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. Itâ€™s a one-stop shop.
Whatâ€™s not to like about this?
If the broker is crystal clear about the criteria â€“ 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
The accounting used is known as a â€œbordereauâ€ 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 donâ€™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 brokersâ€“
as ever, and clear guides, and a cute awareness of the essential conflict
that all brokers face on the high street â€“ 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 thereâ€™s a
long tail of small brokers who â€œover extendâ€ themselves. , to use a polite
phrase. If youâ€™re the broker, then wake up â€“ youâ€™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 on TOBA, and why
you should always pay attention to your terms of biz. Get it checked by
FCA fines The
Carphone Warehouse for insurance misselling
Whistleblower cost the firm Â£29m!
On 13 March 2019, the FCA published the final notice it has issued
to The Carphone Warehouse Ltd (CPW), fining it Â£29,107,600 for failings that
led to the misselling of a mobile phone insurance and technical support product
called "Geek Squad".
CPW made regulated sales of Geek Squad policies worth over Â£444.7
million. And this is how it did it â€“ a notable guide in how not to sell on the
staff were trained in "spin selling", persuading customers to
purchase Geek Squad and repeating the features of the product.
training was provided on how to respond to customers wanting advice.
staff were trained in "objection handling", as a way of
who said â€œI want to think about itâ€ were told to purchase Geek Squad and
cancel in 14 days.
customers complained, CPW didnâ€™t bother too much about it.
high proportion of policies sold were subsequently cancelled early. Just
as with PPI misselling, an apparently simple piece of information was used
to dig deep into standards.
Whistleblowing also helped. Mark Steward, FCA executive director
said "without whistleblowers coming forward these practices may never
have come to light."