Captive Insurance
An insurer owned by the businesses it covers, the forms it takes, and what separates a captive from simply retaining the risk.
Glossary
Coverholder
A business authorised to enter into contracts of insurance on a Lloyd's syndicate's behalf, and where its authority stops.
A coverholder is a business authorized to enter into insurance contracts on behalf of an insurer within agreed limits. In the Lloyd’s market, a coverholder receives that authority from a managing agent acting for a Lloyd’s syndicate. The arrangement is documented in a binding authority agreement. Lloyd’s definition of a coverholder.
This allows a local or specialist business to quote and bind eligible risks without referring every individual proposal to the syndicate’s underwriters. The agreement determines which decisions it can make and which require referral.
How a coverholder arrangement works
A managing agent runs the underwriting business of one or more syndicates. It can delegate specified activities to an approved coverholder that has the expertise and operating arrangements to perform them.
The coverholder may serve a particular territory, customer group, or type of insurance. For example, it might specialize in property insurance for small hospitality businesses or a particular professional liability class.
Three related elements need to be understood separately:
- Coverholder approval: recognition that the business can participate in the relevant Lloyd’s delegated authority arrangements.
- Binding authority: the contract setting out what the coverholder may do for the participating underwriters.
- Insurance policy: the contract issued to the customer under that authority.
A binding authority can support many policies. It is different from a temporary insurance binder issued as evidence of coverage for an individual customer.
What can a coverholder do?
Its responsibilities depend on the authority granted. They can include assessing submissions, selecting eligible risks, calculating premiums within agreed rules, binding coverage, and issuing policy documents.
The binding authority may specify limits such as:
| Area | Example of a contractual restriction |
|---|---|
| Class of business | Only the listed property or liability coverages |
| Territory | Risks located in specified countries or regions |
| Risk size | Maximum insured values or policy limits |
| Pricing | Approved rates, rating rules, or permitted discretion |
| Policy wording | Forms and endorsements that may be issued |
| Referrals | Risks or decisions requiring prior underwriter agreement |
| Duration | The period during which the authority can be used |
These are examples of the kinds of boundaries a contract can establish. The operative agreement determines the actual permissions. Lloyd’s explains that policy documentation issued by a coverholder must use content and a format approved by the managing agent. Lloyd’s guidance for coverholders.
A coverholder example
Consider a fictional coverholder specializing in insurance for independent shops. Its binding authority permits a defined package of property coverages for eligible shops with insured values up to $2 million.
A retailer submits an application for a shop with an insured value of $800,000. The coverholder checks the location, construction, occupation, claims information, and the other eligibility conditions. If the proposal satisfies the agreement, it can quote and bind the policy within its authority.
A second application concerns a building with an insured value of $3 million. Even if the coverholder considers the risk attractive, the value exceeds the authority in this example. It must refer the case and obtain the necessary authorization before binding it, or arrange another route for the business.
The $2 million threshold is an invented contractual limit. It is not a general Lloyd’s rule.
The coverholder’s name may appear prominently on the documents, but the policy identifies the underwriting security providing the insurance. Delegated underwriting authority does not itself make the coverholder the risk-bearing insurer.
Coverholder, MGA, broker, and managing agent
These terms describe different roles, although one business can perform more than one role in different arrangements.
| Role | Main function |
|---|---|
| Coverholder | Writes or administers business under a defined delegation of authority, particularly in Lloyd’s terminology |
| Managing general agent, or MGA | Performs delegated insurance functions for insurers, under arrangements that can extend beyond Lloyd’s |
| Broker | Arranges insurance and places risks with available insurers or underwriting businesses |
| Managing agent | Manages the business of Lloyd’s syndicates and oversees authority delegated on their behalf |
Lloyd’s describes its coverholders as businesses also referred to as MGAs. The terms can overlap, but calling a company an MGA does not establish that it holds Lloyd’s coverholder approval or a particular binding authority. The company’s actual appointments determine that position.
The managing general agent role is therefore useful background, while coverholder describes the more specific delegated relationship being discussed here.
How does a business become a Lloyd’s coverholder?
A new applicant needs a sponsoring managing agent. That managing agent carries out due diligence before the application proceeds through the Lloyd’s process. A broker may assist, but Lloyd’s does not make broker involvement mandatory for every application.
The application process establishes the proposed business and the arrangements supporting it. Approval and the contractual grant of authority remain separate considerations: approval does not give the business unrestricted permission to write any class of risk.
Lloyd’s also requires a coverholder undertaking addressing the business’s conduct and responsibilities. The applicant agrees to operate within its binding authority and relevant local requirements. Lloyd’s coverholder application guidance.
Reporting and oversight
The managing agent needs information about the business written under its authority. Reporting can cover the risks accepted, premiums, taxes, and claims, allowing the underwriters to monitor the portfolio and their exposure.
A bordereau is a structured report used in this relationship. Risk and premium reporting describe the business written and its financial activity, while claims reporting records the relevant loss information.
Lloyd’s reporting standards establish a common core of data. Managing agents may also require additional information because of regulatory obligations, the risk profile, geography, or the distribution arrangement. Lloyd’s coverholder reporting standards.
For example, an underwriter monitoring flood exposure may need to combine location information across many policies. A missing or inconsistent location can therefore affect the assessment of the whole portfolio, even when the individual policy record otherwise appears complete.
Can a coverholder settle claims?
Claims authority must be specifically established. A managing agent may give defined claims responsibilities to the coverholder, appoint a delegated claims administrator, or retain the work itself.
Even where authority is delegated, some claims may require referral because of their value, complexity, or other contractual conditions. Authority to bind a policy does not automatically confer authority to settle every claim arising under it. Lloyd’s explanation of delegated claims responsibilities.
For a policyholder, the policy documents and claims instructions identify the correct point of contact. For the coverholder, the binding authority defines the decisions it can make and the information it must send back to the underwriters.
