Navigating a Crisis: Dealing with Delegated Authority

Insurance and reinsurance companies, banks, and other financial institutions sometimes engage third-party agents to underwrite or administer their business. Often, the agents are paid based on business volume (a share of total premiums or fees generated), not business quality (final loss ratios or loan/investment performance). When paid on volume, the agent has incentive to maximize volume, regardless of the risk of loss to the principal.  Principals generally control for this misalignment of interest by limiting the scope of agent authority through agreed underwriting guidelines.

When business that previously looked profitable starts to turn sour in a crisis, disputes over guideline compliance can arise. Principals contend the poor results are on business written outside of guidelines. Agents contend the business complied with original guidelines or with modifications or waivers made by the principal. We have seen this issue recur often throughout the years, from the Savings & Loans crisis in the 1980s to the Subprime Mortgage crisis of the late 2000s, and at many times and on many products in between (workers’ comp insurance programs, auto programs, life and health programs).

Given the current crisis, we expect defaults and claims to spike significantly in loan portfolios and financial insurance (e.g., reps and warranty coverage, trade credit insurance, political risk insurance). Now is the time to assess and review guideline compliance. If you are a principal, check in with your agent now. Audit and monitor all aspects of the business the agent is responsible for. If you are an agent, make sure your records are clear and up-to-date so you are prepared to answer questions from your principal.

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