WRITTEN BY ALLY REDDING
The previous Insurance Thinking Space article titled Forced reform of insurance delegated authorities explored the inefficiencies that exist in the delegated authority sector and the longer term solutions being discussed in order to meet the deadlines provided under Solvency II. So what is the current state of play and what have we witnessed first-hand of how the insurance industry is responding to the impending deadlines under this regulation?
Delegated authority, also known as binding authority, is “an agreement between a managing agent and a coverholder under which the managing agent delegates its authority to enter into a contract(s) of insurance to be underwritten by the members of the syndicate managed by it to the coverholder in accordance with the terms of agreement”. This is a popular arrangement for outsourcing particular functions to other intermediaries or third parties; such as underwriting, handling of claims and issuing insurance documents. Managing agents have over 7,500 binding authority contracts with over 3,000 coverholders which represents around £6.2 billion of premium income. Whilst this is great for the insurance industry and the economy, it is not without its weaknesses.
Delegating authority to coverholders
All coverholders, before they are registered, have to be approved by Lloyd’s in accordance with the Intermediaries Byelaw. To become a coverholder at Lloyd’s the entity must be sponsored by a Managing Agent, and approved by Lloyd’s, and will be given a certain approved level of authority. There is therefore a need to make sure that from the start of the process that those delegating authority make sure they have set their own clear standards in regards to the level of authority that they have provided to the coverholder and the data that they require to meet internal and external rules and regulation. Coverholders also need to comply with the Lloyd’s Coverholder Reporting Standards which provide a number of central standards to adhere to in relation to the data that must be collected. However, as the Financial Conduct Authority (FCA) 2015 Thematic review highlighted, there are areas of concern regarding delegating authority. For example, the report found that intermediaries delegating specific functions did not always fully acknowledge their regulatory obligations and abide by these, customers were negatively impacted by these arrangements, issues around appropriate due diligence taking place and also the level of controls in place to manage the procedures and ensure audits were sufficient.
As a continuation of this process, the second area to consider is that due to the nature of the subscription market and the delegated authority model (resulting in increased complexity and additional participants involved; both lead underwriters and following market underwriters), there is greater room for inefficiency, duplication of effort and missing data. For example, bordereaux, which is a ‘report containing a list of premiums payable and claims paid or due that is prepared by a coverholder for a managing agent or by a reassured for its reinsurer’, can often be delivered incomplete or not at all. There is therefore, a need to make sure that the coverholders are writing risks within the agreed framework, that the full data is accessible to both the lead underwriters and the following market and also that the managing agents are processing the bordereaux, mapping their exposure and meeting their reporting deadlines with the regulator and Lloyd’s.
Impact of Solvency II - Pillar 3 deadlines
Whilst the longer term solution of a central service offered by the Target Operating Model (TOM) from the London Market Group continues to develop, the insurance industry is having to look at solutions in the immediate term in order to make sure that they meet the deadlines set under Pillar 3 -Reporting & Disclosure as part of Solvency II. In preparation for the final deadline of the 31st March, 2017, the market was asked to participate in a dry run with returns in August 2016. This process unearthed the fact that many participants within the market struggled to deliver the required data, with some not even able to participate at all. Whilst the lead underwriter can often access the data more easily, it is clear that the data received on follow risks is often poor and/or incomplete.
Immediate and long term solution
There is a known industry-wide problem of missing bordereaux; data received in the wrong format; and inaccurate information, all of which have led to those in the market accumulating a large backlog of legacy cases that haven’t been processed. The insurance industry needs to tackle the immediate problems identified and in parallel understand how to prevent these from re-occurring by leveraging the appropriate skilled resources. Moreover going forward by leveraging this skilled resource pool they can monitor the quantity and quality of data being collected ensuring it is processed in a timely and efficient manner. Otherwise, as the dry run has shown, the problem will continue to grow at a cost to participants in the market and they will not be ready for the next impending regulatory deadline.