Placing and binding risks do not always go to plan. For any MGA, being mindful of potential sources of claims is the first step when it comes to creating a robust and effective risk management framework.
In this article, we’ve partnered with leading insurance law firm Clyde & Co (opens a new window) to identify five of the most common insurance claims against MGAs, and how to mitigate them:
1. Deviation from underwriting guidelines and agreements
Underwriting guidelines detail the specific considerations which govern an MGA’s ability to bind, modify, or reject risks presented to its carrier principal. Therefore, the most obvious source of an exposure would be if the MGA bound the carrier to a risk that is either outside of, or deviated from, their underwriting authority (i.e. limits, territories, lines of business, categories of insured).
The impacts of this could be extremely serious. Not only could the carrier be left exposed and without reinsurance for some or all the business concerned, but both parties could face significant reputational and financial repercussions.
In one real-life E&O claim, an MGA bound numerous Lloyd’s underwriters to a Visual Arts Policy designed to respond in the event that various expressly listed US-based film companies committed an error or omission while producing, distributing and/or marketing certain films. However, the MGA had incorrectly bound the risk for the wrong period on a “loss occurring” rather than “claims made” basis, which resulted in the Policy responding in circumstances where it would otherwise not have been covered.
When the film companies subsequently notified a class action under the Policy, the Lloyd’s underwriters agreed to deal with it on a mere reservation of rights basis alone. Accordingly, the Lloyd’s underwriters sought to transfer its responsibility to indemnify the US film companies under the Policy to the MGA, which had breached its binding authority agreement. The MGA was exposed to substantive damages in excess of USD8m, as well as all parties’ legal costs in the region of USD2m.
Mitigation
Thankfully, breaches to the extent identified above are relatively infrequent. It is now commonplace for a carrier to implement strict mitigation controls which monitor and assess the level of underwriting and claims activity conducted by its instructed MGA. This includes analysing monthly bordereaux reports, undertaking periodic underwriting inspections, and obtaining live access to the MGA’s own underwriting accounts system in order to review the MGA’s underwriting processes over a longer period of time.
2. Claims management
When delivering a claims service (opens a new window) on behalf of a carrier, it’s extremely important that MGAs observe the agreed claims referral criteria otherwise it will be a breach of contract. Fail to do so, and they will potentially find themselves in the difficult scenario of dealing with and/or indemnifying claims which exceed their designated authority level.
MGAs may also come under pressure from policyholders to progress and (if accepted) settle claims as swiftly and efficiently as reasonably possible. Protracted delays during the claims process have the potential to place policyholders in difficult financial and operational positions, particularly if their ability to continue as a business is wholly or partially reliant upon insurance-funded proceeds. This would fall under the parameters of Treating Customers Fairly (TCF) (opens a new window) which could lead to a regulatory fine (note this is excluded under most E&O policies but subject to negotiation by insured broker) therefore would be a cost the MGA would need to bear.
Mitigation
The key to limiting exposures with regard to claims management is control. Where applicable, MGAs must possess and adhere to a comprehensive claims administration and management framework. This will ensure that all notifications are handled under one facility from initial reporting to eventual closure, and ultimately help to minimise a claim’s total lifespan.
In particular, it’s prudent to agree in writing with the carrier an arrangement for consistent and regular oversight of notifications – for example, by way of monthly claims reports and inspections. Establishing this structure ensures that claims can be monitored throughout their lifecycle, and that the appropriate levels of authority are in place and complied with at all times.
With the above in mind, Lockton can introduce you to a well-known and respected third-party agent (TPA) to service your claims, governed by a suitable SLA, and a claims system tailored to your reporting requirements. If you are interested in following up with this option, then we would be happy to arrange a meeting with the TPA and a demonstration of their system to showcase how claims are efficiently handled.
3. Inadequate IT security control and education
Cyber security risks have increased in recent years, with attempted data breaches and ransomware attacks against companies now commonplace. MGAs typically have access to carrier data as well as their own, meaning that the impact of any compromise can be particularly severe. Depending on the nature of an attack, an MGAs’ ability to conduct business may also be disrupted.
Mitigation
To mitigate against cyber risks, it’s vital that MGAs implement sufficiently robust IT security controls. Specifically, includes stipulating clear operational guidelines to be deployed at all times in order to prevent a cyber-attack, and a protocol to follow clarifying how MGA and Carrier data is to be dealt with in the event that an attack materialises. Any such guidelines and protocols should be set out clearly and comprehensively in the agreement between MGAs and carriers. This is an area on which Clyde & Co would be happy to support and advise you.
Secondly, it is not merely adequate for MGAs to secure an appropriate level of PII alone. Rather, it is also highly recommended that MGAs procure suitable cyber insurance. In this regard, Lockton would be able to introduce you to our Cyber and Technology (opens a new window) team, who can provide support and produce an internal risk management strategy, with a view to mitigating the detrimental consequences that a cyber breach may have on your business.
4. Conflicts of interest
It’s not unusual for MGAs to write business for several carriers that insure the same or similar programmes. In such circumstances, the MGA may receive better financial incentives from certain carriers for writing particular business on specified terms – for example, higher commission or reimbursement of certain administrative expenses. This may give rise to a potential conflict of interest.
Mitigation
To avoid any suggestion of preferential treatment towards any one carrier or its product, MGAs should retain prescribed guidelines on how they are to treat each carrier compared to others. This will give complete transparency on how and when such similar business is written, and the means by which a carrier is chosen.
Clyde & Co are able to advise you on this, to ensure that your guidelines are incorporated into the agreement between you and the carrier.
5. Problems with premiums
Where an MGA’s authority to bind insurance is not limited, this may lead to the accumulation of a portfolio of risks which far exceeds expectations and/or significantly eclipses the limits of any reinsurance programme that the carrier may already have in place.
Furthermore, the basis upon which policy premiums are remitted is also important, as this dictates when an MGA becomes responsible for releasing the premium funds to a carrier. Accordingly, it’s important for MGAs to understand and appreciate the premium payment obligations that this confers upon them. Problems have previously occurred where an agreement stipulates that policy premiums are to be remitted on a written basis, requiring the MGA to remit the premiums direct to the carrier regardless of whether they have been collected from the policyholder or not. In such circumstances, this places the credit risk firmly with the MGA.
Whenever funds are collected by an MGA for and on behalf of a carrier, there is also a conceivable risk that such funds may be mixed with other monies, particularly if there is only one bank account used.
Mitigation
Any agreement between MGA and carrier must clearly ensure that premium is capped, and dictate how it is to be held. Preferably, any agreement will specify that remittance of premium should only be issued once it has been collected, so as to avoid cash flow issues for the MGA itself. To limit the risk of unwittingly mixing funds, the agreement should also stipulate that all premium funds due to the carrier should have their own individual bank accounts and be properly capable of identification.
Clyde & Co is able to advise on how such agreements should be drafted, in order to protect MGAs against these risks.
Risk mitigation recommendations for MGAs
Any MGA that breaches its obligations could face an E&O claim, potentially costing a significant amount of money, resources, and time. This is particularly the case for those without adequate risk management foundations.
Nevertheless, there are steps that MGAs can take to mitigate their exposures, including:
Document everything – the importance of this cannot be understated, especially given the regulatory scrutiny that is applied to MGAs, including the recent implementation of the Financial Conduct Authority’s new Consumer Duty.
Maintain regular (monthly) reporting to the carrier, highlighting any deviation from binding authority. This is essential for MGAs to demonstrate to carriers that they have a sustainable and profitable business model. These should be reconciled to the prior month’s reports and accounting files to identify any discrepancies.
Implement a requirement for audits within the agreement with the carrier, to ensure equal accountability for the assessment of data provided.
Consider appointing a TPA to deal with claims management, and to monitor claims activity and the carrier’s loss ratios. Identifying industry patterns can help you anticipate problems and, if necessary, implement updates or changes to claims handling and reporting.
Undertake regular testing of your risk analysis skills and stay committed to enhancing your education.
Implement sufficient and robust IT Security and risk management, with detailed requirements written into the agreement between MGA and carrier.
Ensure the production of a clearly drafted agreement between MGA and carrier, including obtaining legal advice.
Review your insurance policy (E&O, Cyber and Directors and Officers) and coverage limits and make changes as needed. A good claims experience and evidence of prudent risk management will only ever support your broker to negotiate the best possible insurance programme.
To discuss any of the above issues raised, or any other concerns that you or your firm may have, reach out to a member of our team.
For more information on our products and services, read our guide to Professional Indemnity for Insurance Intermediaries.
