Lloyd's managing agents are facing a double whammy of regulation as they face Lloyd's and FSA inspection James Sullivan reports on the problems of serving two masters.
One word the insurance industry can't escape today is regulation.
And if you're a Lloyd's managing agency then trying to ignore the regulatory regime is doubly difficult.
The Financial Services and Markets Act [2000] imposed FSA regulation upon the Lloyd's market for the first time, giving rise to one of the most confusing regulatory regimes.
Lloyd's unique aspect is that managing agents not only have to please the FSA - responsible for independent, external supervision of Lloyd's regulatory activities - they must also abide by the rules of the Corporation of Lloyd's.
This dual regulatory burden creates its own difficulties, with uncertainties over what exactly should be done in terms of issues such as capital adequacy, which is a major concern.
And that's only one of the problems posed by regulation. Trying to gauge the appropriate response to both FSA and Lloyd's own requirements is also proving to be difficult in a host of other areas, with distribution arrangements to claims handling, causing considerable confusion and frustration.
Risk management
According to David Gittings, former head of regulation at Lloyd's and now a director of managing agency Wellington Underwriting, the main problems at the moment are in the area of risk management.
He says: "The old Lloyd's regulatory division is now the risk management division, focusing on operational risk management," he says. "It seems to me that the requirements that are being placed on managing agencies on the risk management front by Lloyd's and the FSA are not dissimilar. The real pressure is in that area rather than in compliance."
The head of compliance at another Lloyd's managing agency picks up the theme: "Lloyd's has addressed regulation via risk management, but is risk management really just regulation under a different name?"
Regulatory visits
He outlines some of the problems of dual regulation at Lloyd's. "There's duplication. We have visits from Lloyd's and the FSA, but to date a risk management visit from Lloyd's looks very much like its old regulatory visits. There seems to be two groups of people doing the same thing.
The cost of dual regulation is also a problem, he says. We all have compliance officers, but now we need assistant compliance officers. That's quite a high overhead to run and could hurt small managing agencies."
The extent of the difficulties is particularly apparent when it comes to the FSA's new capital requirements, which have been unveiled in detail in CP04/7. These require insurers and managing agents of Lloyd's syndicates to carry out an individual capital assessment (ICA) on a regular basis.
According to one senior figure in the market, such a requirement causes difficulties for those syndicates already experiencing a fairly lengthy and arduous capital adequacy regime on behalf of Lloyd's itself.
The franchise board brings with it interests and requirements separate from those of the FSA. These requirements are set out as part of the franchise board's risk-based capital regime.
The extent to which it differs from the model the FSA is going to use has been a source of much chagrin for managing agencies this year.
Although Lloyd's is currently meeting all managing agents to review their ICAs and expects to complete the process by December, it has made clear that such ICAs will not go towards the calculation of its own capital requirements "unless significant differences are disclosed".
The difficulties in trying to please two masters are such that some businesses are simply not up to speed with what they need to be doing.
Penny Whitwell, head of legal at managing agency Markel Syndicate Management, explains that not all insurers at Lloyd's have managed to get to grips with the new requirements.
She says: "Some managing agencies haven't got their house in order over conduct of business rules. Look at the claims handling regulations, I'm not sure what managing agents have done about this."
Corporation attitudes
Many of the current difficulties are actually caused by the attitudes of the corporation, according to a senior figure at one managing agency.
He says: "Lloyd's has been quite good in some respects with regard to providing guidance on issues such as new terms of business agreements or policy documentation, so I think there's some work that's been done there, but there are attitudes that could do with changing.
"Where Lloyd's could score a big win is if there is a slight change in the mentality regarding risk management, so that Lloyd's actually assists the market.
"At the moment when the risk management team rings up a managing agency, a shiver goes down the spine. That's something that will change, but it will take time."
He goes even further, warning that unless the issues of duplication that the current regulatory regime brings are sorted out soon, they could well drive players out of Lloyd's.
"Lloyd's functions such as the Central Fund and licences are fine for those writing international business, but for those that are UK-based, there are big costs associated with this duplicated regime" he says.
"Given such costs, the arguments for using Lloyd's become less strong. So you could see some managing agencies slowly migrating business from Lloyd's into (FSA-regulated) companies."
Lloyd's is nonetheless well aware of such viewpoints, and the last thing that the current regime wants is to increase the cost burden for syndicates at a time when the market is softening.
Powerful indication
And despite the concerns raised by various managing agencies the situation may well improve in 2005.
One powerful indication that matters might get better was given last month when the FSA appointed Lloyd's chief executive Nick Prettejohn to represent the general insurance industry on its financial services practitioner panel.
Yet with such a direct involvement in shaping the future of regulation, there will be no place for Lloyd's to hide if the situation deteriorates in 2005.
