UK regulators must intervene over the practice of broker facilities before US authorities take action and potentially create “Spitzer Mark II’, Validus chairman and chief executive, Ed Noonan, has warned.
In an exclusive interview with Insurance Day, Noonan warned broker faciltiies are making Lloyd’s a less attractive place to do business, with some US wholesale brokers now actively trying to move business out of London.
He questioned the legality of some facilities, deeming some unlawful: “When we read the anti-bribery act, one of the things you’re not allowed to do is pay additional incentives just to get the business.”
The emergence of facilities such as Aon Client Treaty and Willis 360, where risks are placed with a pre-selected pool of insurers, has been the most significant change to the way business is placed in the London market in recent years.
However, Noonan said some broker facilitiies “are flat out pay to play”.
Noonan outlined that UK regulators can, and should be doing more, but questioned whether the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) fully grasp the situation: “Genuinely, I think the regulators are yet to get on top of the issue.”
He said that in the past, when he has approached the PRA and the FCA for advice and clarification over the use of facilities, the response received was somewhat muted: “We and lots of other people have had this conversation with the PRA.
“Each [agreement] we’ve entered into we sent on to the FCA in the hope of getting their feedback and to find out if there were any issues, thereby giving ourselves the option to evacuate ourselves from these problems further down the road. And we’ve got virtually no feedback.”
“I think this is a pretty perilous path to go down, particularly for the intermediaries. And the reputational legal risk doesn’t make any sense to me either.”
Noonan highlighted the practice of facilities is not reflected in markets across the pond in the US: “Brokers are not trying to do the same thing in the US on the same business.”
While he acknowledged deals are negotiated between underwriters and brokers in the US, these are not market-wide deals in the same way broker facilities in the UK are. Noonan also said in the US, such deals are negotiated carrier by carrier and typically surround single classes of risk or placement of business.
He said: “The reason it’s not happening in the US is really straightforward. If they [brokers] tried it over there, there would be a dozen state attorney-generals immediately issuing subpoenas for documents and effectively conducting the Spitzer investigation all over again.”
However, Noonan warned it is only a matter of time before US regulators turn their attention to the UK: “At some point some young US attorney-general looking to make a name for themself is going to start issuing subpoenas to US businesses based in London subject to these schemes.”
Noonan also holds Lloyd’s culpable for the development of facilities as well as the regulators: “I’m not sure why Lloyd’s thinks turning the market into a big fat index fund is a great idea.”
While Noonan said many insurers, including himself, have attempted to enter into discussions with Lloyd’s over the issue of facilities, he said no resolutions have been made because of infighting over the issue.
“We’ve had very long, hard discussions with Lloyd’s about this but the Lloyd’s management board has been split on the issue.”
He added: “I scratch my head over it – at the end of the day, they have not been proactive in maintaining the market’s importance.”
With the rise in facilities, Noonan cautioned that Lloyd’s and the London market should fear losing large chunks of business to overseas markets: “It hurts the London market, and that’s not a small issue.”
“I’m talking to the biggest wholesale brokers in the US and they’re actively trying to move business away from London and place it in the US. Facilities are the prime driver.”
Discussing what exactly is driving this exodus, Noonan explained: “Everyone hates it when I say this, but for much of the business that gets placed in Lloyd’s through US brokers (other than the big three or four brokers), those US brokers are saying ‘wait a minute, I’m not getting additional commissions on this. Why is the London broker getting these additional commissions?’ And they’re therefore looking to place more of that business in the US.”
Noonan said Validus and its subsidiaries have agreed to a handful of facilities: “Each one requires long negotiations and we do file it with the regulator. We only agreed to them some after some very hard negotiation in which we feel we got value, but by no means is this the starting point with any of them. And we’ve had to negotiate hard to get that.”
However, despite signing up to some facilities, Noonan warned they make “Lloyd’s a less attractive place for us to do business.”
“We know we’re getting less business and we have to fight harder to keep our lines on renewal without seeing any new business,” he added.
Discussing what could have started the advent of facilities, Noonan said in recent years there has been an excess of capacity in the market, with low prices that benefit the customer prevailing: “There was no shortage of capacity, in fact, there was excess capacity in each class before anybody hit on the idea [of facilities].”
“I find it very difficult to believe this was somehow a way to deliver a better price to the customer. We were doing a very good job of beating prices down in the market every day.”
Noonan said: “It’s a soft underwriting market so underwriters are feeling pressure to maintain their revenues and therefore they are caving into these demands.”
While issues surrounding facilities have been an increasingly prominent topic of conversation for some time, Noonan recognised few insurers are willing to speak on record about the subject over fears of losing business with brokers in extremely soft market conditions.
Noonan said: “We’re taking a very strong view on this and probably making ourselves a bit of a pariah to some of the intermediaries because of that.”
“I know brokers will take offence but I take offence as an underwriter to what they’re doing,” he added.
Looking at the potential impact to the industry if there is regulatory intervention, Noonan outlined that his bigger fear is going through a “Spitzer Mark II”.
“Having lived through Spitzer, I saw so many good people’s careers disrupted, damaged, ended. Their lives were thrown into chaos and turmoil because of that investigatory process. I don’t want my staff in that position. I don’t want the industry to be in that position, but especially my staff.”
Noonan said he hopes by speaking out on the issue it will bring the issue to the table with regulatory bodies in the UK: “If the regulators read my comments and take offence – I’d be happy to sit down with them again.”