Binding Authority

by Adam Bishop on October 7, 2010

This week we’ll be expanding our glossary of insurance terms as we delve into Binding Authorities.

Article contents:

  1. What is a Binding Authority?
  2. How does an Insurer control a binding Authority?
  3. How does the Insurer get their premium?
  4. Who handles the claims?

What is a Binding Authority?

A Binding Authority is an agreement whereby an Insurer delegates underwriting authority to another party known as the Coverholder.

The Coverholder is usually an Insurance Broker or Underwriting Agent and will act in all respects as the actual Insurer.

This arrangement is especially attractive to Lloyds Underwriters as they do not deal directly with the public so the Binding Authority gives them a means with which they can conduct business with a wider market rather than just relying on business presented to them by Lloyds Brokers.

How does an Insurer control a Binding Authority?

The granting of a Binding Authority (sometimes called a ‘binder’) does mean that the Insurer has less direct control over the business that is being placed with them so there are very strict limits imposed under which the Coverholder can operate.

These terms are normally contained in the Binding Authority Agreement and Underwriting Guide which must be adhered to.

A breach of the Underwriting Guide would be a serious breach of the Binding Authority so to ensure that everything is in order regular audits will be made by Insurers.

During these audits the underwriting files will be inspected, rates checked and particular attention will be paid to ensuring that any matters which exceeded the underwriting authority were referred to Insurers for agreement.

How does the Insurer get their premium?

Coverholders will normally be responsible for the issue of all policy documentation on behalf of Insurers and the collection of premiums.

The Coverholder will normally operate on a commission basis and will deduct this from any payments made.

There may in addition be an agreement where the Coverholder earns further commission depending on the profitability of the authority, this is referred to as Profit Commission.

Premiums are normally paid to Insurers on a monthly basis, this may be in arreas to allow the Coverholder a period of credit.

Payments are normally accompanied by a report called a Bordereau which details all of the risks that have been bound on behalf of the Insurer.

Who handles the Claims?

In most cases Claims are still handled by the Insurer as they will already have Claims Departments in place to deal with this and have the expertise of Loss Adjusters available to them.

If the Coverholder can settle the cliams this is known as a Claims Authority. This may only be limited to claims below a certain agreed limit.

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