Conduct risk is fast becoming the issue by which the future of the MGA business will be decided.
The FCA having taken over the supervision of consumer protection, and in publishing a number of papers outlining the approach, now expect conduct risk management to be embedded into the every day business of the Insurer (supported by appropriate MI). Insurers need to demonstrate their own compliance with FCA requirements and are looking to their MGA partners to ensure their compliance. The Senior Manager regime, which came into force earlier this week, extends the responsibility and personal accountability of both NED’s and Senior Managers at Insurers and puts them at the heart of this new regime. The message is clear, you can delegate tasks but you cannot delegate responsibility.
Leaving the term ‘conduct risk’ deliberately undefined, the FCA has been clear that it is up to individual firm to decide what ‘good’ conduct and customer outcome mean. The situation for the MGA is complicated; often they represent both Lloyd’s and Company market and for this reason, from a reporting stand point, have more than one master. Insurers are still trying to establish exactly what metrics should apply within the delegated space and in spite of this are already seeking to rely on contractual clauses for non- compliance by the MGA business.
Lloyd’s helpfully issued guidance to all of its coverholders throughout 2015 and made MI reporting on conduct mandatory from January this year. However, the lead in time to make system changes which facilitate appropriate data capture was short and as each managing agent scrambles to demonstrate how they manage their delegated business; the MGA will come under even closer scrutiny.
The FCA itself has referred to conduct risk in the context of “consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products”. This regulatory concept of conduct risk has gone hand-in-hand with a new supervisory approach based on two main features: it will be outcome rather than process based: and it will seek to be proactive and intervene early, before consumer interests are harmed. The FCA will look to the business to be able to demonstrate evidence of Board engagement and understanding of its product and customer profile.
In order to remain competitive the MGA business will need to be able to demonstrate and evidence a customer centric culture throughout its entire business and consistent capture, interpretation and sharing of relevant and meaningful conduct MI. The Senior Insurance Managers Regime (SIMR) increases personal accountability for Senior Managers at Insurers who should know what they are responsible for and will be held personally accountable for failings in their area. Conduct MI collection and more importantly collation and analysis if done well, will bring business benefit and competitive advantage within the MGA space. Any MGA who can demonstrate its understanding and offer a business model which is customer centric will be easier and more cost effective for Insurers to deal with. And the MGA business who can respond quickly to conduct risk metrics, will sit side by side with insurers within already congested market sectors.
Insurers doing business through MGA’s must assess their risk based capital as regards each MGA business with whom they deal. A well run MGA is therefore likely to require less capital provisioning and be amore attractive partner to the Insurer.