occurs.

  7. Dealing with tax issues post termination, especially US tax issues.

Current Lloyd’s Fees (for 2017)

For 2017, the Central Fund contributions are as follows:

  • Members’ subscriptions of 0.40% of gross written premium.

  • Market modernisation levy of 0.09% of gross written premium.

  • Standard rate Central Fund (CF) contributions of 0.35% of gross written premium.

% of GWP




Members’ subscriptions



New Central Fund contributions



Market modernisation levy






A further contribution to the CF of up to 3% of capacity remains callable at the discretion of council.

It should be noted that the New Central Fund contributions are only 0.5% (not 2%) of written premiums if the new corporate member participates in an existing syndicate. Further, additional New Central Fund contributions of up to 1.5% will be considered where Solvency II implementation is considered insufficient.

Additional contributions of 0.75% of written premiums may be payable if written premiums exceed allocated syndicate capacity, as contained in the syndicate business forecast.

The basic Lloyd’s application fee for corporate membership is £25,000.



The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at September 2020.

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Posted by David Coupe

David was the founder of EC3 Legal (merged with Birketts April 2020) and has been practising corporate commercial law for over 35 years , principally around the London and Lloyd’s insurance market. Prior to founding his own practice, he had been a partner at two of the best known London insurance and commercial legal practices. He advises and supports insurance brokers, underwriting agents, MGAs, insurers and other service providers, and those looking to invest in the market including venture capital funds, business  angels and (re)insurers. He also specialises in insurance governance and regulation.

David is a founder of the Managing General Agents’ Association (MGAA) and sits on the Board and their Regulatory and Compliance Committee, and has regular contact with the UK Financial Conduct Authority (the UK regulator of brokers and insurance agents) in such capacity.

David’s practice has also covered a number of transactions, transfers of business and schemes of arrangement in the insurance run-off market, being the first to obtain an order under Chapter 15 of the US Bankruptcy Code.

Whilst much of his work is based in the UK insurance market, he has advised many clients worldwide on insurance related matters. For instance, he has assisted many clients from the US and Bermuda with their acquisitions and transactions in the UK. He also has clients from as far away as New Zealand, Australia, China, Malaysia, Brazil and throughout the EU. Most recently, he has assisted the Government of Gibraltar with regards the changing of their laws for intermediaries. He is also dealing with many issues arising relating to BREXIT such as back branching and run-off.

David is also a well-known name in the Lloyd’s market, and has acted for a number of agents and capital providers relating to Lloyd’s investments, setting up new Lloyd’s syndicates and special purpose arrangements (SPAs), and Lloyd’s corporate capital vehicles (and the provision of FAL into those).

He also deals with many financial insurance and reinsurance instruments, and alternative forms of risk transfer through protected cell companies and captive insurance.  

David was admitted as a Solicitor in October 1986.


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