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TIME FOR ACTION ON COVERHOLDER SOLUTIONS

As published by Insurance Day: Time for action on coverholder solutions By Paul Bermingham, Advent Insurance Management

Rising compliance costs mean some managing agents will not be able to write some lines of coverholder business after July 1, 2017. Something needs to be done

Perhaps Brexit will lead to relaxed reporting requirements for Lloyd’s insurers accepting business under delegated authorities. Maybe, outside the solvency regime of the EU, we as a market will no longer need to think about the need to harvest more and better data from coverholders. Perhaps the need for a claims reporting solution will eventually be addressed under the Target Operating Model (TOM), and maybe that central solution will be sufficient to meet new regulatory demands.

Or maybe, by the time we know if these things will happen, it will be too late.

Two years ago the London Matters report declared in order to prosper, we as a market must be cheaper, easier, faster, and better. In the coverholder market that just hasn’t happened. We have become more expensive and even more cumbersome. Regulators have demanded more risk, financial and service detail. We, in turn, have simply handed the problem to our managing general agents (MGAs), coverholders and third-party administrators, and left them to deliver solutions.

As rates continue to slide, London faces a grave dilemma. Coverholders are typically willing to introduce new systems and procedures to supply the data and analysis required for regulatory compliance, but they want two or three more points of commission for the service. Acquisition costs of up to 40% for coverholder business are already unsustainably high, and ripe for disruption, but the immediate need to garner new data for regulatory purposes is inescapable. Managing agencies know that if coverholder business isn’t compliant with Lloyd’s latest minimum standards by July 1, 2017, they will be unable to continue writing it, but they don’t have the margin to pay more.

The pressure is ratcheting up. We cannot afford to wait for the problem to go away, or for someone else to solve it for us. It is equally unacceptable simply to pass the problem onto coverholders. We’ve given them the problem, and now we need to provide a solution.

Coverholders are the lifeblood of Lloyd’s. The delegated authority model has proved exceptionally robust for targeting niche areas of risk. The majority of those delivering it are small, entrepreneurial agencies who know their niche and want to service it with popular and effective products. When reporting requirements were not onerous (many MGAs launched only with a spreadsheet for processing bordereaux), they were
able to get on with the business, to everyone’s benefit.

If we simply leave the reporting problem on their doorsteps, they must choose between devoting resources to compliance or sales. Many are likely to choose sales, and find a local market to assume the risk, especially if London cannot or will not offer to make up the additional compliance costs. After all, every coverholder is already regulated in their local market. They have already shouldered that burden.

This possibility of business flight is no longer a worry; it has begun to happen. Surplus capital from a variety of sources is waiting to take up more of our coverholders’ quality risks. Some managing agencies, to cut their own costs, have begun to prune their producer panels. The hapless producers left without capacity are whetting the appetites of alternative markets.

Grasping the problem

The problem may seem too huge to grasp hold of. The largest managing agencies are actively considering solutions, typically involving one or another form of straightthrough processing. So far they have failed to make the leap to this efficient solution. The problem is so large, and universal for Lloyd’s, that it may seem too daunting to tackle. I see four possible outcomes:

First, the market gets its act together and offers a solution quickly. Second, everyone does what they do already (bordereaux), and delivers the problem to coverholders, but costs go up, even as rates go down. Third, some of our coverholder business, perhaps a large share, migrates away from London to local markets. Finally, disrupting companies materialise to apply the available technologies in a meaningful and
dynamic way, and disintermediate the incumbents.

Whenever claims challenges are raised at market forums, the standard response is aired: TOM’s front end is getting the attention first. So a market solution demands a long wait. And despite some hopeful sounds from various market figures, the Financial Conduct Authority has been very clear its regulatory regime is not going to be eased, inside Europe or out, even as Lloyd’s has introduced another more stringent minimum
reporting standard. Our coverholder customers aren’t poised to wait. They are ready to walk away to cheaper, easier to do business with, local markets, or to more dynamic replacement capital.

Something has to give. If that something is London’s steadfast wait-and-see attitude, we may retain our pole position in the global delegated authority market. To do so requires a fifth way. Managing agencies must act now to deliver an individual solution to their coverholders. Technologies are available that do the job for a fraction of a percentage point of premium. They are self-financing, since they remove costly steps form the data entry and exchange process. London’s star can continue to rise, but it needs this gentle push.