FX rate creep: what it is, how to spot it and how we keep watch

What is FX rate creep?

It is the gap between the rate that won your business and the rate you get two or three years later for the same kind of conversion.

Most FX pricing carries no separate fee. The margin sits inside the exchange rate, so a statement line shows one rate and the sterling amount credited. If the markup on your US dollar premium conversions moves from 15 basis points to 40, nothing on the statement says so. The market rate moves all day anyway, and a wider margin hides in that movement unless someone measures it against the mid.

In an insurance business the cost also falls between teams. Credit control matches the sterling received to the debit note. The claims team records the amount paid. Finance sees a foreign exchange line in the accounts that mixes the markup with genuine movements in the rate. Nobody owns the number, so nobody sees it grow.

Why has the FX rate our bank gives us got worse over the years?

Usually because the price that won the account is not the price that was kept. Once premiums, remittances and claims run smoothly through one bank, moving them looks like work, and pricing can drift on that assumption.

The causes are usually small and each one is easy to defend, which is why they add up unnoticed:

• Relationship pricing that lapsed after the first year or when the relationship manager changed.
• Automatic conversion of incoming US dollar and euro premiums at the bank's standard rate because there is no currency account to receive them. Each premium becomes a small conversion at a rate nobody negotiated.
• Tiered pricing that moved you into a more expensive band after a quiet quarter, for example when a binder was not renewed, and never moved you back when volumes recovered.
• New or higher charges for receiving international payments, for intermediary banks and for urgent claims payments.
• Wider margins on less common currencies used for claims abroad, which were never part of the original pricing.
• Conversions agreed by phone at busy moments such as quarter end, where the dealer has more discretion than on a platform.

Not every bank or provider does this. Some put their margins in writing and keep to them. Without measuring you cannot tell which kind you have.

How do we chart our own markup from our statements?

List every conversion for the last 12 to 36 months, find the market mid at the time of each one, work out the markup in basis points and plot the median by quarter for like-for-like conversions.

1. Pull the statements

   Bank statements, FX confirmations and platform reports for 12 to 36 months. Include the premiums your bank converted automatically on receipt. These often appear only as a sterling credit, with the rate in the narrative or on a separate advice.

2. Record each conversion

   Date and time where shown, currency pair, direction, the amount in each currency, the rate and any fee. Tag each line by flow: premium received, remittance to capacity, reinsurance settlement, claim payment or expense.

3. Find the mid at that time

   A timestamped mid from a licensed data source gives the most exact answer. Daily reference rates such as the ECB euro reference rates, published around 16:00 CET for information only, give an estimate that is good enough to show a trend.

4. Calculate the markup

   markup (bps) = |your rate − mid| ÷ mid × 10,000

5. Group like with like

   Same pair, same direction, same flow and a similar size band. A $25,000 premium converted automatically and a $5 million reinsurance recovery converted by phone are different prices and do not belong in the same group.

6. Plot the median by quarter

   Use the median rather than the average so one odd trade does not distort the line. A flat line is reassuring. A line that steps up after the first year, after the banking arrangement was renewed or after a new relationship manager arrived is rate creep.

Illustration of the method, not client data. On £30m a year of conversions in that size band the move from 15 to 41 basis points is 26 basis points, or £30,000,000 × 26 ÷ 10,000 = £78,000 a year.

If you would rather not build this yourself, our FX cost review does it for you and includes the markup by quarter view. You can also check a single conversion with the quick markup check on that page.

How much does FX rate creep add to an insurer's expense ratio?

In the illustration below, 30 basis points of creep on £60m of conversions costs £180,000 a year. For an insurer with £100m of net earned premium that adds 0.18 percentage points to the expense ratio and the same to the combined ratio.

This is an illustration with every assumption stated. It is not a claim about any firm or about any provider's pricing.

annual cost = volume converted × markup (bps) ÷ 10,000
points of ratio = annual cost ÷ net earned premium × 100

Illustration only. Volumes, markups and premium are assumptions chosen to show the arithmetic. Some firms measure the expense ratio against written premium. The arithmetic is the same with a different denominator.

In the illustration the creep from 15 to 45 basis points is 30 basis points: £180,000 a year and 0.18 points of combined ratio. Nobody decided to spend that money, and it recurs every year the creep goes unchecked.

A note on where it shows up. Because the markup is inside the exchange rate it is not usually booked as a separate expense. It tends to sit inside foreign exchange gains and losses, mixed with genuine movements in the rate, so it may never appear in the reported expense ratio at all. The illustration treats it as what it is economically: a cost of doing business in more than one currency. Ask your finance team where it lands in your own accounts.

For MGAs and brokers the same arithmetic applies to income rather than a ratio. An MGA converting its commission to sterling to pay staff, or a broker converting brokerage, loses the markup straight from revenue.

What should we ask our bank or FX provider?

Ask for your markup in writing by currency and size band, and ask what has changed since the account opened.

• What markup over mid do you apply to our conversions, by currency, direction and size band?
• Do you convert incoming foreign currency premiums automatically, and at what rate? Could they be credited to a currency account instead?
• Has the markup changed since we started? If so, when and why?
• Will you give us a written pricing schedule and review it with us once a year?
• Which charges apply to receiving premiums and to sending claims payments, including intermediary bank deductions? Have any been added or increased?
• Will our confirmations and statements show the time of each conversion so we can check the mid ourselves?

Take a markup by quarter table from your own statements into that conversation. It is much harder to dismiss than a general sense that rates feel worse. If you hold premiums as client money, your compliance officer will want to know how any new currency account fits your client money arrangements before you open one. Our page on client money, CASS 5 and FX sets out the questions.

Do you keep checking our rate after we switch?

Yes. Every quarter we measure the markup you actually paid from the statements you send us, and once a year we put your main flows back out to the panel on a blind basis.

The quarterly check compares each conversion with the mid at the time and with what the provider quoted when you chose it, flow by flow and size band by size band. The yearly blind re-quote shows what providers would charge today for the same premiums, remittances and claims, without telling your provider you are looking. If your pricing has drifted you see it in basis points and in pounds, and you can take that to your provider or move.

A provider that knows its pricing is being measured tends to keep it where it was. That is the purpose of the check. We also recheck each provider's FCA status and safeguarding arrangements at least once a year.

We are paid by providers, not by your firm. We explain the basis on our how we are paid page. It is also why we show you every quote we receive, including those that would pay us less.

Should we renegotiate with our bank or switch provider?

Renegotiate first, with evidence. If your bank will not commit to a written schedule, or blind quotes for the same conversions come back well inside what you pay, it is usually time to move.

• Measure it. Build the markup by quarter table yourself or ask us for a cost review.
• Compare it. A blind quote shows what several regulated providers would charge for the same flows without naming your firm.
• Fix the structure. Ask whether premiums can be received into currency accounts so they are not converted on arrival, once your compliance officer is content with how that fits your client money position.
• Keep a second route. A second provider with modest volume gives you a live comparison and a fallback.
• Move in stages. If you do switch, our staged switching plan keeps the old route open until the new one has handled real claims payments and premium receipts.

Ask for a cost review   Request a blind quote