Permission seekers

The permission to write business on behalf of an insurer is often granted to a broker or an agency because of its expertise in a particular area. Delegating authority is attractive to insurers because, not only does it cut their administrative costs, it allows the insurer to benefit from the specialist knowledge and expertise within the agency or broker.

James Hart, head of marketing of the Folgate Partnership, says: "Essentially, it allows them to utilise more capacity without having to spend money on administrative infrastructure."

Virtual insurer Towergate and regional broking company Folgate began acting as the Towergate Partnership from the end of March and expect to complete the legalities of the merger this September. TP has a range of specialist underwriting agencies, which have expert knowledge of their industry or trade sector.

Hart says: "The agencies have an excellent understanding of the risk from an underwriting perspective and can therefore deliver the underwriting profit, which the insurer requires. It also means that they have a deep understanding of clients' needs and can deliver the right product and service."

Personal service

In addition, Hart says: "In terms of scale, underwriting agencies tend to be smaller than the composite insurers and can provide a more personal service. Brokers placing business with Towergate Underwriting Agencies have access to knowledgeable underwriters who can make decisions. Brokers can develop a personal relationship rather than having to deal with a call centre."

The Folgate Underwriting Agency has experienced problems attracting brokers since it was established after a buy-out of the Folgate Insurance Company in 2002 by the Towergate Underwriting Group.

This acquisition confused brokers. FUA is backed by Norwich Union but some brokers were unclear about the insurer's involvement, particularly if they already had an agency for household with NU, according to Hart.

However, NU writes a separate and distinct segment. Its change in status from insurance company to virtual insurer means it does not have the baggage of an insurer and is more focused on distribution and claims handling.

Hart now believes the message is getting through and brokers are switching on to use FUA.

Virtualisation focuses on network-based processing across enterprises to create more streamlined and efficient organisations.

As a result, managers are able to focus on growth strategies by outsourcing many business processes and reducing the numbers of staff employed. However, most so-called virtual insurers are simply underwriting agencies.

Kevin Pallett, managing director of Fusion, says: "The term virtual insurer is one that means different things in different contexts. In a virtual office, the idea is anything that is not core to the business is outsourced.

So, a virtual insurer may focus on the part that they do best, whether it is underwriting or marketing, and will outsource all the rest.

"We refer to ourselves as virtual because we do everything that an insurer would do, but we do not have our own capacity."

Fusion expects to underwrite around £120m premium income on behalf of Lloyd's Syndicate 2147. The terms and business plan are agreed in advance - its focus is on underwriting commercial liability packages for the medium-sized companies.

Pallett says: "A range of things may be delegated from simply issuing documentation to working out what to charge for the risk. Fusion handles everything right through to dealing with claims, whereas brokers with binding authority tend to be more restricted than agencies."

In the SME sector, Royal & SunAlliance is one of the largest players and has more than 170 binding authority arrangements with brokers.

Daryl Hine, RSA corporate development manager, says: "Niche and specialist markets tend to be suited to delegated authority arrangements. RSA has many tripartite relationships where a broker, trade association and RSA work together. This could range from hairdressers to educational establishments.

"A delegated authority broker must have a strong understanding of its clients needs from a products and service point of view. RSA has strict criteria when selecting brokers and strictly manages its schemes."

For RSA, delegated authority comes in three categories: delegated authority for setting pricing terms, for documentation and for claims.

Hine says: "Financial Services Authority regulation has meant that we have had to enhance our approach. It has not become a lot more expensive, although more attention has had to be dedicated to managing the arrangements."

Janette Austin, schemes operations and compliance manager at RSA, says: "For each type of delegated authority we have defined parameters. It is essential for us and the broker to have a legal agreement - as a result of FSA regulation, insurers can transfer work but must show that the end-consumer is not prejudiced in any way."

Business continuity

Scheme agreements, annual reviews and auditing have always been carried out by RSA, says Austin. As a result of regulation, it has put in place new measures to ensure that: the broker has business continuity plans in place; documentation in support of schemes is fair and not misleading and that consumers get adequate information and understand the policy before they go on cover; where a third party such as a trade association is involved, checks are made to ensure that people who are undertaking the work are regulated; corporate governance - understanding RSA's ability to give accurate information to the market about the size of its book and premium represented and measures in place to ensure it does not understate or overstate its position.

According to Pallett, Lloyd's derives a huge amount of business from delegated authority with agents working around the globe on behalf of syndicates.

He says: "Where syndicates have had problems with standards in the past, it has often been with delegated authority. However, new rules introduced in 2004 are helping to ensure good business practice."

The new rules include a new delegated authority by-law, a code of practice for managing agents and a standard application for cover holders seeking Lloyd's approval, in addition to a range of accompanying handbooks for all parties. Auditing is one element that is now crucial to Lloyd's syndicates that back binding authorities and checking that a scheme is being run according to guidelines is a formal requirement.

Some argue that syndicates have also become more selective about who they work with, insisting on pre-binder audits that are paid for by prospective brokers. An audit will examine every facet of a business, from compliance to financial and the staff and Lloyd's has the power to intervene and inspect books and records where appropriate.

In addition, those running binding authorities must ensure they have adequate professional indemnity cover and there is a more stringent requirement for record-keeping. It is now a disciplinary offence for managing agents to accept business from cover holders before a binding authority has been officially set up and authorised.

In addition, since the beginning of 2005, Lloyd's slips for all placements of binding authorities need to comply with London Market principles. This move aims to improve the certainty, clarity and efficiency of Lloyd's policies.

Pallett says: "Delegated authority is a huge risk as the insurer is giving away their underwriting pen. It has to be sure they are experts in what they do and have the right processes in place."

Folgate Underwriting Management Specialty Lines delegates and manages binding authorities to brokers on behalf of Lloyd's Syndicate Wellington.

It has access to £100m gross written premium of Wellington capacity. FUMSL works with brokers with the right levels of in-house expertise and helps them set up and manage a binding authority.

Hart says: "This brings benefits to clients as they are able to deal with a broker who is empowered to underwrite and issue documentation, providing a slicker service. Brokers benefit from being able to avoid reliance on insurers to provide quotes and issue documentation, so they can deliver a better service to their clients and grow their business. Insurers are able to reduce their costs of administration and benefit from the brokers' expertise."

Hart adds: "As many of the composite branch networks have contracted, a lot of underwriting experience has migrated to brokers. FUMSL allows brokers with this in-house expertise to tap into Lloyd's capacity and make full use of this knowledge."

11 September

According to Hart there was a significant reduction in the number of binding authorities being operated following the events of 11 September 2001 with underwriters being more cautious about delegating underwriting authority. However, as the market softens, more delegated authority is becoming available, he says.

Pallett agrees that the delegated authority was curtailed following 11 September and that recent market softening has meant more is coming back into the market.

He says: "Agencies are increasingly setting up offices in regions outside London to increase their coverage. Pallett also points to other insurers that have expressed interest in increasing exposure in the regions including BRIT, Catlin, ACE and Primary.

Pallett adds: "I expect to see the number of delegated authority agreements increase. But, if insurance companies are determined to make money out of underwriting, they will be very careful about who they give capacity to. I think arrangements will be more restrictive. However, for Lloyd's, it is here to stay as it is so reliant on its agents that operate worldwide.

For Hine, it is essential to get the initial partner selection process right. He says: "We have to understand each other's responsibilities and work closely. Not all brokers are suited to delegated authority and it takes a lot of organisation. Going forward, I would like to see fewer brokers getting involved, while those that already do well will see growth. RSA is looking to grow its delegated authority through carefully chosen partners."

So, for brokers with an area of expertise, strong organisational skills and the willingness to agree strict parameters with a partner insurer, delegated authority offers the chance to earn greater commissions and deliver higher levels of client service.