A coverholder worried about your profit commissions? Read on, as a tie-up between City Insurance Brokers and Compass Underwriting brings a protection scheme for managing general agents (MGAs) and brokers with delegated binding authorities.
Called “Profit Commission Coverholder Protection” (PCCP), the offering is said to be among the first catastrophe profit protection schemes. Underwritten by international A-rated re/insurers, it indemnifies profit commissions against the impact of a single large loss.
“In simple terms, PCCP can remove a single large loss from the profit commission calculation,” explained Compass Underwriting managing director Andrew Briant. “It is similar in concept to insurers purchasing catastrophe reinsurance.”
Briant said the scheme will ensure that an MGA can protect part of its catastrophic exposure – up to the selected limit of indemnity – without concerns being raised over the quality of underlying underwriting.
“MGAs often base their business model around the risk commission covering the operating costs, and profit commissions forming the profit of the business,” he said. “PCCP is a particularly good match for this type of MGA especially where the MGA may not be aligned in terms of reinsurance protection purchased by their capacity, and yet still has to contribute towards the insurer’s operating costs.
“Deficit clauses can then destroy the ongoing profit share arrangements even though the underlying insurer may have been reinsured.”
City Insurance Brokers chief executive David Goodley, who has seen not only the advantages but also the extreme difficulties brought about by profit commissions, warned of what a single large loss can potentially do.
“The benefits from years of careful underwriting can be wiped out in an instant by a single large loss,” said Goodley, who has served as a compliance consultant for MGAs. “PCCP enables those distributing or underwriting to remove this potential and secures the ongoing benefits of their disciplined and careful underwriting.”