Capacity For Binding Authorities Drying Up

London Editor

London

“The full delegation of underwriting authority to a broker oragent is the fastest way to insolvency.”

Anthony F. Markel, president of Markel Corporation, Glen Allen,Va., uttered those controversial words during a speech he gave inJanuary.

Mr. Markels comments hit a nerve in the London market wherecapacity for binding authorities started drying up years agowellbefore the events of Sept. 11, according to marketparticipants.

To some underwriters, binding authorities are bad business. Butsupporters of managing general agents and binding authoritybusiness believe that the London market is in danger of paintingall binding authorities with the same brush and thereby abandoninga good, stable source of business.

“For every success story there are 20 horror stories,” said Mr.Markel during his speech. “Im totally in favor of giving ourchannel partners, agents and brokers, the necessary tools to beresponsive and provide outstanding customer services, but I dontwant them making underwriting decisions on our behalf.”

Then why do four of Mr. Markels six companies continue to dobusiness with MGAs?

“I love MGAs. Some of my best friends are MGAs,” Mr. Markel toldNational Underwriter. “I just suggest that the granting ofrisk selection and pricing authority without very, very sensitive,disciplined oversight and communication and controls of theMGA/wholesaler is not a good idea,” he said. “Our companies [that]have thrived with MGAs havegreat working relationship[s]” withthem, enabling us, “ frankly, to exercise those controls.”

He said he has observed “a much stronger abdication of thosedisciplines and oversights” at Lloyds.

Nevertheless, any lax attitude toward binding authoritiesappears to be a factor of the recent soft market because marketpractitioners on both sides of the Atlantic have found that manybinding authorities are not being renewed.

Alistair Maurice, leading underwriter for Amlin plc in London, amanaging agency at Lloyds, said “the neurosis in the marketplaceabout binders has been going on for about two or three years.”

“I think Tony clearly got his numbers the wrong way around,” hesaid. “There are not 20 failures for every one successfar from it,”he said. “The number of binders that go truly, spectacularly, badlywrong, you could probably count on the fingers of one hand.”

Indeed, he said, there are probably no more binders that gohorribly wrong than the number of treaties or facultativeplacements that go wrong.

Gary Clark, managing director of North America for MillerInsurance Group, said that well-controlled binding authorities canprovide a steady stream of income for the inevitable softmarket.

Julian Sawyer, director of North America for Miller InsuranceGroup, a London market broker, said there are some Lloydsunderwriters who arent too bothered about letting their MGArelationships go out the window, since they can devote capacity tolines that are getting the highest rate increases.

“Were saying that that is a very short-sighted approach,” hesaid.

He and Mr. Clark have observed knee-jerk reactions that appearto be based almost entirely on the short-term leverage of a hardmarket, rather than consideration of the long-term MGArelationships that have provided bread-and-butter profits for manyyears.

To prevent abuses with binding authorities, Mr. Maurice said,“We first and foremost underwrite the man–underwrite thecoverholder [or MGA], then the business itself, and finally theterms.”

“If youve got the right coverholder, youre in with a pretty goodchance of making a profit,” he said.

“There are syndicates out there that have marked their files, Donot renew, without hearing what the broker has to say to them orindeed what the terms would be,” he said.

“We are seeing business, which made 30 to 40 points profit,disappear from Lloyds because someone has it in their skull thatthey dont want to write this type of business. Its a binder andtherefore they think its bad business,” he said.

He said that Amlin is picking up the binders “where we can.”

“I already lead probably 70 to 80 percent of my overall incomeanyway,” he said. “And were certainly able to get the right termswith the right coverholders, but we cant do it by ourselves.”

Further, he said, Amlin doesnt have an infinite amount ofaggregate available.

“I dont want to be the biggest writer in just Texas and miss outon nice business in maybe Montana or Wyoming.”

Mr. Maurice noted that he has never lost money writing propertybinders. “In the last eight or nine years, Ive probably made anaverage return of 20-to-30 points net profit every year.”

He said the Amlin property binder team has increased its income60 percent this year for binding authorities.

“We, at Amlin, come from the attitude that binders are a verynecessary source of effectively high volume/generically low premiumbusiness,” he said.

“Youve only got to ask people, how many World Trade Centerlosses have been picked up under the property binding authorities,and the answer is nil,” he said.

He admitted that some casualty experience has been bad, butthats not just for binders.

Mr. Maurice said that during the 1990s, Lloyds and many playersin the company market “gave out too many binding authorities.”

“When I took over another syndicate here, they had somethinglike 500 binding authorities,” he said. “Now its down to 200 in ayear, and 200 for my team is very controllable.”

Next week: Reaction from MGAs in the UnitedStates.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 25, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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