Insurance body to publish formal code of conduct on delegated underwriting

The International Underwriting Association (IUA) set up a working group to examine issues in relation to delegated underwriting authorities last month in response to the recent thematic review of insurance outsourcing by the Financial Conduct Authority (FCA). Paul Rich, who chairs the group, told Insurance Day that the group was taking the FCA report "very seriously".

Rich told Insurance Day that the group would work with both the FCA and with other trade bodies to ensure consistency across the insurance market and that any regulation of delegated authorities was "appropriate and proportionate for the business model". The Lloyd's Market Association (LMA) already has a 'dedicated underwriting committee', and the market has operated a code of practice for delegated underwriting since July 2011.

Insurance regulation expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that the need for an agreed code of conduct on delegated authority arrangements had emerged from the FCA's work.

"The thematic review highlighted the FCA's concern that various aspects of insurer outsourcing arrangements may not be adequate or appropriate and, most importantly from the regulator's perspective, may be leading to increased risks of poor customer outcomes because of inadequate allocation of knowledge and responsibility between insurers and those to whom they are delegating various business functions," he said.

"The FCA expects affected insurers to consider how they are impacted by these issues and what changes they need to make to remediate any shortcomings in outsourcing arrangements to ensure that their customers are treated fairly. An agreed code of conduct or practice is an important step towards achieving this and will, no doubt, be welcomed by the FCA as well as market participants," he said.

Delegated authority arrangements are used by insurers to outsource certain functions, including underwriting and claims handling, to third parties. At the end of June, the FCA said it was concerned that some firms did not treat these arrangements as outsourcing, did not carry out appropriate due diligence when selecting suppliers and were not exercising sufficient control over delegated regulated functions. The report followed a thematic review by the FCA of 12 insurers' outsourced underwriting and claims handling arrangements, and the associated activities of 19 intermediaries and third party administrators.

New rules will govern the outsourcing of "critical or important operation functions or activities" by insurers once the Solvency II regulatory regime comes into force on 1 January 2016. Any such outsourcings will require a written outsourcing agreement which clearly states the duties and responsibilities of all parties, compliance with applicable laws and regulatory requirements and a number of other specified items.