24th March 2020
This article was first published in Insurance Day.
The growth in delegated authority business has continued to gather momentum, but the challenge is not only underwriting but also underpinning the operation.
For all participants in the delegated authority market the difference between the expectation and reality are becoming more profound. For managing agents and capacity providers the flexibility to allocate capital via delegated authority still delivers benefits in terms of focused niche underwriting and the diversity of risk. For MGAs and brokers it allows them to meet the needs of their clients for specific products and utilise their expertise in areas where they excel.
However, the growing regulatory burden, be it the FCA, Solvency II or the impact of the Part VII transfers that are underway to move EU business from the UK in preparation for a potential loss of passporting rights is creating a new dynamic. The very benefit that delegated authority business delivers is exacerbating the challenge of meeting the regulatory and support functions for the MGAs, brokers and managing agents.
The benefit of allocating capital to small firms which can operate without the need for hefty investment, can harness technology to reduce underwriting staff, and speed processes is now challenged by the growing cost of the infrastructure needed to ensure compliance and operational resilience. It has created new demands from our clients and partners in the market.
There is no single reason driving these demands rather they are a reaction to the changing market and its plans for the future. The work Lloyd’s is undertaking within its Blueprint for the Future, and the need to be ready to take advantage of the new systems when they go live, has created a need for the ability to adapt strategies. This includes the work currently underway around DASats. The continued drive towards portfolio profitability in what remains a challenging market, and a requirement to reduce operational costs continue to occupy the thoughts of many senior managers.
There is also a desire for better data and the ability to more effectively use it. There is a growing need to prove greater support to the underwriter with more accurate and timely data, but there is also a requirement to create more granular data that can be used to aid the reporting responsibilities to both capacity provider and regulator. It comes as concerns continue over the increased demands around regulatory reporting.
It has led to a clear demand for access to a greater and more experienced pool of resource with which to meet many of the challenges they face. There is a need to have the necessary expertise to enable firms to change or react quickly to changes in their DA landscape, market conditions or meet their regulatory requirements. As such they are looking for capabilities in all aspects of the DA life cycle including Underwriting Management (at Senior Levels), Business Planning, Compliance, Operations, Legal, Audit and Inspection. They understand what is required to manage and enhance their business. However, the costs of hiring quality staff to carry out these roles is prohibitive for smaller entities and the managing agents are also questioning their ability to attract delegated authority underwriting managers that can effectively carry out the tasks required. Technology can drive a great deal of efficiencies in the market and will continue to do so. However, there remain tasks which simply need human interaction.
Costs are spiralling and the increased demands around regulatory compliance are only adding to the pressure that businesses are facing. The market remains specialist, bespoke and one size does not fit all. Firms may have strength in some areas but require support in others. It necessitates a modular response from those that provide the back office support that is increasingly being demanded. The services and processes involved are not seen to be business specific but there are greater efficiencies that can be had, although economies of scale are often significant in the delivery of those benefits.
The regulatory burden is pushing up the costs to all in the market as a growing focus on the performance of the London market and its ability to enhance its delivery to clients has been identified as a key priority by the regulators for 2020. Brokers and MGAs are growing increasingly concerned around the rising costs but also the choices they are having to make. In many respects managing agents are faced with having to go back to basics to ensure their DA portfolio is aligned to their ambitions and strategy and use this information to structure and identify a bespoke support environment that compliments their business models and goals.
Once that support structure has been identified the challenge remains as to how you create the model that will enable you to deliver the support the business requires. Given the conversations that we continue to have with clients across the market the solutions may not be found in isolation, rather the ability to access external expertise as and when it is required.
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