Cost, administration, systems and staff skill levels are all major considerations for brokers that must be addressed in implementing and maintaining a successful legacy business system, argues Philip Grant
This year promises to be a tough one for intermediaries both large and small. Carvill has ceased trading, while Aon and Benfield have merged and further consolidation and retrenchment are likely to follow. In this environment, one of the main challenges for the broking sector is the cost and administrative burden of dealing with legacy business.
Brokers have a quite different definition of the term legacy from liability carriers. For them, it is defined effectively as any business that is no longer current and encompasses the servicing of the run-off of accounts where it has lost the business to another broker, or where a team has been lured away and taken the renewals with it. The problem for the intermediary is that its obligation to service business for a client extends well beyond the income stream from that client.
In the past, a significant cost element to brokers of servicing legacy business was subsidised by the investment income derived from the substantial, uncleared balances on their insurance brokerage accounts (now non-statutory trust accounts) that, by tradition, they have been allowed to keep.
Two factors now threaten that comforting cushion against the shocks of the economic downturn. The first is that interest rates are at an historic low, so the income itself will have dwindled to almost nothing. Secondly - and more significantly in the longer term - the Financial Services Authority seems to be starting to take a harder line on large and unreconciled balances in NST accounts.
In its recent document, Credit write-backs - an articulation of the FSA's position (http://www.fsa.gov.uk/pubs/other/write_backs.pdf), the regulator stated: "Where a firm has significant uncorrelated or unmatched cash positions, in the first instance the implication is that a firm's systems and controls are ineffective."
With income streams under attack, there is a legitimate question to be asked regarding how brokers should deal with legacy business. The larger firms have already taken steps to outsource their legacy back offices and doubtless others are also considering this option. However, transferring problems to somebody else does not always solve them; if what is being sub-contracted is not clearly understood and managed, there is a significant risk that the result will be yet further loss of control and clarity. Outsourcing is certainly part of the toolkit for dealing with legacy business, but it is no more a complete answer to the issue for intermediaries than it was for insurers' run-off portfolios 20 years ago.
At the risk of stating the obvious, the key is to have a strategy for closing-out legacy business efficiently and effectively within the constraints imposed by legislation, regulation, contract and legitimate client expectation. Asking the right questions can help that process.
First, brokers should consider whether they wish to differentiate legacy business within their operation: does it merit alternate treatment from current, live business in terms of priority or speed of service? If this is the case, how is legacy business defined and what are the contractual and commercial drivers of that definition? For example, where a broker hopes to win back a client that they have lost recently, should that client's business be classified as legacy or maintained as though it were still live?
In addition, what are the service standards that should be adhered to in dealing with legacy business in order to satisfy regulatory and contractual obligations? Are those standards currently being met in responding to client requests for service and reconciling the financial position with them?
Having decided on an appropriate strategy and the service standards required to deliver it, the next step for brokers is to raise their game and meet them, both now and in the future. The first problem this throws up revolves around resourcing and whether or not those in-house are capable of managing the legacy business. In terms of personnel, retention and motivation are important because it is often the long-serving staff looking after old legacy accounts that go when job cuts are made. Financially, it is about ensuring that there is adequate provision to manage the legacy obligations to extinction.
It may prove cost-effective to outsource the management of the legacy business, but it is vital to find out enough about the potential legacy partner to ensure that appropriate goals and service standards can be imposed. There also needs to be a fit in terms of size so that the business receives the priority it deserves from its outsourcing partner. Having the business queued behind larger and more influential clients will not enhance a business' reputation.
As if things were not complicated enough, brokers will also have to consider that the way they transact business is likely to change significantly in the near future. At long last, there seems to be real impetus behind the move to electronic trading, yet what does that imply for the mass of business that has been transacted in the traditional way and will take years to run off? Will it be possible to maintain in-house teams' motivation for servicing non-electronic business when they see their colleagues on the electronic side acquiring future-proof skills?
There are urgent questions for brokers to address this year in relation to their legacy obligations but the urgency of addressing them should not lead to knee-jerk responses. Time should be taken to reflect - and seek external advice where appropriate - on the issues discussed above before coming to any firm conclusion on a direction for progress. The result will then be a clear and positive strategy for dealing with legacy business that gives confidence to shareholders, regulators and clients alike.
- Philip Grant is executive chairman of Ambant.
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