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15 July 2021 | 5-minute read
The Operational Resilience bandwagon is now well and truly underway. The rules (referred in resources below) published at the end of March by both UK regulators has had plenty of time to be read and digested and the LMA guidance (produce of the LMA Working Group) at the end of April has been very well received by Managing Agents looking to get their heads around what they need to do and how they’re going to do it.
The regulator wants this new legalisation to be a value-add process where firms actually become more resilient, and not simply treat this as a box ticking exercise. And yes, whilst it’s fair to assume that their focus is perhaps substantially on the retail banking sector - think TSB or NatWest - intolerable consumer harm can also be caused in the speciality subscription market.
It makes a lot of sense to map processes end-to-end so that if a critical system somewhere in the chain or an offshore team goes down it’s possible to quickly identify the services that are affected by it and the potential workarounds that exist to remediate before consumers face intolerable harm, or the firm faces intolerable harm to it’s balance sheet albeit the latter is likely to be a much higher bar. The pandemic has been transformative in one important respect – thinking that offices were essential for BAU to happen to one where a disparate workforce has been proven to also hold the fort.
The regulator has taken an interesting line with the new rules - the presumption is not about whether a major disruption might happen - history tells us that it will - there is a new assumption that these disruptions will happen and correspondingly it’s up to the firm to figure out all of the what-if permutations in order to keep the show on the road while normal service is resumed.
I recall in a former life in personal lines a well known industry SaaS broking and policy admin system went down for over 3 weeks. We were one of the few hosted insurer customers (it was mainly a broking platform) affected and resulted in an incredibly difficult period of time as everything stopped, except the phones which rang increasingly often as customers were trying to find out what was going on with their claim or renewal. Would we have done anything different if we had had these OpRes processes in place beforehand? Yes, of course - it’s just we never really thought it would happen, or certainly not for as long as that.
The interesting challenge for the market is that of aligning common processes - the policy lifecycle from broker or cover holder to carrier via central systems - but where each firm is free to decide for themselves not only what constitutes an Important Business Service (IBS) but also what the definition of ‘intolerable harm’ is. Add to that the fact that shared London Market central service contracts in large part are agreed once at market level, so outliers end up with a problem. The LMA is trying to help address this through the quarterly benchmarking exercise of Managing Agents, the second one having just been completed and published. We had around 70% response rate which has been very helpful in being able to start to see the picture emerging around what the common market view is of Impact Tolerance for each Important Business Service. As this picture continues to evolve and crystallise we will use the information to help shape and inform the requirements that need to go into common service agreements for central services.
The regulator recognises that the whole OpRes piece is going to be an evolving picture as it begins to mature over time, and whilst for some it is still early days nevertheless with only eight months until the rules actually come into force all firms should at least be clear about who is going to deliver this and have resource in place appropriately. Given the need for Board sign-off for all aspects of firms’ plans from strategy down to each IBS it feels like most will want to have their ducks in a row by the end of this calendar year. The LMA OpRes Forum has already attracted over 70 participants keen to listen to each other and talk about what they and others, along with the LMA, are doing. The Working Group has published a set of ‘deliverables’ aimed at joining the inter-connected dots between broker/cover holder, carrier and market shared service providers along with our friends at LIIBA.
Full details of everything we are doing can be found on the LMA website.
In a recent conversation with the regulator it was nice to see that they were very complimentary of our guidance which even acknowledged the fact that its existence saved them the need to explain the rules to individual firms in the way they had seemingly expected to. My two most notable take-aways were 1/ they very much liked our approach to the number of IBS’ (6 in total: new business/renewals; MTA/cancellation; claims FNOL; claim handling/adjustment; claim payment & complaints) in contrast to some in the banking industry who had adopted an overly-granular approach with far too many IBS’, and 2/ the statement that desktop/simulated testing alone in future will not be sufficient, they are going to be looking to firms to go well beyond this. Questions remain about ‘how’, and the extent to which we have to do this at market-level which will certainly be something we’ll return to in due course.
Resources
The FCA rules are PS21/3 – here PS21/3 Building operational resilience | FCA
The PRA rules are SS1/21 – here SS1/21 Operational resilience: Impact tolerances for important business services | Bank of England
Matt Wood
Head of Technology