London can achieve contract certainty believes Gerry Albanese
The comments made by John Tiner in early April, serve as a good reminder for underwriters and brokers within the London insurance market.
The chief executive of the UK FSA told the London market to improve its business practices or risk regulatory intervention. He said there needed to be a "sea change" in the culture and behaviour of underwriters. In particular, he was concerned that much insurance underwriting is agreed without drawing up a contract - which often follows months or even years later.
"Within two years, we expect there to be a solution to this ... if not, we will have to get our rule book out and start being more dirigiste, in a way we don't want to in wholesale markets," Mr Tiner is reported as saying.
He's absolutely right. Contract certainty is fundamental to the insurance process. Although the market knew that finalised policy documentation was often not in place until many months after cover had been agreed, it was a shock to most outside the market that the claims against insurers for losses of up to $7bn following the terrorist attacks on the World Trade Center were complicated by the lack of final policy documentation or much of an audit trail to support what the coverage agreed might in fact be.
As well as contract certainty, the other issue is the expense of handling the existing paper-work, from initial submissions to final claims settlements. This has an effect on the London market's pricing as the cost of processing is part of the premium. Although London, as a highly specialist market, with a differentiated offering that serves complex insurance needs, doesn't compete solely on price, price is far from unimportant in the long term. Insureds may be willing to pay a little more for dealing with the London market but there is a limit. London doesn't have to be the cheapest option, but it can't afford to be perceived as the most expensive option either.
The market needs to find a solution to the problem of contract certainty within Tiner's stated two-year period. However, with new initiatives, such as Kinnect, it is clear that the market is beginning to work together and is slowly recognising the need to take action. The market has faced problems at least as significant as contract certainty in the past, and has successfully resolved them through the combination of investment of capital, intellectual input and a considerable amount of effort. I am confident we will resolve this issue.