As we near the outcome of the Financial Conduct Authority's Coverholder thematic review, general insurance firms across the Lloyd's and London market should consider how they stack up against regulatory expectations and current good market practice. Over the next month, we will be producing a series of short blogs covering some of the key elements of delegated authority control and oversight that we see the market currently designing and implementing:
Blog 1: Conduct risk assessments
Blog 2: Due diligence, audits and Management Information (MI)
Blog 3: Key market solutions and commercial challenges
Introduction
The FCA thematic review has been looking at how firms control and
oversee Coverholders and claims handling Third Party Administrators
(TPAs), with a focus on conduct risk. The review started in Q3 2014
and the findings are likely to be released over the next couple of
months.
These findings will be one of the first public outputs from the FCA on "wholesale conduct" since regulatory focus evolved to include the Lloyd's and London market. We released Striking the Right Balance in April 2014 and over the last year we have seen a big shift in the quality of conduct risk frameworks in the market.
Coverholder and TPA arrangements are not new to the FCA's agenda. In its first Risk Outlook in 2013, the FCA indicated that it will focus on areas of the market where profitability pressures, coupled with an increased appetite for risk, drive firms to venture into new arrangements that could lead to poor customer outcomes. Delegated authorities provide firms with access to new markets, products and local knowledge in a cost effective way.
The attractiveness of the delegated authority model has therefore not gone unnoticed by the regulator. When the FCA looked into it, they found that "oversight of delegated authorities regularly falls short of our standards and should be more robust".
Firms also recognise that more could have been done. Many firms are currently updating delegated authority control and oversight frameworks, with the Lloyd's conduct minimum standards being a useful guide. With Coverholders (including Service Companies) accounting for approximately 30% of GWP at Lloyd's, it is critical to find risk-based and proportionate solutions.
Proportionality is being achieved through conduct risk assessments of Coverholder and TPA populations to identify different exposures to conduct risk. With this foundation, firms are targeting control and oversight framework at the higher risk agents, such as due diligence, renewal processes, audits and MI requests. Solutions should also strive to be consistent, not least to maintain competitiveness and assist with placing reliance on each other in the subscription market.
We see the results of this thematic presenting firms with three challenges:
- How to enhance control and oversight frameworks in line with "good" market practice;
- Whether the profitability of delegated authority arrangements justify the cost of compliance with heightened conduct requirements; and
- How to take advantage of the efficiencies gained from placing reliance on other firms in the subscription market and the supply chain.
This series of blogs will help firms to prepare for a risk-based and proportionate response to the unprecedented regulatory focus on Coverholder and TPA control and oversight, and consider how they might compare against potential findings of the FCA thematic review. If you're also interested in the FCA's commercial claims thematic review due out soon, our recent paper on the subject can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
