Apr 1, 2016

The London Market is presently being held back some outdated practices. The London Market Group (LMG) was formed with the remit of championing the modernisation of the Market. The LMG developed a Target Operating Model (TOM), which outlines fifteen initiatives which will help to overcome the challenges currently facing the Market. In February 2016, the TOM Steering Board of the LMG announced that, of the fifteen initiatives, there would be three prioritised in 2016[1]; Placing Platform Limited, Central Services Refresh Programme and Delegated Authorities.

Delegated authorities (also known as binding authorities) are agreements which are entered into by (re)insurers, allowing third parties to undertake duties that would ordinarily be carried out by the (re)insurer (for example, underwriting). The party to whom authority has been delegated is known as the coverholder. As part of its role as supervisor of the London Market, Lloyd’s approves and monitors each of the coverholders participating in the Market. Such approval ensures that underwriting is delegated only to financially sound coverholders with strong governance processes. (Re)Insurers however, remain legally responsible for auditing those that they have delegated authority to, to make sure that they are underwriting business within the framework outlined by the delegated authority agreement.

It is recognised that there are major inefficiencies in all delegated authority processes which need to be resolved[2]. Ultimately this is due to two reasons; inadequate systems and duplication of effort. Hard to access, centrally held, reference data often results in re-keying of the same information by multiple parties. This leads to a greater workload when renewing or amending existing contracts, as well as introducing an increased possibility of human error. The systems presently being utilised have also not been designed in such a way that they are compatible with each other – preventing straight-through-processing (STP) of delegated authority processes. Finally, as coverholders are usually delegated duties by multiple (re)insurers, the coverholders will have to provide identical information to many parties, leading to duplication of efforts both for the coverholders and for the (re)insurers who each have to monitor and audit separately their delegated authorities.

What should success look like?

STP, when facilitated across the market, would both reduce the burden of reporting and regulatory requirements (to all parties) and decrease the possibility of human error. On top of this, the mechanism for approving new coverholders and the whole lifecycle of delegated authority contracts would be more efficient. Achieving STP would mean that the quality of data (from contracts and about coverholders) held would be improved and that all parties would be able to access the information in a common format more readily. This would enable coverholders to cut out needless duplicated audits, provide compliance data to Lloyd’s easily on an ad-hoc basis and allow for ongoing compliance checks on binding authority agreements. By allowing multi-year delegated authority agreements (which would afford coverholders and their clients greater confidence than annual contracts), the Market would become a more attractive place to operate.

Where do things stand at the moment?

Under Solvency II, insurers have been given a deadline of March 31st 2017 to report delegated authority data in a standardised format. As such, delegated authority reporting is the problem most easily comparable to banking’s modernisation being driven by the regulators. This has put it on top of the list for Lloyd’s managing agents and the LMG TOM.

The Two Tier Solution

  1. Managing Agents

Managing agents must find a short term solution to meet the strict regulatory deadline before March 31st 2017, with progress reports expected as early as the end of June 2016. They cannot afford to wait for a central market solution as that could not possibly be implemented before the reporting deadline.

  1. TOM

The challenge for the TOM is to provide a long term solution which brings together the cover holders, brokers and managing agents under a single standard. With competing technology providers, multiple reporting formats and client confidentiality conflicts of interest between brokers and managing agents, this is a huge test and has been identified as one of the three most urgent priorities for the TOM.

What next?

First thing’s first –the managing agents must take individual responsibility to meet the Solvency II reporting deadline in March. The race is on. With half a dozen systems being used across the market, managing agents can no longer afford the time to blame technology and must concentrate on delivery. By leveraging existing technologies and implementing them through partnership with experts in change management, the Market has the opportunity to enforce its position as the dominant global insurance powerhouse.