The head of insurance supervision at UK regulator the Prudential Regulation Authority (PRA) has said the watchdog would probe deeper into the impact of facilities on carriers.

The move came after participants in a recent survey expressed worries about a lack of transparency and the potential for conflicts of interest.

In a 22 June letter to insurance CEOs, PRA director David Rule noted that most firms that took part in a recent market-monitoring exercise “had concerns about changing distribution channels”.

Worries included higher commissions, difficulties in exposure management and the implications of moving from case to portfolio pricing, he noted.

“Views differed as to whether broker-insurer facilities were significantly increasing acquisition costs. Some firms stated that increased commissions could be offset by a reduction in their own claims administration,” he wrote.

“However, a common point of feedback was the importance of managing the potential for conflicts of interest and transparency of commission arrangements. Several firms mentioned increases in different types of commission and fee arrangements that could be perceived as going against the benefit of the insured.”

Rule said that the PRA survey found that the Lloyd’s market is expecting the decline in open market placement and growth of delegated underwriting to continue.

He noted that a company’s distribution strategy is a “commercial decision, but it may have an impact on a firm’s ability to monitor, manage and assess risks”.

The regulator continued: “This is an area we will seek to understand in more depth as part of our ongoing reviews into the underwriting and exposure management of a number of firms in the London market.”

The PRA’s work on the area, which was revealed earlier this month by this publication, marks a change from a previous more laissez-faire approach to carriers’ arrangements with brokers.

The underwriting and exposure management review is one of several initiatives detailed in Rule’s letter.

The regulator is working with large carriers and zeroing in on a select number of lines of business.

Rule said the PRA is also looking at the impact on those firms of broker facilities, MGAs and other delegated underwriting arrangements in which they participate.

In these cases, “we will be assessing how they ensure that they understand the impact of business written on their overall risk profile and their results”, he wrote.

The PRA is also conducting a thematic review of distribution practices across smaller Lloyd’s managing agents.

This publication reported earlier this month that the PRA’s work on facilities and other underwriting practices will feed into separate studies the Financial Conduct Authority (FCA) is conducting on value in the insurance distribution chain and the wholesale insurance market, which are due to end in the business year beginning April 2018.

Facilities and rising acquisition costs are also expected to be one of the areas of the FCA’s focus.

Lloyd’s performance management director Jon Hancock has said he expects the market to shrink for the next two years, as the Corporation takes a tough stance on underperforming lines of business.

Speaking at the Association of Lloyd’s Members national conference yesterday, Hancock said the market needed to change what it is doing to improve underwriting results.

“I expect the market to shrink this year and to shrink next year,” he said. “Premiums must surely reduce if performance is going to notably improve. Doing the same just cannot be an option for syndicates and portfolios which are underperforming.”

Doing more of the same can only be an option “if you are performing really well or outperforming the market”, Hancock added. “The market cannot simply grow exposures to maintain premium.”

Lloyd’s does expect some syndicates to grow, but only if they are doing something different, the executive added.

“That could mean a new product, a new proposition, a new acquisition or a new footprint. We will support those profitable sustainable plans. But overall, we expect the market to shrink in these competitive conditions,” he said.

Monitoring market growth is one of five key areas the Lloyd’s performance management team is focusing on to turn around the market’s results, with accident-year loss ratios in all segments running above 100 percent.

Other areas of focus include catastrophe exposures, facilities, operating expenses and acquisition costs.

Lloyd’s typically writes 8 percent less premium than its allotted stamp capacity for the year, the executive explained. In 2016, the market wrote 12 percent less than its stamp.

“That is a good sign of some discipline,” Hancock said. “It is good – it is essential, in fact – that managing agents are making those tough decisions.

“We are entering a Darwinian phase where only the fittest will survive.”

Some in the market believe that Lloyd’s needs to see some failures, and record large losses, in order to maintain the health of the overall market.

When questioned on his viewpoint, Hancock said Lloyd’s had a duty to ensure the market does not enter a period of sustained losses or low returns.

“That has an impact on reputation, on the Central Fund, on credit ratings etc,” he said. “Syndicates need to stand on their own two feet. The weakest won’t.

“We need to put a really safe environment around [the weakest syndicates] so that policyholders, the Central Fund and the mutuality of Lloyd’s is protected.”

The Corporation is enforcing a risk-based approach to its market oversight, and will focus its attention largely on underperforming syndicates.

“I can assure you that a new risk-based approach means we identify poor performers much earlier,” Hancock said. “We can intervene much faster and harder when we need to.”

Lloyd’s will restrict or remove authority when syndicates start to underperform or diverge from their approved business plans, he continued.

“We will not allow syndicates to begin writing business we don’t believe they have the capability to, or where we have evidence that the market just cannot write it successfully,” he added.

“This also means we will spend less time on the best performers, so they have more time to focus on running their businesses. We will leave them to work harder for their returns.”

Lloyd’s broker, experiencing a period of growth with new teams and distribution channels, are looking for a Financial Controller to take responsibility for all financial and structural directions of the Group.

This is a key appointment and the individual needs to be someone who can develop relationships with the senior management team, manage the day to day work flows, the timely and accurate production of accounting records for management, statutory and regulatory reporting within a small organisation.

The position will report directly to the Managing Director and the Board of Directors and will have specific responsibility for all internally and externally required financial reports and for the control environment over the underlying accounting processes.

This will ideally be someone who has had previous experience in either a similar position or a number two in a larger organisation and who is looking to move to take full responsibility.

As the Group continues to grow and move forward it is the intention that this position will lead to a Board (Finance Director) appointment.  Ideally a qualified accountant (ACCA / ACA / CIMA) with at least 10 years experience in an Broking / Insurance business.

Duties and Responsibilities:

• Prepare and report on all financial board materials including detailed financial analysis and reporting across the Group entities and to all internal and external parties.
• Manage the Group financial planning and forecasting processes.
• Responsibility for group consolidation and make recommendations on structural considerations to the Board of Directors.
• To develop and operate an effective control and reporting environment across the Group.
• Develop a robust expense allocation policy and procedure to operate across the Companies.

Key Skills:

• Good understanding of the business and ability to interact and experience of working with the management team and Board of Directors.
• Good understanding of financial controls and demonstrated ability to manage the close process and financial staff.
• Ability to lead effectively and work effectively both independently and with the management team.
• Experience of Lloyd’s broking accounting processes and operations and UK GAAP
• Strong project management skills and proven experience in establishing priorities and meeting deadlines in a changing environment.