The London market's bid to achieve contract certainty will only be a success if insurers, brokers and clients can work together. Richard Clifford highlights the current focus areas.
There are now under two months to go until the Financial Services Authority's (FSA) deadline for at least 85% of all risks placed to achieve contract certainty. With the market's attention focused on the FSA's 31 December deadline, now seems an appropriate time to look at the progress made so far, areas of focus and process reforms that are being driven through the market on the back of the contract certainty initiative.
Progress to date
Over the past year insurers, brokers and clients have made significant progress towards achieving certainty of contract and ensuring that they have robust measurement systems in place to monitor this effectively. The FSA appears satisfied that the industry has taken the issue of contract certainty seriously. However, the success of the project across the UK insurance industry remains dependent on cooperation between brokers, underwriters and clients.
Although many clients assume that most of the solutions to achieving contract certainty depend on the market's actions, clients need to assist wherever possible. This includes providing insurers with the required information as early as possible to allow negotiations to be completed before the policy inception, and for the production of full documentation to be completed within the 30-day deadline.
Brokers also have an important role to play, concentrating on making sure contracts are compliant and maintaining a high level of quality so they are not overwhelmed by the potential heavy workload during the busier times of the year.
A recent letter sent by Dane Douetil, chairman of the contract certainty steering committee, to the London market insurance brokers committee highlighted the following three areas of focus for the remaining months prior to the FSA deadline:
- Quality of data;
- Legacy policies; and
- Analysis of why some contracts continue to fail certainty.
The FSA will not only require firms to demonstrate that they are achieving contract certainty, but also that they have reliable and tested systems and controls in place to monitor and ensure that their reported data is accurate. Their recommendation is that these procedures should be independently tested to ensure adherence and ascertain the quality of the data. They also recommend that a firm's management board checks contract certainty performance on a monthly basis. The board must also demonstrate that it has acted on any poor quality data or cases where procedures have not been adhered to.
Legacy policies are of particular relevance to companies operating in the subscription market. The FSA requires these firms to scope out and address any backlog of policies that are not currently contract certain. By the end of the year firms will need to ensure that they are in a position to demonstrate quantifiable progress. The main questions that should be addressed are:
- Has the magnitude of legacy policies been assessed and prioritised in accordance with the legacy code of practice?
- Does the board receive regular reports on the status of legacy policies?
- Are there adequate plans in place to resolve legacy issues?
- Have agreements been made with the company's main trading partners as to how legacy policies will be reduced?
The FSA will be expecting companies to demonstrate a clear understanding of the value and complexity of any policies that fail to achieve contract certainty. Companies will need to implement processes that capture information as to why contract certainty failure has occurred, evaluate what lessons can be learned and decide what further improvements to their systems should be made.
Management boards must be able to demonstrate that they not only receive but also act upon regular reports and recommendations for change. Companies should also look to capture data on the value of contract certainty failures and ensure appropriate analysis is undertaken to assess the correlation between higher values and increased levels of contract certain failures.
The contract certainty project, although challenging, provides an opportunity for all market members to review and improve current processes and identify areas where activities can be streamlined to add value to the placing process. A number of broad additional market initiatives are now underway within the London market:
- Accounting and settlement (A&S);
- Placement; and
Accounting and settlement - Process reform for A&S aims for all documentation and data to be submitted electronically, streamlining submissions to the central processing bureau. The first stage of the A&S project will allow the electronic submission of documents while subsequent stages will be aimed at the replacement of documentation with data feeds and the speed of processing.
Electronic claims - The electronic claims filing (ECF) project aims to remove the need for paper documents, providing documentation to underwriters electronically using the Insurers' Market Repository, a central electronic repository. Linked to the CLASS (claims loss advice and settlement system) for agreeing claims, the ECF system will allow concurrent access by all interested parties, replacing the existing requirement to provide the paper file sequentially. The result should be quicker claims agreement processes and claims settlement.
Placement - The Lloyd's contract documentation process pilot has been introduced in direct response to Lloyd's CEO Richard Ward's recent challenge to the market to improve the way insurance risks are presented, valued and accepted. The aim is to have all policy checks completed by the firm order stage.
A group of Lloyd's underwriting agencies, known as the Group of Six (G6) has also been considering further areas for using technology to streamline and create efficiencies. The initial target of the G6 is a simple quotation interchange process. However, mid-term amendment processing, fuller placing interchange and extended A&S process reviews are planned.
The UK insurance industry must ensure that contract certainty requirements continue to be part of best practice long after the December 2006 project deadline has come and gone. The FSA has indicated that it will continue to consider contract certainty as a supervisory priority throughout 2007. It is important to remember that these projects, if implemented successfully, will help the UK insurance market to remain globally competitive and pre-eminent. Their success is wholly dependent upon the ability of clients, brokers and underwriters to work together.
Richard Clifford is associate director of business operations at Miller Insurance Services.
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CONTRACT CERTAINTY - WHAT IS IT?
The Market Reform Group defines contract certainty as "the complete and final agreement of all terms (including signed down lines) between the insured and insurers before inception". Full wording must also be agreed before any insurer formally commits to the contract, and the appropriate evidence of cover must be issued within 30 days of inception.