As the insurance industry sees a rise in Financial Conduct Authority (FCA) regulations, Laura Thomas, Head of Compliance at NuVenture, examines how they affect the Managing General Agent (MGA) market.
There is a general feeling in the market that Managing General Agents (MGAs) are subject to too many rules and that the regulatory burden is a disproportionate drain on resource and finances. However, the regulations apply just as much to insurers and brokers as they do to MGAs, and we must remember their purpose – they are there to protect end users and ourselves, in the event of a dispute.
MGAs have a principal company that is directly authorised by the Financial Conduct Authority (FCA), and that principal is responsible for monitoring the MGA through regular contact and meetings to ensure it complies with the relevant rules. This is different from brokers, which are directly authorised, and therefore, responsible to oversee the adherence to FCA regulations.
Many of the customer-facing rules apply more to brokers than MGAs, which act as a kind of underwriter in the middle of the transaction rather than dealing directly with customers. Brokers are expected to provide clear information to the customer about the insurer behind the MGA, and ensure that the customer is aware that the MGA is not the insurer.
The main purpose of the rules is to ensure that insurance brokers have carefully considered the insurers with whom they place their customers’ business by carrying out due diligence. The FCA’s overriding concern is the risk to customers in the event the insurer fails and is unable to pay claims. More than one million policyholders had to find insurance cover when Alpha, Enterprise and Gable failed.
The FCA has a specific handbook of rules that apply to the conduct of insurance business. This is where you can find any new regulations for insurance intermediation, such as the consumer duty rules and fair value pricing review rules. https://www.handbook.fca.org.uk/
Examples of insurer due diligence the FCA expects, include looking closely at the Insurers’ Solvency and Financial Condition Report, particularly at the solvency coverage percentage. Customers can also consult the FCA and Financial Ombudsman Service (FOS) complaints data, which reflect how insurers treat their customers.
The insurer’s audited accounts should also be analysed. For further information, clients could also check the British Insurance Brokers Association (BIBA) Litmus test which is carried out to find out how the firm’s financial ratios compare to the rest of the market. Clients can also check the FCA register to find out if the insurer has passported on a branch or services basis, and if they have elected to come under the jurisdiction of the FOS.
MGAs should not see regulations as irksome – they are part and parcel of good business practice. They are designed to protect the end customer and ensure that the product they are being sold is suited to their needs, that the customer is fully aware of the insurance they are being provided with, what it means for them, and to ensure that they are getting fair value. The regulations bring transparency to insurance transactions and ensure there is nothing untoward in the conduct of the individuals underwriting the risk, selling the product, or handling claims.
However, the rules are also there to protect the insurer and the MGAs. If MGAs can show that their organisation is trustworthy and compliant and has good business ethics, then their products become more appealing to the customer.
In the event of a dispute, the MGA and insurer can go back to the regulations and provide evidence that they have been followed to the letter. Customers are protected by the Financial Services Compensation Scheme and have a right to make a complaint, which means firms need to comply with dispute resolution regulations to ensure that the customer has transparency and is receiving prompt responses.
If there is a perception that there are too many rules governing MGAs, it may have arisen because of the fact that there are more MGAs in today’s market. MGAs are growing in popularity because they provide a relatively easy way for entrepreneurial underwriters to form their own insurance business.
The swathe of new regulations in recent years, particularly relating to consumer rights, has placed additional burdens on compliance and claims teams.
MGAs, however, are smaller and more agile than larger and more well-established insurance businesses, and this gives them an advantage, allowing them to be flexible enough to adapt to an ever-changing regulatory landscape. MGAs have also been quick to adopt to new technology, which has enabled them to fulfil their reporting requirements in an efficient manner.
Many insurance companies still do most of their data gathering and reporting on Excel spreadsheets and use laborious manual systems. But MGAs are more willing to invest in the technology and use up-to-date systems to collect data, providing them with the information they need to underwrite efficiently and remain compliant.
There are increasing concerns about online data and privacy, and this can present challenges for MGAs. They store huge amounts of digital data concerning their customers – and they need to be extremely careful to ensure that the information is stored securely and used appropriately so that they do not breach legislative principles such as GDPR.
Regulation is not designed to create more work for insurance businesses – it is there to protect customers and insurance companies themselves. MGAs have a well-earned reputation for being innovative and flexible, and they should embrace regulation as an opportunity to improve the way that they do business.
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