Board-level scrutiny of Irish insurers’ use of managing general agents advocated

Insurance regulation expert Niall Campbell of Pinsent Masons made the recommendation after the Central Bank of Ireland (CBI) found that the governance and oversight controls insurers and reinsurers have in place for underwriting MGAs need to be “enhanced”.

The CBI said (13-page / 1.11MB PDF) a recent thematic inspection it carried out into six firms found that the specific risks arising from MGAs are “not being adequately assessed, or independently tested”, and added that the procedures relating to the monitoring of MGAs are “either non-existent, incomplete, or lacking adequate detail”. The regulator said its findings are “relevant to the wider industry, and to all outsourcing arrangements”.

Campbell said: “The CBI has identified a number of shortcomings concerning the use of MGAs. These include a failure to clearly reference in insurance company’s key risk management documents the risks of using underwriting MGAs. It is apparent that, in some instances, the CBI has identified that there is a material disconnect between how MGAs are operated in practice by insurance companies and how they should be operated under the EU Solvency II regime’s outsourcing requirements.”

The CBI said it expects insurers and reinsurers that delegate underwriting activities to MGAs to “identify, mitigate and monitor the specific risks arising from these outsourcing arrangements”.

“There is ample guidance available in relation to regulatory expectations and good practice, in the management of outsourcing arrangements from the Central Bank and the European Supervisory bodies. It is our expectation that (re)insurance undertakings should ensure that this guidance is fully applied to all outsourced activities, and in particular to all underwriting MGA arrangements,” it said.

Campbell said that there is a clear inference in the CBI’s comments that it expects insurers and reinsurers to comply with its cross-industry guidance on outsourcing when delegating underwriting activities to MGAs.

“In light of the shortcomings identified by the CBI, it would be prudent for insurance companies that use MGA arrangements to review and, where necessary update, those arrangements against the CBI’s expectations in that guidance,” Campbell said.

“While an insurance company’s board of directors may, in practice, delegate the day-to-day governance of an MGA arrangement to the company’s management, it is important for directors to be aware that under the EU Solvency II regime, the board has the ultimate responsibility for compliance with the EU Solvency II regulations. The CBI’s article would appear to suggest that, in some instances, the board of directors needs to be made more aware of the risks to the insurance company that are associated with using an MGA arrangement,” Campbell said.