EY partner Simon Burtwell is a leading authority on delegated authorities. He predicts growth will continue but warns (re)insurers that regulators are scrutinising all forms of delegated underwriting,
Why is the topic of Delegated Authorities receiving such attention in the London market?
(Re)insurers are increasingly using delegated underwriting authorities to access markets. Indeed, EY estimated that more than £70bn ($100bn) of global premiums in 2017 were accessed through coverholders.
As Lloyd’s and the London subscription market has long depended upon coverholders as a distribution route, it is no surprise that this growth has also been witnessed on Lime Street. EY analysis estimates that around £15bn ($20bn) of delegated premiums written in the London market has flow through delegated authorities.
We also believe that over £10bn is written directly into Lloyd’s – effectively one-third of the market – and that this growth will continue because (re)insurers are under pressure to diversify and grow their books. Delegated authorities, used well, are an efficient way of diversifying portfolios, expanding geographic reach and targeting niche specialty classes. As a consequence, we anticipate that London market premiums written through coverholders will increase from £15bn to over £20bn within the next five years.
Why are Delegated arrangementscoming under such scrutiny?
The sizeable growth of the market has inevitably attracted scrutiny from regulators. In the UK, the FCA and PRA have focused on insurers’ oversight of distribution networks, with a number of thematic reviews and regulatory interventions.
A key challenge for all insurers in the London market that use binding authorities is to ensure they have robust control frameworks in place to manage the additional risk of delegating your underwriting to a third-party.
Are there other challenges that insurers are facing in the space?
Yes, a number. In addition to navigating regulatory hurdles, strategic and operational misalignment can also create significant challenges for carriers.
For example, many insurers are failing to treat delegated business as a unified distribution concept and consequently do not have clear strategies for these arrangements. This is resulting in undifferentiated value propositions and the inability to effectively control portfolios.
By not distinguishing delegated arrangements from open market books, insurers typically struggle to effectively monitor portfolios and understand drivers of profitability.
Manual, onerous and often duplicative processes are also evident in the delegated space. These operational inefficiencies are resulting in higher administration costs and expense ratios that are not commensurate to the benefits of ‘giving-away-the-pen’.
What should carriers look to do to address these challenges?
Carriers can seek to differentiate competitive positions through a number of initiatives.
They need to ensure they have defined and achievable strategies for delegated business so that their value propositions can be easily articulated to third parties. This is important given how competitive the space has become.
London market carriers need to ensure they respond to regulatory scrutiny as best as they can. They can do this by implementing and evidencing an effective framework for oversight and reporting, and defining clear accountabilities as to who is managing risk across the portfolio.
Investing in technologies across the value chain offers various benefits to insurers in the space.
What does this all mean for carriers in the space?
The implications for carriers who transform delegated operations versus those who maintain status quo will be significant. Those who deliver transformational change have the opportunity to consolidate and build market leading positions through defined strategies, efficient operating models and robust control frameworks. Whereas, those who maintain the status quo face losing competitive positioning, will continue to have poor visibility into book performance and risk the inability to effectively react to ever-enhancing regulatory scrutiny.
As the market continues to grow in the coming years, those who are proactive in addressing challenges have the opportunity to target significant profitable growth. Ultimately, we estimate that up to £200m of incremental underwriting profit could be on the table for market leaders who deliver year on year combined ratio improvements over the next five years. In other words, the reward will be handsome for those carriers who invest properly in managing their delegated authoritie