Delegation of underwriting and claims handling by insurers to managing agents (MGAs) and other insurance brokers is an important part of the way forward for the growth of the general insurance market. Many insurers rely on coverholders to generate for a significant proportion of their premium income. The regulators, however, tend to look at insurers and brokers who outsource via delegated authority with greater scrutiny, mainly because of the increased risk of weak oversight and control by the principal over the performance of products and delivery of services outsourced in this way.
The FCA’s 2015
Thematic Review TR15/7 sets out key conduct issues affecting insurers and brokers that delegate authority. These issues remain relevant today. Given this, it is crucial for firms to have the right systems and controls in place, together with clear allocation of responsibilities, to ensure good oversight of delegated activities, both from a regulatory and commercial perspective.
What good delegation looks like
The key to good delegation is setting up a strong framework for the governance and oversight of delegated authorities.
Some of the key elements of such a framework include:
1. Strategy and risk appetite
- A delegated authorities strategy and risk appetite that is aligned with the principal’s wider business model and strategy.
2. On-boarding and regular review of coverholders
- Selective appointment of coverholders with the right qualities and experience, using comprehensive on-boarding and due diligence processes and procedures.
- Clarity over potential conflicts of interest.
- Maintaining a holistic view of each coverholder through ongoing risk based monitoring, regular reviews of contracts, relationship management, regular management information and coverholder audits.
- Good quality, up to date management information that is regularly reviewed and acted upon.
3. Roles and responsibilities
- Clear documented allocation of responsibilities including:
- who is acting as product provider;
- product design and marketing;
- extent of ‘know your client’ and sanctions screening by coverholders;
- ongoing monitoring of product performance in terms of value for money, customer outcomes and underwriting risk.
- Clear contracts with coverholders covering, amongst other things, principal’s rights to audit, access to data, management information requirements, service level agreements, and conduct standards and expectations.
- Clarity over sub-delegation arrangements including appointed representatives of coverholders.
4. Coverholder audits
- A structured coverholder audit framework and plan, in line with typical audit standards and which provides objectivity/independence.
- Quality and consistency of coverholder auditors with effective audit action tracking and follow up procedures.
5. Internal escalation procedures
- Clear internal escalation procedures (e.g. for dealing with coverholders that fail to perform or comply).
To summarise, robust systems and controls to mitigate conduct and prudential risks together with clear allocation of responsibilities are essential to the art of good delegation.
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