Delegated authority schemes and the importance of TOBA
(photo of Lloyds building)
Following enquiry on new-start GI firms we explain Delegated Authority.
Delegated Authority is an arrangement between underwriter and broker, which gives the broker the authority to do the underwriting for the broker. Brokers are closer to the ground, so are better placed to assess the risk. The broker can in this way incept the policy themselves. It’s a one-stop shop.
What’s not to like about this? If the broker is crystal clear
about the criteria – then surely it is a win-win? The insurer has outsourced
their work, franchised their power and the broker is empowered to decide.
In addition the brokers can net off their commission without referring to
the underwriter, reducing costs all round.
The accounting used is known as a “bordereau” system. (Tricky term, bordereau, but is effective at confusing the laity, alongside indemnity commission and clawback.) Bordereau means that each quarter the broker accounts to the insurer for the risks and commission and premium, and pays the premiums on again.
Control comes through the 'Terms Of Business Agreement' or TOBA which is a weighty document setting out exactly what the coverholder can and cannot do. Nice clear underwriting guides should let everyone know what sort of risks they cover, and what they don’t.
The problem is the amount of trust placed in the broker, and the insurance company can very quickly lose control with a mad broker sticking their name to some lunatic risks. So you need training for the brokers– as ever, and clear guides, and a cute awareness of the essential conflict that all brokers face on the high street – they need the new biz, whereas the underwriter needs a profit, and is looking at three year accounting periods, not 3 months. And be very careful with the finances. The broker has the premium on trust (or risk transfer) of the underwriter, and there’s a long tail of small brokers who “over extend” themselves. , to use a polite phrase. If you’re the broker, then wake up – you’re almost certainly liable to account for the premiums to the underwriter.
The way to navigate that is to have very clear underwriting criteria in place for the coverholding broker, so that they can know exactly what they can and cannot write. Then someone from the insurance company must examine the book and see the risks that they could end up swinging on the meat hook for.
It's the Terms of Business Agreement, TOBA that decides this. This explains why the regulator is so very keen