Insurance Compliance: A Client’s Friend or Foe?

While researching topics for our Costero website blog, I came across a post on LinkedIn by Emmanuel Maggiori, a freelance software engineer, titled “I’ve been in tech for years, but I’ve almost never worked.”

The piece provides fascinating insight into working practices at large tech companies. You can read the full article here.

Emmanuel discusses the prevalence of freelance roles for projects that are continually overstaffed, so much so that engineers are barely working at all. In analysing why this happens, he cites task bloating as a key reason. Project managers have to predict how much time and costs a task will require. This is also broken down further into individual tasks, with the time and staff allocation wildly overinflated.

This phenomenon is largely driven by a strict adherence to the agile philosophy. As Emmanuel states, the principles behind agile software development are commendable. In fact, one of the key principles is “satisfying customers by delivering value as quickly as possible.” Sounds great, doesn’t it? However, to ‘be agile’, organisations adopt a number of agile ‘recipes’, with step-by-step guidelines. This is the bit that really jumped out at me: “The adoption of a recipe results in a box-ticking-exercise that makes companies believe they become agile just by strictly abiding by a set of inflexible rules. The effect is the opposite.”

I couldn’t help but feel this exact statement could also be applied to insurance regulation. In a similar vein, the need to protect the customer, which is at the heart of regulation, is a completely reasonable objective. However, what has gradually resulted over the last decade is a blind adherence to the correct processes, which are all geared towards “treating customers fairly” and more recently delivering “fair value to the customer”. Inevitably, to achieve these objectives, there needs to be auditable evidence that you are following the guidelines, and this means forms must be dutifully completed to adhere to these requirements and to demonstrate that you have given due thought, care and attention to the customer, particularly those who are at the smaller end of the scale.

Just to be clear, I am talking about businesses purchasing insurance as opposed to individuals, as that is the core focus of Costero’s business. However, if you are a business with a balance sheet of less than €6.2 million, and a net turnover of €12.8 million (I would love to know who establishes these very precise numbers), then you are still deemed to be ‘high conduct’ business. At a high level, the smaller the size of the customer, the more oversight is required, with additional layers of conduct sign-off, additional Product Oversight Group (POG) committees, more forms that need filling in and resultantly a higher barrier entry for an underwriter, who might ultimately decide they are better off sticking to what they know and avoiding the hassle.

In the Binders & Programs Division at Costero, our core business is facilitating binding authorities on behalf of MGA and coverholder clients, with an increasing emphasis on insurtech and emerging risks. In placing this type of business, we are regularly asking underwriters to step outside of their comfort zone. In most cases, we are also asking them to address a current weakness in a product area, whether that be in the claims process, the coverage being offered, the risk management being provided, or the customer experience.

In most cases, the opportunities to markedly improve on an insurance product or disrupt a traditional way of writing business tends to be focused on the micro to SME market, as historically this is where insurers have been less nimble in addressing the needs of the customer. Historically, the MGA market has filled the void left by insurers, addressing the coverage needs of SME clients, as well as more specific niches, geographies, or coverages. Insurers have been able to almost outsource creativity to MGA clients, who are closer to the needs of the actual customer. More recently, technology has given forward-thinking MGAs and insurtechs the ability to do this in an even more effective way by dramatically improving the user experience of purchasing cover, and, hopefully, of making a claim.

However, as the ability to improve the customer experience of an insured has improved dramatically over the last ten years, and as more and more tech-savvy talent has entered the insurance market, the barrier to entry for insurers has become increasingly burdensome. We are regularly told by underwriters that they are spending too much time on ever more reporting and form filling, and not enough time on underwriting, with delegated business being the biggest time vacuum for underwriters. The result is fewer underwriters willing to write a piece of business that might dramatically improve the experience of the insured, as the easier path is to do nothing and avoid the pitfalls of going through endless committees, oversight sign-offs, and so on.

There’s a second issue created by fastidiously adhering to these compliance processes. Every insurer needs to employ an army of compliance/DUA/conduct staff to make sure that the rules are being followed, with this perhaps being the biggest area of headcount growth at Lloyd’s syndicates in the last ten years. This might be a slightly more controversial point to make, but it is perhaps the elephant in the room as far as expense ratios are concerned.

Ironically, an ever-increasing expense ratio results in Lloyd’s syndicates having to write to larger profit margins, resulting in more selective underwriting. I can hear the underwriters amongst you questioning what is wrong with selective underwriting; however, the other outcome of this is a less competitive market environment where syndicates are perhaps less able to take on risks or opportunities that don’t fit within their core appetite. This is ultimately bad for the customer as it leaves them with less choice and higher insurance premiums.

This is what made me think of compliance in insurance when reading Emmanuel’s article. So many resources go into following the correct process itself, the outcome for the customer gets completely lost. The result, I believe, is less creativity, less innovation and fewer positive outcomes for the most important party in the chain: the client. In a similar vein to the way agile working practices have been loyally followed in the tech industry, how can the current compliance environment be working if it results in less competition and fewer product options for the customer?

There is no denying that compliance serves a purpose, but the customer’s benefit must remain at the heart of every business practice. If you are an InsurTech or MGA trying to navigate the pitfalls of the compliance process then please get in touch, a key aspect of our role at Costero is navigating this for you so you partner with the markets that are best set up to make the compliance process as straightforward as possible.

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