Passing the pen to brokers

The record-breaking £500m binding authority deal, agreed recently between Primary Broker Services and insurers AXA and Royal & SunAlliance (R&SA), was one of the main talking points at the recent Biba conference. Many are wondering who is next to get a slice of the action?

Brokers and insurers are largely agreed that bigger deals are the shape of things to come. And for brokers with the golden touch, insurers are sniffing around them like felines targeting large pots of catnip.

Stuart Reid, chief executive of broker Stuart Alexander, says there is a clear move towards "distribution by proxy" and, with over 40 binding authority arrangements, his company is geared up to make the most of it.

He argues it makes sense for brokers to take on more work, saying: "We can offer clients better service. With insurers, service levels can be abominable."

Lyndon Wood, chairman of broker Moorhouse Group, agrees that binding authorities mean a better deal for the client. "We have around 14 or so and this is the only way to work. In many cases, the service from insurers is still rubbish. You can't have a situation where you get an inquiry, fax it to several insurers and they take two weeks to get back to you. Clients aren't going to wait around."

Reid says a number of insurers are actively wooing brokers with offers of capacity. But they want to pick the winners and, for smaller brokers, the favourable winds are unlikely to be blowing in their direction.

"Smaller brokers are having a difficult time in many cases. They are more likely to have a restricted marketplace and the recent Fusion arrangement is evidence of this. It is driving them towards further consolidation," says Reid.

Wood adds: "For smaller brokers, the message is get big or get out. If you start winning delegated authority business, then this is what really helps a broker to grow.

"If you put your head above the parapet, for example, you're read about in the press, then insurers start getting interested. We used to take schemes on with less consideration, but that's all changed. We only take it on now if it fits."

Certainly, R&SA is interested in doing further large binding authority deals. Tesh Patel, corporate development director at R&SA says: "I would not rule out other deals of this size for us."

And R&SA is not alone. Other insurers are keen to give the underwriting pen away, albeit on a smaller scale to R&SA and AXA.

David Fitzgerald, property underwriting manager at Markel says: "These arrangements are going to become more common as capacity grows, but we would typically look at deals of up to £10m which we see as a better risk."

Underwriting agency Anglo Pacific Consultants is evidence that Lloyd's does not want to miss out on binding authority business either. Managing director Brian Russell says: "With a number of syndicates hit by major disasters such as Katrina and the Twin Towers, they've started looking closer to home. We are regularly approached by insurers knocking on the door with offers of capital, some of which has been offshore, but we won't go aboard. Within Lloyd's and the London market, the appetite for UK business is increasing."

He says the Primary deal is no surprise. "There are going to be fewer binding authorities, but those that take place are going to be bigger."

But Russell is less prepared to say the trend is sounding the death knell for small brokers. "We work with 1,000 brokers on a wholesale basis and can offer them a good service."

Peter Matson, underwriting director of SVB, takes a different approach to the 'big is best' argument. "Binding authorities are cyclical. If the market is hard, insurers don't give them out. If it's soft they want to do deals with brokers. But, as an underwriter, I would prefer to have 10 smaller binders than one big one. I also have no problems working with smaller brokers. It is a question of balance."

In the 1990s, problems at Lloyd's were in part caused by losses from binding authority arrangements. But, Matson explains that generally, there has been a raising of standards. "If well run, I think now we can say these arrangements are good for contract certainty since you have agreed wordings and processes."

Stephen Coates, UK facilities and development director for Allianz Cornhill, is somewhat more cautious. "Binding authorities can be dangerous when you give the pen away. You also need to ensure you validate pricing levels. That said, we are prepared to consider these arrangements."

Coates also argues that insurers have strived to improve service in recent years.

The attitude of Matson shows that smaller brokers are not being taken out of the picture - and the wholesale market continues to provide a sanctuary for them.

Binding authority arrangements are likely to be on the FSA's radar. Because of the work involved, brokers will be earning higher remuneration, and the challenge is to keep dealings transparent.

Reid says: "Joe Public is probably not going to be aware of the role we are doing and we need to ensure, if we are acting as virtual insurers, that this is appreciated."

Wood does not anticipate regulatory problems if brokers have the systems in place to run the binding authorities well. "You need slick and fast processes and the regulator seems far more concerned about smaller brokers being less compliant."

The Primary deal signifies a new trend where brokers are starting to act as virtual insurers and have a much wider role. As Wood says: "I don't want us to be categorised as a broker. I hate terms like wholesalers, underwriting agents and sub-brokers. We're simply a distribution channel and brokers are becoming more like insurers."

Time will tell if the Primary deal succeeds and many will be watching with interest to see if - when the initial three years are up - the champagne corks are popping or if the insurers walk away with a loss. IT