Lloyd's of London executives have urged underwriters to exercise caution when entering into deals such as the facility launched by Aon P.L.C. and Berkshire Hathaway Inc.

Under the deal announced in March to increase capacity, Berkshire Hathaway International Insurance Ltd. will take a 7.5% share of all of Aon's retail placements in the London market where Lloyd's underwriters are participating.

In a similar move in May, Willis Group Holdings P.L.C. said it is preparing a facility for up to 20% of its specialty business.

Meanwhile, Marsh Inc. said it has no plans to set up a similar facility, but sources said it has used the approach previously in some special cases.

The Aon/Berkshire Hathaway deal covers most lines of coverage (see box).

While Lloyd's executives initially welcomed the idea, CEO Richard Ward later expressed concern that the Aon/Berkshire Hathaway deal would take business away from Lloyd's syndicates.

Among more recent advice, two Lloyd's executives told market participants that they must treat such arrangements in a similar way to binding authority business and ensure they have exercised sound risk management and capital control to avoid “blind underwriting.”

“If you are considering entering into similar arrangements with brokers, then you should be aware that, because these arrangements involve delegation of underwriting authority to the broker, Lloyd's regards these as binding authorities,” Tom Bolt, director of performance management at Lloyd's, said last month in an email to all syndicates. “Therefore, they need to be registered on the binding authority registration site before inception and should be subject to the same controls as other binding authorities.”

Before entering such an arrangement, Mr. Bolt said syndicates should discuss it with their contact at the market's Performance Management Directorate, which oversees market conduct and analyzes syndicates' business plans.

Syndicates that already have entered into deals involving such facilities, which Aon described as a type of sidecar, also should be reported to the directorate “so that we can discuss the risk management and risk monitoring measures in place,” Mr. Bolt said.

During a speech at a Lloyd's dinner in New York last month, Lloyd's Chairman John Nelson warned that the current low interest rate environment was driving the behavior of capital markets in the reinsurance and direct insurance marketplace “in ways that may disrupt the insurance market, such that it operates against the interest of the insureds.”

“Specifically, tracker funds blind underwriting — if it proliferates — will damage the underwriting pool of expertise and diversity available in the market — so important to world economies and businesses — in respect of the specialized risks that Lloyd's and other carriers write,” Mr. Nelson said. “We must be careful in our industry to watch out for these sorts of unintended consequences.”

A spokesman for Aon said the London-based brokerage believes such deals are in the best interests of clients, that buyers can choose whether or not to participate in such arrangements and that buyer feedback so far was “overwhelmingly positive.”

The spokesman said that in all discussions with Lloyd's on the subject Aon stressed that it believes the facility to be in the best interests of clients and reinforces the benefits of operating in the London and Lloyd's subscription markets.

Some underwriting sources, however, have expressed concern about so-called blind underwriting.

“If you are blindly underwriting a percentage of someone's business, you need to do your aggregate work,” said one source who asked not to be named.

“It is writing a line slip,” noted another market source, “but it still needs to be done properly.”

A source noted that when underwriters in London “give their pen” to a U.S. binding authority, they still have tight controls over what is underwritten.

While a brokerage source said a rash of deals such as the Aon/Berkshire arrangement is unlikely in the coming months, Willis said it is preparing a facility, called Global360, that will bring new following-market capacity for property/casualty, construction, aviation, and energy and marine risks.