Lloyd’s, MGAs and a new risk based approach

D A Strategy in Lloyds

There has been a lot of noise in the market about the future of Lloyd’s and what this means for the corporation and all its stakeholders.

One of the key areas the market’s transformation project is focusing on is delegated authority business.

Binder/Managing General Agent (MGA) business has grown significantly in recent years and now makes up nearly 40% of Lloyd’s annual premium income, bringing with it materially higher acquisition costs and marginally lower administration costs.

However, in spite of this change in business mix, Lloyd’s has not adapted quickly enough – and it freely accepts this in The Future at Lloyd’s Prospectus sent to the market at the beginning of May.

Perceived inefficiencies around costs and approvals process in addition to heavy-handed oversight has actually driven a number of MGAs to place their business into the insurance company market, thereby denying Lloyd’s a chunk of what should be its core business.

Nevertheless, the spotlight on delegated authority business has meant this fast-growing part of the market is now at the forefront of the transformation agenda and changes are well underway, with a number of enabling initiatives coming out of Lloyd’s and the LMG.

A new risk-based approach

The Lloyd’s consultation around a new approach to third party oversight and its resulting actions are designed to produce a revised code of practice when it comes to delegated authority.

The corporation believes these changes will modernise the current arrangements, support reduced compliance costs, reflect modern distribution methods and allow for a more risk-based approach to oversight and, if delivered correctly, so do we!

The good news is that it should result in faster decision marking on both applications and adjustments to MGA and coverholder authorisations.

Strong managing agents should be able to speed up many new applications by between two and four weeks, through removing the need to involve Lloyd’s at this stage. The Lloyd’s team itself will thus have more time to accelerate other approvals because straightforward tasks will be passed back to lead managing agents.

The Lloyd’s third-party risk and oversight team is to be applauded for grasping this opportunity to speed up the process, removing the temptation to ‘offload’ work, and in some cases blame for delay, onto Lloyd’s centrally.

However, resources freed by these changes will mean more precise analysis of applications and ongoing due diligence. As the workload from GDPR, the Insurance Distribution Directive (IDD) and Brexit changes recede, delegated authority teams will: a) start to analyse their portfolios in more depth; b) start to join the dots between their bordereaux, claims, audit and due diligence reviews; and c) start to develop better management information to draw broader conclusions on each MGA.

When it comes to a more risk-based approach, one of the concerns that managing agents have expressed is that brokers will quickly identify which managing agents are ‘strong’ and have approval from Lloyd’s to agree ‘lower risk’ new coverholders directly.

The concern is that as a result, it will drive business away from those managing agents that are not classified by Lloyd’s as ‘strong’. This could, we hear, lead to suggestions around the new measure being anti-competitive, or stifling innovation, and Lloyd’s may need to be careful here.

However, having spoken with a number of people across the market, it is already clear to most brokers which carriers or managing agents have invested in their delegated authority teams to support new applications and which have not. As a consequence, what Lloyd’s will be doing in making these differentiations is arguably already common knowledge.

Upfront clarification on the actual risks involved in each MGA opportunity is more important as the variety of MGA opportunities changes. True online MGAs are very different to traditional MGAs. For example, algorithm driven rating systems generally mean that checks on underwriters’ CVs are less relevant and the need for traditional E&O coverage is reduced, but cyber-liability insurance is a must.

In addition, direct payment of premium into a carriers account removes significant financial risk. The risk-based approach Lloyd’s is driving must give the market an opportunity to focus approval and due diligence work more appropriately than the old ‘one size fits all’ approach.

Takeaways: What will it take to be a preferred MGA in light of a new risk-based approach?

  • Being fully aware of your risk profile with insurance companies or managing agents is essential. From data received over the years carriers may believe an MGA to have issues with IT systems, bordereaux quality, limited financial crime controls, a lack of tax data, and many other possible matters. Often, this is due to miscommunication during visits or audits and indeed from out of date information! Check this with your lead carriers so that, rather like a personal credit score, it shows you in the best light!
  • Actively managing your MGA’s risk profile with managing agents will become increasingly important. Completing the ‘bare minimum’ attestation will of course be an option, however, as carriers and Lloyd’s work further on joining the dots any ‘missing’ items or ‘weaknesses’ will create a negative point on the MGA scorecard. Therefore, swiftly fixing any recommendations from approval, audit or bordereaux errors is key.
  • Leading on from the above, communication with your managing agent’s delegated authority team, their auditors during the audit process and any other parties in the process will be incredibly useful. If you have any issues with bordereaux production because of a new system, or someone being away ill, or with an auditor ‘getting the wrong end of the stick,’ it is best to raise it with a plan for fixing the matter, or a clear explanation to the delegated authority team, so that they understand what is being done.

Charles Rowley

The full version of this article was published in Insurance Day in July 2019