Capacity For Binding Authorities Drying Up

London Editor

London

“The full delegation of underwriting authority to a broker or agent 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 in January.

Mr. Markels comments hit a nerve in the London market where capacity for binding authorities started drying up years agowell before the events of Sept. 11, according to market participants.

To some underwriters, binding authorities are bad business. But supporters of managing general agents and binding authority business believe that the London market is in danger of painting all binding authorities with the same brush and thereby abandoning a 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 our channel partners, agents and brokers, the necessary tools to be responsive and provide outstanding customer services, but I dont want them making underwriting decisions on our behalf.”

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

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

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

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

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

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

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

Gary Clark, managing director of North America for Miller Insurance Group, said that well-controlled binding authorities can provide a steady stream of income for the inevitable soft market.

Julian Sawyer, director of North America for Miller Insurance Group, a London market broker, said there are some Lloyds underwriters who arent too bothered about letting their MGA relationships go out the window, since they can devote capacity to lines that are getting the highest rate increases.

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

He and Mr. Clark have observed knee-jerk reactions that appear to be based almost entirely on the short-term leverage of a hard market, rather than consideration of the long-term MGA relationships that have provided bread-and-butter profits for many years.

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

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

“There are syndicates out there that have marked their files, Do not renew, without hearing what the broker has to say to them or indeed 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 that they dont want to write this type of business. Its a binder and therefore 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 income anyway,” he said. “And were certainly able to get the right terms with the right coverholders, but we cant do it by ourselves.”

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

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

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

He said the Amlin property binder team has increased its income 60 percent this year for binding authorities.

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

“Youve only got to ask people, how many World Trade Center losses 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, but thats not just for binders.

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

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

Next week: Reaction from MGAs in the United States.

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

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