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Binders Keepers ?
13/09/2007 - Post Magazine
Andrew Holman, Chief Executive, Holman's
Binding authorities have been known to create conflicts of interests for brokers; forced between legal commitments to underwriters and clients' interests. But do in-house moves to separate it from the main broker business go far enough? Ana Paula Nacif investigates...
Binding authorities can be an efficient way to bundle business together and create an attractive book of business for underwriters. But brokers running binding authorities know they have to achieve a delicate balance when juggling clients' and underwriters' interests. Whereas binding authorities are legally obliged to look after the interest of underwriters, brokers are legally bound to their clients. And one way some brokers deal with this issue is to create a separate business wing to deal exclusively with binding authorities.
Lloyd's broker John Holman and Sons, for example, recently created a new division to handle all of its binding authority business. The broker said the move had been driven by the desire to increase efficiency within the business, and to clarify and manage any potential conflicts of interest between the business's broking and delegated underwriting functions.
Andrew Harding, chairman of the marine division at broker SBJ, believes that binding authorities held by brokers can be usefully consolidated into a separate area. "It would be increasingly prudent on the grounds of treating the customer fairly, and it is part of our long-term strategy to look at issues of capacity and capacity control." He adds: "In simple terms, the customer should be advised when the broker has access to these facilities and there must be a considerable degree of transparency. If the best market and terms and conditions available is the in-house capacity facility in the form of a binder, then the customer needs to be made fully aware of that in all stages of the process."
Gary Hirst, executive director of the Chesterfield Group, which owns three underwriting agencies and runs a traditional broking business, believes that having a separate division can help brokers not only better manage conflict of interest but also focus the business more. "Broking is for brokers and underwriting agencies are for underwriters," he says. "The way we manage potential conflict of interest is by making sure brokers do not operate binding authorities and by employing properly qualified underwriters." He adds that his company has no preferential treatment for their own brokers when it comes to placing business. "Our underwriters must make the decision on whether the business being placed fits within the guidelines," he explains. "If it doesn't, the business is then declined even though the broker works for our subsidiary."
Self-regulation
But not everyone is convinced that this is the way forward. Institute of Insurance Brokers director general Andrew Paddick argues that setting up a separate division for binding authority is not necessary if brokers businesses are run in a professional manner. Howden Insurance Brokers' operations manager Neil Bullivant is in agreement, and adds that although a separate division may provide a dedicated viewpoint in terms of business development, it does not really matter as long as brokers manage the administrative running of the binder. He goes on to point out that sometimes expertise actually "works much better if kept in one place". And expertise is the reason why many brokers do have binders. Howden chief executive Tim Coles says the most important thing is to provide expertise to clients and make sure they are properly represented. "Binders are set up for very good reasons; we can provide clients with better customer service, claims services and a better product overall - which they wouldn't get for a £600 premium, for example, in the open market."
According to Mr Paddick, these binders are almost like mini mutuals where niche business groups come together to get wider cover and more specific policy wording. "If the broker operates the binder well, it should operate more profitably and, as a result, all policyholders get lower premiums." He also believes the only conflict of interest is if the customer feels that they are being directed to a specific binder because the broker will earn more commission - when, in fact, the client may be better served elsewhere. However, he points out: "This is not usually the case as you get better premium and wording in binders than in the open market."
Malcolm Smith, commercial insurances manager at Groupama, says its commercial business is mainly written under binding authorities and agrees if binding authorities can offer clients good products at better rates, there is no conflict of interest. However, he admits that insurers need to be conscious of business, which could be placed under the broker's binding authority, being diverted to the open market. "There must be a reason, which may well be a legitimate one, but insurers need to be aware," he explains.
Biba sanction
The British Insurance Brokers' Association says that, as long as customers are treated fairly, it does not make much difference whether brokers set up a separate business for running binders or not.
Neither does Biba have a strong objection to brokers running their businesses together or otherwise. Steve Foulsham, technical services officer at Biba, explains: "In many ways binding authorities are not that different from any arrangement brokers have these days with panel insurers, where they have three or four insurers to where most of their business is channelled. As long as they can demonstrate that there is no requirement that they should go to the whole market to place the business - normally binding authorities have good cover and good rates - there is no problem." Apart from conflicts of interest, another argument in favour of separating binders from general broking business is the fact that both operations need different skills sets.
Paul Upton, chief underwriter officer at Evolution Underwriting, says that experience, management and quality of information are key. And he argues that underwriting skills are normally found in insurance companies and underwriting agencies, as opposed to brokerages. "This is not a criticism; it's just a fact," he points out. "Providing brokers can fulfil the criteria I don't have a problem with that, but experience tells me that ordinarily that's not the case."
But brokers have been running binding authorities for years and some argue that movements in the market place have meant that many of them have the necessary underwriting skills to ensure their binders do thrive. According to Adrian Thone, managing director of Towergate underwriting binder management, his company spends a great deal of time in making sure brokers are up to scratch. "We turn away far more schemes than we write; it is important to be discerning." Despite his company's strict filtering system, he believes that handling binding authorities does sit comfortably with a lot of brokerages. "We have seen underwriting skills move away from insurance companies and migrate to brokers."
He continues: "Additionally, the sort of business we delegate is straightforward on the underwriting side. A broker can have underwriter skills even if he has never been an underwriter; a huge part of our investigation of brokers applying for binders is to make sure they look at the business on a profitable basis and that they are able to look after their clients without prejudicing them in whatever they do." From an accounts point of view, separating the business means the results for this division will be reported independently from other business streams, which may bring positive results in the end, according to RGL forensic accountant Ben Hobby.
Management for the binding authority division will be responsible for delivering results as well as the processes and controls that underpin that business unit. Mr Hobby explains that accounting issues with binding authorities result from inadequately designed or poorly operating controls, inadequate reporting mechanisms, and poor data quality, which then negatively impact on results and management remuneration.
Managerial responsibility
He adds: "By creating a clear responsibility for the results of the binding authority division, managers will be motivated to ensure appropriate operating controls are in place and to continuously improve business systems. This may lead to brokers incurring an additional cost in the short term, but if correctly implemented, this will create increased profits for both underwriters and brokers in the medium and longer term."
Those willing to take the plunge should not encounter too many difficulties, according to Mr Upton. "It is not difficult for brokers to set up a separate binding authority division under their own brand," he says. "But, if they want to become a totally separated underwriting agency, it is a bigger mountain to climb." However, Mr Hirst adds such a move requires a lot of discipline. "Brokers need to make sure that demarcation lines are properly adhered to. As soon as the Chinese wall is broken down, it starts to compromise the ethics for the client as well as the confidence the open market underwriters has given them under the delegated authority."
Despite the conflict of interest inherent in binding authorities, it seems the solution is not necessarily tied to how far apart they are from the general broking business. "The argument of conflict of interest in binding authorities is valid," Mr Harding concludes: "So the big issues here are treating the customer fairly and transparency. Is the broker acting for the underwriter that has given him the authority or for the client? Brokers need to make available to the client all the relevant terms of business agreements, including a full explanation about the relationship they have with underwriters."
