Why does coverholder due diligence matter?

Coverholder due diligence often doesn’t receive the attention it deserves. However, regulatory bodies like the FCA and the PRA are now increasing their scrutiny of delegated authorities. They expect insurers to maintain oversight on their behalf, adding more work to already busy compliance teams. The purpose of coverholder due diligence is to ensure that third parties comply with regulatory requirements, financial standards, and have the appropriate governance practices in order to be compliant with the insurer’s policies and regulatory obligations.

The rise of delegated authority

In the last few years, we have seen a rapid rise in the use of delegated authority. During a market briefing in October 2024, Rachel Turk, Lloyd’s Chief Underwriting Officer, said that at 39% of GWP is generated through delegated arrangements. The rise of DA is attributed to the availability of private equity funds coupled with hard market conditions. Turk raised the concern of the deteriorating loss ratio since 2013, which she attributes to the poor performance of the delegated book. Industry experts, such as Ross Baker, a partner at law firm Beale & Co, believe that delegated business continues to pose а market risk. The risk arises from oversight complexity, high exposure, and historical underperformance as mentioned above.

Coverholder due diligence: The risks of getting it wrong

This is where due diligence comes in. It is the frontline of defense against the risks associated with DA. If not done properly, it can have dire consequences for insurers and brokers. For example, in 2024, top-tier broker Marsh faced legal action from White Oak Commercial Finance because of its role in arranging insurance for Greensill Capital, a firm which crashed in 2021. White Oak alleged that Marsh did not disclose details about the Greensill’s main insurer, and also details about the dismissal of a key underwriter who exceeded risk limits. Later, White Oak lost $143 million on investments linked to Greensill. This case study shows that even big names in the industry can be exposed to a legal risk if proper due diligence is not in place.

Where does the problem come from?

The root cause of the problem often lies in a lack of funding. Many insurers don’t always allocate enough capital to have comprehensive due diligence frameworks and processes. Another issue is data capture. There also has not been enough funding for due diligence data capture for outsourced parties. As a result, insurers rely heavily on spreadsheets or other non-DA, disparate systems. In the same statement (quote above) by Rachel Turk, CUO of Lloyd’s, she also reiterated the importance of accurate and timely bordereaux data. The industry is still relying on outdated data, which can undermine decision-making and due diligence.

How can Sunapto help?

Sunapto is our innovative solution to the industry’s challenges in managing DA. Sunapto offers a comprehensive solution for managing the relationship with third-parties. It integrates seamlessly with existing systems and offers analytics. Some of Sunapto’s features include contract management, third-party management, approval workflow, and dashboard. Sunapto helps you onboard any business, including coverholders, TPAs, auditors, and agents.

Coverholder due diligence is increasingly on the regulators’ watch. Both the FCA and the PRA expect insurers to maintain oversight of third parties. However, they often lack the funding and internal systems to do so, leading to a heightened market risk. Our new product Sunapto addresses these challenges by offering an integrated solution for managing third-party relationships.

Sources:

https://www.insurancejournal.com/magazines/mag-features/2024/10/21/797417.htm?utm_source=chatgpt.com

https://www.ft.com/content/fa1d2e08-8076-4bf6-a8f6-28665c010200?utm_source=chatgpt.com