Delegated authority agreements have become a staple for many insurers. Insurance Times takes a look at the pitfalls to be wary of, the questions insurers should be asking and how to ensure these arrangements are successful
Delegated authority (DA) agreements, such as binding authority arrangements, lineslips or consortium agreements, boomed during yesteryear’s soft market as insurers – particularly within the London Market – grappled with how to boost their premium income opportunities and move into more voluminous lines of business to improve topline figures.
Despite the trajectory into a now hard market, DA agreements, but especially binding authority agreements, have remained popular with insurers.
Working with a coverholder or managing general agent (MGA), for example, can help insurers reach niche sectors and geographical markets that they cannot currently access.
It could also provide a more cost-effective way to branch out into a new line of business, without having to hire an entire new underwriting team. Some insurers may even transform part of their business into an MGA if they wish to divest certain books.
Delegated authority agreements can also help smaller insurers to diversify their portfolio, provide more agility and flexibility compared with building up an in-house team and can potentially offer access to innovative new products.
‘Human nature’
Despite the overall success of delegated authority arrangements, Andrew Schütte, partner at Keoghs, still sees examples of where these agreements go wrong, primarily because “it’s human nature not to be as careful with someone else’s money as you would be with your own”.
He cited Sphere Drake Insurance and Anr v Euro International Underwriting Ltd in 2003 as a recent example, where Sphere Drake authorised Euro International Underwriting (EIU) to write traditional personal accident business on their behalf.
According to a report from law firm CMS, EIU instead wrote a large volume of workers’ compensation carveout reinsurance. The case also involved broker Stirling Cooke Brown, which had interests in underwriting agencies and licensed carriers that were involved in underwriting workers’ compensation carveout or similar products.
The judge ruled in favour of Sphere Drake, stating that the firm had been “serially misled as to the nature of the business being underwritten”.
Although Schütte acknowledged that this is an “extreme” example with “an element of scandal and dishonesty”, it does however highlight how vital it is that delegated authority contracts are crystal clear in their content and that the relationship between insurers, brokers and MGAs is well managed.
Agreements gone awry
According to Schütte, the main risk that can arise with binding authority agreements is if the MGA “will exceed the authority that they have been given”.
If the coverholder is also charged with delivering a claims service on behalf of the insurer, problems can occur if the “referral criteria aren’t properly observed” as the MGA will then “be dealing with claims which are worth more than their authority level” and paying claims that they shouldn’t.
“Often you’ll find that the book isn’t performing well, which is why maybe people have taken a generous view of what they were allowed to do under the binding authority agreement, even exceeded their authority,” he said.
Charles Rowley, director of DA Strategy, added that it is the breakdown of trust and communications that can also cause issues for delegated authority deals.
He explained: “Delegated authority partnerships between MGAs [or] coverholders and carriers are based on trust. Trust is built through delivering on promises including promises about premium expectations, underwriting expertise, underwriting profit, policyholder servicing, payment of premium, delivery of data, meeting regulatory requirements and the like.
“Failing to deliver on these promises or a breakdown of communications are areas where trouble can start.”
Warning signals insurers should watch for include late reporting, as “people don’t normally like to report bad news quickly,” said Schütte.
Rowley cited further red flags such as cash flow issues leading to bankruptcy, loss of key staff, IT failures and management change as other indicators that an agreement might be going wrong.
“Worsening communication, delayed responses to enquiries, poor bordereaux and payment, significant change in type of customers and increasing numbers of complaints may also be indicative of trouble,” he added.
Considerations
The key to a successful delegated authority agreement, therefore, lies in “setting expectations between all partners, both at the outset and throughout the relationship” said Rowley.
This includes “regular updates - whether monthly, quarterly or when there are changes in the market or circumstances”.
Rowley continued: “This must extend beyond simply sharing data, reports and performance metrics and should include face-to-face, conference or video discussions, which review the underwriting questions, claims questions and data questions arising.
”This clearly aids transparency and the strengthening of trust between the partners. It also reduces the risk of unpleasant surprises.”
Schütte added that there are a number of questions that insurers should pose prior to signing on the delegated authorities dotted line.
This includes asking about an MGA’s staffing and resources – particularly pertinent in today’s home-working regime - whether the MGA intends to sub-delegate any of the insurer’s business and how it plans to deal with any potential conflicts of interest.
Insurers should also check that the MGA has sufficient insurance itself, such as professional indemnity and errors and omissions cover – Schütte said this is often “not well expressed” and can be “a real face palm moment” if the insurer decides to make a claim.
Furthermore, Schütte said the termination section of the agreement should be carefully reviewed.
“I’ve seen them where the only real basis on which to terminate is if there’s been some sort of fraud by the coverholder. Well that’s a very high bar.
”In fact, you normally find that insurers want to terminate if it’s not making any money,” he explained. This section should also clarify the powers the MGA has once the insurer decides to terminate the agreement and identify who actually gets to keep the customers.
The mantra for success then, according to Rowley, is “trust but verify”.
He explained: “Having a strong monitoring and reporting system in place to back up the trust given can reduce risk of going wrong.”
Who has responsibility for regulatory compliance?
In terms of compliance, it is the insurer that will face the music if an MGA acting under a delegated authority agreement does not adhere to the industry’s regulations.
Andrew Schütte, partner at Keoghs, explained: “What insurers need to be careful of is that in giving someone authority to underwrite business on their behalf, they’re also mindful of their responsibilities as the insurer because the regulator will require an insurer to comply with all regulations, whether that business is written by that insurer themselves or by a coverholder; you can’t delegate responsibility for you regulatory compliance.”
‘Follow the money’
Schütte recommended that insurers also “follow the money” when setting up delegated authority agreements, clarifying how the coverholder is going to be paid. This becomes particularly important if the MGA faces insolvency later down the line.
“You don’t want to be in a position where, if they became insolvent for example, the insurer’s money is going to pay someone else’s claims. That would be a disaster,” he said.
“You might have to pay the money to the coverholder, that then gets sequestered in the insolvency or they then use that to deal with other debt. You end up having to pay out on claims as well, so you end up paying twice. It’s not always properly addressed in the agreement.”
What about the role of the broker in delegated authority agreements?
Charles Rowley, director of DA Strategy, said: “A top performing broker does much more than matchmaking and works to ensure that the details of the delegated authority relationship are well specified and documented in the binding authority agreement.
“Good brokers provide real added value in terms bringing partners together, helping them build close working relationships, and facilitating data sharing and strong project management. Delegated authority partnerships are built on trust and good brokers help build, foster and maintain this trust.”
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