Lloyd’s focuses on delegated authority agreements as an emerging market risk

The poor performance of the delegated book was one of the factors contributing to the deterioration of Lloyd’s loss rate from 2013 onwards. “We must not make the same mistakes again,” said Rachel Turk, CUO of Lloyd’s.

“This is an area of ​​concern that I think I share with many (market practitioners) based on the number of times it comes up in conversation,” she said. “Currently, 39% of gross written premium is generated through delegated agreements and that excludes service companies.”

The reason for Turk’s concern is that the poor performance of the delegated book was one of the factors contributing to the deterioration of the loss rate from 2013 onwards. “We must not make the same mistakes again,” she said.

As Lloyd’s is a global leader in the MGA and delegated authority business, there are reasons for caution.

Looking at the largest market for MGAs – the United States – of the estimated $102 billion written by U.S. MGUs, more than $14 billion was written by front companies, and about $7.5 billion have former binder businesses written by Lloyd’s syndicates, according to a report published by Global Insurance Law Connect (GILC) titled Innovation abounds for growth in global MGA market.

“Despite excellent recent results and a favorable current climate, Lloyd’s (and others) believe that delegated business remains a potential risk to the market, particularly if conditions change,” said Ross Baker, partner at the law firm based in London Beale & Co. a member of Global Insurance Law Connect, in an emailed statement.

“It remains more important than ever that the right delegated business providers are selected to help avoid the pitfalls of poor risk selection, unrealistic pricing and issues arising from inadequate terms and conditions,” he added.

Baker said Lloyd’s recognizes “that poor delegated business arrangements were a key cause of rate deterioration in 2013-2019 and is very keen that history does not repeat itself”.

“Lloyd’s has made it clear that there must now be close attention to the framework in place for the selection, oversight and performance management of outsourced providers, requiring swift action to exit poor service providers,” continued Baker. “Providing out-of-date data has been a particular problem, and the expectation going forward is that real-time performance data will be of the highest quality.”

“Careful delegation can bring greater efficiencies, improved modeling and alternative access to business, so it can and should be an extremely valuable part of the market,” Turk said during the market briefing.

However, given the materiality of this portfolio, unions should expect increased performance oversight on this topic in the future, Turk emphasized.

“We expect both the open market and delegated portfolios to constantly correct themselves to prevent poor risk selection, inappropriate pricing and terms and conditions from getting away from us,” she continued.

Dynamic portfolio management

Turk then addressed an area she described as “weird” in 2024: the fact that unions are still receiving slips that are out of date.

“With this in mind, I want to see us all focus on getting quality performance data, in a timely manner and ideally in real-time, and only through this can you really deliver on the dynamic ambitions of managing the portfolio.”

She said she expects unions to have clearly articulated strategies for determining when and where to delegate authority, and that they are responsible for holding delegates accountable.

It is important that interests are aligned, she said, stressing that it is vital that unions have a framework that allows them to “select, supervise, challenge, manage performance and exit appropriately if necessary… “.

Baker noted that MGAs are “an extremely valuable part of the insurance market, bringing real innovation and agility.”

“Their growth in recent years has been prolific, supported by the easy availability of private capital and the promise of stable cash flows, following three and a half years of outstanding combined base rates in the low 80s at Lloyd’s,” Baker added.

MGAs have long provided a unique environment for new insurance ideas, “enabling small teams to innovate and demonstrate agile approaches to service and claims,” ​​according to the GILC report.

“MGAs can also enable established entrepreneurial underwriting teams to obtain support from good quality capacity without having to be directly regulated,” the report said. “As a result, the number of MGAs has grown in most major global insurance markets over the past decade, particularly in the US and UK.”

More recently, the report added, less developed insurance markets have recognized the innovation that MGAs can bring to policyholders, and some have taken steps to encourage the development of their own MGA ecosystems.

“In short, new ideas can get to market faster through the MGA distribution model and with less risk for large carriers who are interested in experimenting with a new idea,” the report continued.

The moral of the story, Baker pointed out, is that the delegated authority business is a valuable part of the global insurance ecosystem, but it must be selected and monitored carefully.

Other market risks

In addition to his concerns about delegated business, Turk outlined four other key areas of risk that he closely monitors in his market oversight: property, cyber, US general liability and the legacy market. For US property, cyber and general liability, she focused on the importance of exposure management. For legacy transactions, she highlighted concerns about the lack of adequate market surveillance of these transactions given the risks to reserve adequacy.

Discipline must be maintained in managing a property portfolio, reflecting the uncertainty that climate change brings, Turk said in his discussion of the property issue. “The clearest short-term climate signaling events, such as fires and floods, have had an unprecedented impact in recent years, and the number of severe and costly convective storms has far exceeded other hazards,” she said.

In overseeing the Lloyd’s market, Turk continued: “We have shown a commitment to accepting increased natural catastrophe exposure (business) for those syndicates that consistently demonstrate strong capabilities to price, measure and respond appropriately to catastrophic events.” .

Understanding Cyber ​​and liability EXPOSURE

Turning to cyber, Turk said, the CrowdStrike event provided a “warning spot for our industry.” She described the event as a reminder of the “critical need to deeply understand our exposure to actual or potential events affecting our market.” (On July 19, cyber security company CrowdStrike distributed a flawed software update that crashed nearly 8.5 million Microsoft systems, affecting many industries such as airlines, banks, hospitals, and hotels) .

Another key risk area discussed by Turk was US general liability. While positive steps have been taken “to materially reduce the size of lines, as well as more sophistication in how and where capacity is deployed,” she questioned whether such corrective actions were enough.

“We don’t think the challenges in this class are just contained to the later years, and so those who use consistent skepticism will be better placed for success,” Turk continued.

“We will be vigilant about plans that expand into areas that serve to threaten the green shoots of positivity, and we will continue to remind you that, absent any meaningful tort reform, claims inflation remains a major headwind to price adequacy in this class,” she said, noting that Lloyd’s insurers are expected to maintain sufficient capital to cope with a 45% deterioration in reserve levels.

Inheritance Market

Turk went on to discuss the legacy market, which also has its own reserve adequacy issues. She explained that “the oversight of Lloyd’s performance risks being undermined without taking a more sophisticated lens into this area.” (Old insurance deals involve the transfer or purchase of legacy or old liabilities to close a book of insurance business).

In an emailed statement, a Lloyd’s representative explained that in Lloyd’s “live” market, any significant changes must go through an approval process, but old transactions are not captured in that process. “Thus, there is a risk that a significant transaction may be made in the Lloyd’s market of which Lloyd’s has no prior knowledge, or one where the strength of the reserves is significantly undermined,” the representative continued.

As a result of these oversight concerns, Turk said, from January 1, 2025, all new legacy transactions in and between the Lloyd’s market will require a review and pre-transaction approval from Lloyds.

Despite the five oversight concerns he listed, Turk stressed that he “would be doing the market a disservice” if he did not reiterate “that market performance is strong.”

“Combined ratios underlying in the 80s are probably only seen once in an underwriting career, so together we should celebrate this success and I have every confidence that sustainable profitable performance will remain given the laser focus on consistent management of the portfolio and managing the bottom line. .” (Combined reports below exclude major damages).

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Lloyd’s Surplus