Through coverholding, underwriting agents aroundthe world have built longstanding and extremely beneficialrelationships with carriers in Lloyd's and the London wholesaleinsurance market.

Delegated authority arrangements give managing general agentsand other coverholders access to risk capacity with a broad andspecialist appetite, and deliver high-quality, appealing risksdirectly to London insurers. The system has worked for everyone formore than a century. Today, however, many such partnerships areunder threat.

Ever-increasing regulatory requirements

In 2014, London market trade bodies commissioned consultants toreport on the market's challenges, and to outline possiblesolutions. Their report declared that London's continued prosperitywould rely on its being cheaper, easier, faster and better. Almosteveryone agrees with their prognosis, but these goals have not beenreached for most delegated authority business.

Instead, London has become more expensive and cumbersome.Ever-increasing regulatory requirements nowdemand that underwriters possess much more, and increasinglygranular risk and claims data. Bordereau reporting is woefullyinadequate to deliver the detailed level of informationrequired.

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

Looking at new systems

Most coverholders are happy to introduce new systems andprocedures to supply the data and analysis required for regulatorycompliance, but they understandably need two or three morepoints of commission to cover the cost. As members of a value chainalready feeling growing pressure from rising expenses, delegatedauthority holders typically have little slack to spend a few extrapercentage points on processing.

In many cases, however, London cannot afford even this smallmargin. Acquisition costs reach up to 40 percent for delegatedauthority business. With rates sliding, that price is alreadyunsustainably high. However, London cannot simply expectcoverholders to swallow the cost. It is no longer the only marketwith an appetite for the kind of risks it accepts through delegatedauthority. It is now much easier for London's producing partners tofind alternate insurers to assume the risks we now take on. Theyare especially likely to go down this road if London cannot or willnot offer to pay the additional compliance costs. After all, everycoverholder is already regulated in their local market. They havealready shouldered that burden.

A joint London market system could be created and providedrelatively easily and cheaply to all coverholders. Plans to do thisare afoot: London'smarket-wide technology initiative known as the Target OperatingModel (TOM) is beginning to address front-end challenges andobstacles to make London cheaper, easier, faster and better. ButTOM isn't helping at the back end.

Claims challenges are acknowledged and often raised at marketmeetings, but when it comes to priority-setting, they always seemto get pushed to the proverbial back burner. A market solution tothe 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 ripefor disruption. Business flight to other markets has already begunto happen. Our industry is awash with capital, and some savvyinvestors are waiting to displace incumbents as the ultimatecarriers of coverholders' quality risks.

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Meanwhile some Lloyd's managing agencies have begun to addresstheir own acquisition cost challenges by paring down the number ofcoverholders on their producer panels. The agents left withoutbackers are priming the pumps for a more general advance byalternate capacity providers. Sometimes those new risk carriers arein London; others are closer to the coverholders they support.

Some of the London market's largest syndicates and companies areactively considering solutions to the challenge, typically throughthe introduction of systems that involve one or another form ofstraight-through processing that can be provided down the chain toagents. However, few have embraced this option. The problem is solarge, and universal for Lloyd's, that it may seem too daunting totackle.

I see four possible outcomes:

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

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

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

4. Disrupting companies materialize toapply 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 arein London. However, for Lloyd's syndicates and London companiesthey are either unrealistic (#1), cost-prohibitive (#2), orunacceptable (#3 and #4). 

London needs an interim alternative

London needs an interim alternative, something to keep ourcoverholder relationships intact until the mooted market solutionmaterializes. Syndicates and companies could acquire individualtechnology solutions to the reporting challenge, and deliver themto their coverholders.

Several technologies are already for sale, and they can do thejob required for a fraction of a point of premium. But they have toact fast.

The stark reality is that syndicates which prove unable tocomply with Lloyd's latest Minimum Standards for coverholderbusiness by July 1, 2017 will not be permitted to continue writingit. Coverholders need to begin an open dialogue with their carriersabout how the problem will be addressed.

Paul Bermingham is the director of Advent Claims. Email him at [email protected]. Theviews expressed here are the author's own.