As published by Insurance Day: Reducing expense and complexity for coverholders By Paul Bermingham, Director And Paul Argent, Director of Advent Insurance Management.
There is an urgent need to address the challenges associated with regulatory reporting under delegated authority arrangements in the London market – one of the top three concerns for the market’s Target Operating Model. Not long ago, Lloyd’s managing agencies realised that they had to address a pressing problem. For the significant slice of their business written by 4,000 coverholders, they do not possess the detailed risk and claims information required for gold-plated regulatory reporting.
The simple solution, it seemed, was to require producers to deliver the goods. But a year after the implementation of Lloyd’s minimum standard requirements, it is clear that handing off the problem has not worked. Another approach is required, and it could have fringe benefits. If managing agencies embrace the problem together, they can efficiently satisfy regulators, enjoy the benefits of an enriched data stream, and make London a more attractive place to do business. Ambitious plans to get coverholders to assemble detailed risk data have been knocked back by reality. Old-fashioned bordereaux, typically prepared manually, are plainly insufficient to provide the granularity necessary to fuel Solvency II own risk solvency assessments and the Financial Conduct Authority’s conduct reporting requirements.
Even after the 13 data fields originally requested from managing general agents were pared down by Lloyd’s to just six, it quickly became clear, as the first monthly bordereaux for 2016 rolled in, that coverholders are unable easily to fulfil even these reduced reporting requirements. Few managing general agencies (MGAs) possess the systems to collate the data, even those with sophisticated binder management tools. The market needs a cost-effective fix that works for them, for the syndicates, and for Lloyd’s.
Without it, managing agents face a stark choice. They may push their coverholders for the data they desire, and risk watching them walk away to another market in a less demanding jurisdiction. As starkly reported in the London Market Group’s (LMG) London Matters report, EC3 is an expensive and complex place to do business. Making placement in London more complicated and costly is obviously no solution. Alternately, insurers may accept insufficient reporting from their producers. With that concession, they would risk the wrath of regulators wielding fines, capital loadings, or worse. It is not an appealing pair of options. A third alternative provides a way out of the dilemma. If producers had a tool that harvests and collates data automatically at the source, and feeds that data to markets without re-entry and reconfiguration, a significant slice of London’s extra complexity and cost would be eliminated.
Problems with reporting under delegated authorities – one of the top three concerns for the Target Operating Model (TOM) – would be addressed, and one of the vulnerabilities identified in London Matters eliminated. Emerging technologies allow coverholders to capture the granular data required, and report it straight through to insurers, and even to the bureau, without intervention. These technologies have an obvious cost-benefit, and by delivering detailed risk and claim information into the hands of underwriters regularly, they allow informed reserving decisions to be made with greater confidence. In other words, it is possible to have better data for a lower cost, while making it easier and cheaper to do business in London. The real crux of this middle-way solution is to ensure it works for all parties and keeps everyone on side. A straight-through processing solution for those holding delegated authority should be provided by London’s risk carriers. Many MGAs work without the benefit of an integrated processing system, and so are likely to embrace such a solution. Others, primarily the largest MGAs, have invested significant sums in their systems, and are therefore less likely to adopt another which complicates their processes. They are more likely to walk away to a market with fewer and lower hurdles. But if some other benefit is attached to adopting a new system, they will be much more inclined to swap out of their existing, costly tech infrastructure. Providing a process solution at no cost, and incentivising producers by adding another percentage point or two of commission, will make London a more popular risk destination for MGAs, by reversing the dual London Matters challenges of cost and complexity.
Further benefits will accrue to underwriters from their gift to MGAs of a tool that harvests and structures data automatically at its source over a web-based system. The rich stream of LMG/Lloyd’s TOM-compliant information about delegated authority business will add to the accuracy of reserving exercises. It will help in compliance with forthcoming claims payment law under the new Insurance Act. It will allow more informed management of risk portfolios. Jurisdictional taxation issues will be managed without intervention. Conduct-related requirements for benchmarking points over the lifecycles of claims will be addressed. All of that will make compliance cheaper, potentially paring down expense ratios despite a slightly increased commission structure and the upfront cost of technology.
Handing off a London market problem to MGAs and third-party administrators did not work. Instead, it is incumbent upon the market to embrace and solve its own problem. Sophisticated tools which offer a solution are waiting. They could be provided as a central service on the model of Xchanging, or sourced from competing suppliers. Utopia would be a move by the market to adopt such a solution, provide it to coverholders, and offer a financial incentive for them to adopt it. We are all aware that London faces challenges. It is easy to see them as individual problems that can be addressed by chipping away at one, then another, for years. But a holistic solution that addresses multiple inefficiencies and barriers is far preferable: better for customers, better for producers, and better for insurers. It is a prize worth going after.