Revisions to Central Services contracts between managing agents and Xchanging Joint Ventures – XIS and XCS

This communication explains important contract revisions on behalf of all managing agents on 29 March 2022 by the LMA in its role as Customer Representative.

Headlines

An aggregate 10% reduction in Xchanging central services costs incurred by Lloyd’s market over the period January 2023 to December 2024.
A four year extension of the Initial Term to provide pricing certainty for 2023 to 2026 (if existing services are required for that long).
Contractual alignment with regulatory requirements.

Executive Summary

Pricing for supply of existing services has been agreed for 2023 and 2024. This is required as the Initial Term of five years, for which pricing was defined in 2017, expires at the end of 2022. The impact of the revised pricing is the equivalent of a c.10% reduction in aggregate costs invoiced to managing agents across both Xchanging central services contracts over the two-year period 2023-24 (assuming processed volumes remain the same as that estimated for 2022).

Existing services are currently scheduled to be replaced by new Digital Processing Services (DPS) during H2 2024. A new contract for supply of DPS will be developed over the next 12 months and is expected to be presented to individual managing agents for sign-off mid-2023.

Revisions have also been made to align with new or updated requirements relating to:

GDPR and Data Protection.
Outsourcing, Third-Party Risk Management & Operational Resilience.
Use of Public Cloud Hosting as the basis for infrastructure used to supply of DPS in the future.

Numerous other revisions have been made as part of an annual housekeeping exercise to ensure the contracts are reflective of general developments in the relationship between Xchanging and managing agents including Contract Change Notes approved since the last contract conformance exercise.

The proposed revisions were presented to and approved by (i) a working group comprising members of the LMA Operations and Finance Committees, (ii) the LMA Operations Committee and (iii) the LMA Board.

Revised Pricing

Reduced prices take effect from 01 January 2023. Xchanging has discounted all services by 3%. Additionally, the Volume Discount arrangement has been revised. This action has released c.£4.6m of annualised value which has been used to further reduce pricing of most, but not all, central services used by managing agents. The effect of this is c.8.5% reduction to most transaction pricing in 2023 and a further 3% in 2024. Claim processing costs attract a greater reduction as volume discount earnings on the XCS contract have been higher than on the XIS contract. An illustration of revised pricing is shown in Appendix 1 . Actual prices will be confirmed by December 2022 once the annual indexation adjustment has been applied.

The Annual Subscription will increase by an estimated £7k per active syndicate. This is to absorb costs of services not currently included in managing agents’ invoices, but instead paid for by LMA using service credits and volume discounts earned over the past four years. These services are Auto Reinsurance processing for Lloyd’s Insurance Company, incremental Xchanging costs related to broker adoption of ACORD EBOT and ECOT message processing and provision of a dedicated Market Acceptance Testing environment. The LMA commits to exploring means by which this increase might be offset or mitigated and will notify the outcome of this to managing agents later in 2022.

Annual Indexation remains unchanged, i.e. capped at 5% for India related costs and 3% for UK costs and is re-calculated in Q4 each year. You are reminded that the blended indexation applied at the end of 2021 to finalise pricing for 2022 was 2.62%.

If the implementation of new DPS is delayed, pricing in 2025 will remain unchanged from 2024 (except for an indexation adjustment). If reliance on existing services continues into 2026 a further 5% reduction will take effect from January 2026. At the end of 2026, if the reliance on existing services still remains, the Agreements will automatically extend for a further two years, with another 5% discount taking effect in 2027.

Alignment with Regulatory Requirements

GDPR (Data Protection) – this was necessary due to changes in legislation as a result of the UK's exit from the EU. LIMOSS secured the legal services of Bird and Bird’s GDPR team to advise on the required changes.

Outsourcing and Third Party Risk Management – this was necessary due to the PRA SS2/21 regulation. LIMOSS also secured the legal services of Bird and Bird’s financial services regulatory team to advise on the required changes. Consideration was also given to the requirements of Lloyd’s Europe and Belgian regulators and this is reflected in a revised definition of Regulator.

Operational Resilience – the contract changes can be summarised in two ways:

a strengthening and expanding of existing provisions, and
new wording and clauses.

The clauses that have been strengthened and expanded are in respect of existing business continuity and disaster recovery (BCDR). The provisions place a greater obligation on Xchanging in BCDR testing. The definition of a Disaster has been widened. A new term of ‘Disruption’ has been introduced with a new obligation on Xchanging to anticipate, withstand, respond to, and recover from Disruption.

The new clauses for Operational Resilience include the new terms of ‘Important Business Service’ (IBS); ‘Maximum Service Outage’ (MSO); ‘Severe but Plausible Scenarios’ (SBPS); Mapping, Market-wide Test and Resources. The market IBS are included in the contract, are attached to an MSO of 10 days and subject to annual review with, and agreement by, the Customer Representative. The LMA will issue a further summary outlining the changes in more detail to all LMA Operational Resilience contacts.

Other Significant Updates

The contracts now provide for the use of Public Cloud Hosting for provision of new Digital Processing Services. This provision is activated once the technical design of the new services has been reviewed with the Market Technical Design Authority (TDA) panel and LMA CISO Committee. Use of Public Cloud Hosting is already in operation, and each instance has been individually reviewed and approved by the Market TDA. The revision provides a blanket approval. The launch of any Services operating on Public Cloud will still be required to pass successfully through the Change Approval Board (CAB) process.

The contracts now include a new Schedule detailing Approved Locations from which Services and change projects can be delivered. This takes account of the intended use of Public Cloud Hosting in partnership with Amazon Web Services.

The contracts now include an agreement to negotiate in good faith to achieve a contract for DPS to extend until 2029, in accordance with Heads of Terms signed in May 2021. A new document describing the milestones towards implementing DPS has also been added.

A summary of revisions made to these contracts is contained in Appendix 2 cross referenced to the relevant sections of the Main Agreement &/or Schedules relevant to each of the two contracts.

Accessing Revised Contracts

From 06 April 2022 a full set of contract documentation can be accessed in the Xchanging Knowledge Repository. You are reminded Xchanging has provided for five users per managing agent to register for access. For further information please contact LondonMarketKnowRep@dxc.com.

The repository contains ‘clean’ versions of the latest contracts into which the above changes and previously approved Contract Change Notes have been assimilated.

Revision marked versions of these contracts are available on request from Neil Minto. (n.minto2@dxc.com)

Digital Processing Services (DPS)

There is more work to do in order to achieve the delivery of a new contract in advance of the implementation of DPS. Xchanging, LMA, IUA, LIMOSS, Lloyd’s and market organisations need to:

agree descriptions for the new digital processing services,
develop non-functional requirements for the new digital processing services,
define the pricing structure and pricing for DPS,
define pricing for use of Transitional Services for those organisations who require this,
agree how DPS will be tested and accepted by the market,
identify when market organisations will be operationally ready to consume DPS,
most importantly, Xchanging and DXC need to complete the build of new DPS capabilities.

Contact

Rob Myers
Operations Director
rob.myers@lmalloyds.com