D A Strategy’s Charles Rowley outlines how a strong business contingency plan can help mitigate any challenges that may arise from a coverholder impacted by unforeseen circumstances.
It is essential for your business resilience to stare into the face of severe counterparty risk. DA Strategy recently completed a piece for work for a carrier client to put in place contingency plans in case a coverholder, managing general agent (MGA) or third-party claims administrator (TPA/DCA) were to fail. Similarly, MGAs and TPAs need to consider counterparty risk which could threaten loss of lines or key client contracts.
It is abundantly clear that having a robust and comprehensive contingency plan in place is essential – particularly for delegated authority carriers – because they are relying on their coverholders and MGA to be their front line with clients.
Given the current situation with Covid-19, our recent client instruction was very well timed indeed.
It is clear this devastating global pandemic is impacting crucial business relationships which have become an intricate part of the global insurance industry. Delegated authority programmes have proven to gain more traction in the end market, given their obvious advantages of serving increasingly fragmented distribution networks, but as with all partnerships, during times of uncertainty, they need to be monitored closely and supported where possible.
Regrettably, we are likely to see some coverholder failures arising from this pandemic and steps must be taken now to build resilience to this risk and develop analysis that helps identify potential issues early so that support can be offered before the situation deteriorates beyond salvage.
D A Strategy has identified the triggers for coverholder failure or severe operational risks which include the following:
- Lockdown measures impacting the income of a significant proportion of the customer base curtailing instalment payments, new business, and renewals.
- A surge in business client failures resulting in significant return premium and consequent return commissions.
- Implementation of extended cancellation terms to allow clients longer to pay with consequent slower cashflow.
- A surge in client claims with consequent increased administration costs.
- An E&O claim.
- Curtailment of external product training programmes for recently launched products that are ‘stuck in transition’.
- Failure of a key IT supplier or upheaval in the midst of a significant IT transformation.
- Carrier cancellation of a key coverholder binding authority which impacts on the business operation triggering an impact on other binding authorities with the same coverholder.
- Delays or rejections of binding authority renewal due to carrier partners having significant changes in risk appetite or more limited underwriting authorities.
- Regulatory failure leading to fine, suspension or withdrawal of license by FCA or AR provider.
Businesses that can handle these challenges are likely to have inherent resilience within their operation by having sufficient capital and cash in the bank, a number of different revenue streams and written down and credible ‘fit for purpose’ business contingency plans.
The independent ‘Can Do’ attitude that leads many entrepreneurs to start new businesses may also carry the risk that contingency or resilience planning is less well developed, particularly in the early years, than, for example, new business plans, sales strategies and forward budgeting. It should not be ignored and is an area where having some independent and expert advice is invaluable – if only as a check and control in these difficult and uncertain times.
When it comes to contingency planning when coverholders are involved, DA Strategy has identified a number of key oversight metrics that provide early warning. These include:
- Cash balance relative to fixed monthly expenses, credit terms and capital ratios;
- Near term revenue dynamics – bordereaux amounts vs prior month, quarter and year assessed by key business vertical; and,
- Reporting and payment timeliness.
How D A Strategy can help
Our D A Strategy team have handled a number of coverholder failures and managed the outcomes from these – some of which were very challenging incidents. Through this, we have developed significant in-house expertise in identifying key risks and managing these difficult situations and finding the right solution for all key stakeholders.
Protecting customers, key staff and other stakeholders as well as managing costs and cash flows is challenging and often puts carriers in conflict with banks and other creditors. Active management, intense data gathering, cash flow scrutiny, legal engagement and clear communication in these situations is crucial.
We know through our experience that it is never too late to review or fortify business contingency plans and that close, systematic and regular monitoring of counterparty structure and behaviour can reduce business risks.
If you are looking for any support during this difficult time please get in touch for an initial discussion which can be followed by a concrete plan.