Filed Under:Agent Broker, Agency Technology

Can we create a sleeker, leaner insurance model?

Opinion

Tower Bridge, on the river Thames, in central London, Thursday, Jan. 19, 2017. (Photo by Joel Ryan/Invision/AP)
Tower Bridge, on the river Thames, in central London, Thursday, Jan. 19, 2017. (Photo by Joel Ryan/Invision/AP)

Through coverholding, underwriting agents around the world have built longstanding and extremely beneficial relationships with carriers in Lloyd’s and the London wholesale insurance market.

Delegated authority arrangements give managing general agents and other coverholders access to risk capacity with a broad and specialist appetite, and deliver high-quality, appealing risks directly to London insurers. The system has worked for everyone for more than a century. Today, however, many such partnerships are under threat.

Ever-increasing regulatory requirements


In 2014, London market trade bodies commissioned consultants to report on the market’s challenges, and to outline possible solutions. Their report declared that London’s continued prosperity would rely on its being cheaper, easier, faster and better. Almost everyone agrees with their prognosis, but these goals have not been reached for most delegated authority business.

Instead, London has become more expensive and cumbersome. Ever-increasing regulatory requirements now demand that underwriters possess much more, and increasingly granular risk and claims data. Bordereau reporting is woefully inadequate to deliver the detailed level of information required.

The most efficient way for the ultimate carriers to obtain the data they need for the regulators is to get the agents to capture all the relevant risk and claims details, and send them over electronically. But rather than helping its agents accomplish this, London has simply handed off the problem to MGAs, coverholders and TPAs.

Looking at new systems


Most coverholders are happy to introduce new systems and procedures to supply the data and analysis required for regulatory compliance, but they understandably need two or three more points of commission to cover the cost. As members of a value chain already feeling growing pressure from rising expenses, delegated authority holders typically have little slack to spend a few extra percentage points on processing.

In many cases, however, London cannot afford even this small margin. Acquisition costs reach up to 40 percent for delegated authority business. With rates sliding, that price is already unsustainably high. However, London cannot simply expect coverholders to swallow the cost. It is no longer the only market with an appetite for the kind of risks it accepts through delegated authority. It is now much easier for London’s producing partners to find alternate insurers to assume the risks we now take on. They are especially likely to go down this road if London cannot or will not offer to pay the additional compliance costs. After all, every coverholder is already regulated in their local market. They have already shouldered that burden.

A joint London market system could be created and provided relatively easily and cheaply to all coverholders. Plans to do this are afoot: London’s market-wide technology initiative known as the Target Operating Model (TOM) is beginning to address front-end challenges and obstacles to make London cheaper, easier, faster and better. But TOM isn’t helping at the back end.

Claims challenges are acknowledged and often raised at market meetings, but when it comes to priority-setting, they always seem to get pushed to the proverbial back burner. A market solution to the challenge of delegated authority claims reporting is therefore, a long way off.

London delegated authority market is ripe for disruption


In the interim, the London delegated authority market is ripe for disruption. Business flight to other markets has already begun to happen. Our industry is awash with capital, and some savvy investors are waiting to displace incumbents as the ultimate carriers of coverholders’ quality risks.

Related: Brexit and the P&C insurance industry: What's next?

Meanwhile some Lloyd’s managing agencies have begun to address their own acquisition cost challenges by paring down the number of coverholders on their producer panels. The agents left without backers are priming the pumps for a more general advance by alternate capacity providers. Sometimes those new risk carriers are in London; others are closer to the coverholders they support.

Some of the London market’s largest syndicates and companies are actively considering solutions to the challenge, typically through the introduction of systems that involve one or another form of straight-through processing that can be provided down the chain to agents. However, few have embraced this option. The problem is so large, and universal for Lloyd’s, that it may seem too daunting to tackle.

I see four possible outcomes:

1. The London market gets its act together and offers coverholders a broad solution quickly.

2. Everyone does what they do already (bordereaux), and the problem is handed to coverholders, but insurers bear the cost through a hefty increase in commissions.

3. Some coverholder business, perhaps a large share, migrates away from London to local markets.

4. Disrupting companies materialize to apply the available technologies in a meaningful and dynamic way, and disintermediate the incumbents.

None of these solutions pushes coverholders out of the business. After all, they are much closer to the ultimate clients than we are in London. However, for Lloyd’s syndicates and London companies they are either unrealistic (#1), cost-prohibitive (#2), or unacceptable (#3 and #4). 

London needs an interim alternative


London needs an interim alternative, something to keep our coverholder relationships intact until the mooted market solution materializes. Syndicates and companies could acquire individual technology solutions to the reporting challenge, and deliver them to their coverholders.

Several technologies are already for sale, and they can do the job required for a fraction of a point of premium. But they have to act fast.

The stark reality is that syndicates which prove unable to comply with Lloyd’s latest Minimum Standards for coverholder business by July 1, 2017 will not be permitted to continue writing it. Coverholders need to begin an open dialogue with their carriers about how the problem will be addressed.

Paul Bermingham is the director of Advent Claims. Email him at paul.bermingham@advent.global. The views expressed here are the author's own. 

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