After years of talking about reform in the London market, things are actually happening, says Dave Matcham
It has been a slow, often frustrating journey and there is still some way to go, but efforts to reform the London insurance market are starting to go places. The main aims have always been to exploit technology to create a faster, more efficient environment and to bring clarity and transparency to processes that customers have found baffling and impenetrable.
It is often quite difficult to measure or prove these things, so a recent spate of surveys were of particular interest. They demonstrate how much real, tangible progress London has made, and also how much work has yet to be done. Let's start with contract certainty, which is defined as "the complete and final agreement of all terms (including signed lines) between the (re)insured and (re)insurers before inception."
It has always struck people from other industries, notably banking, as extraordinary that buyers of insurance and reinsurance can purchase a product without substantive proof of what they have bought. Since a key aim of modernising the market is to provide clarity for insurance and reinsurance buyers and providers alike, getting this right was something of an imperative; it was a litmus test for the reform programme.
Lack of contract certainty is not specific to any one market, but has for a long time been an unfortunate aspect of many people's experiences of London. It reflects the complexity of some of the risks in our industry, compounded by the demands of a subscription market. London's efforts to tackle it will be influential elsewhere, notably the rest of Europe and Bermuda, where the same issues can arise whenever risks are shared.
Last year the Market Reform Group, the top-level committee overseeing reform in London, set itself a target of achieving 85% certainty by the end of 2006. As a first step to getting there, it created an interim target of 30% in the December 2005 renewals.
When these aims were first announced they were regarded by many, at least in private, as impossible. A survey of chief financial officers, for example, found that not one of the 20 questioned believed that the programme would meet its objectives. Yet, when the figures for the December renewal came out, they showed that the market had achieved 65% certainty - more than double the target figure.
The UK regulator, the Financial Services Authority, declared itself satisfied with these results. Not, of course, that we can be complacent. The FSA reserves the right to return to the issue. Above all, increased levels of contract certainty are a must-have - an essential element in providing the levels of service that customers rightly demand and increasing the market's efficiency.
In March, the figures received powerful, independent support from a source that has occasionally been a severe critic of the market. The Association of Insurance and Risk Managers (AIRMIC) surveyed its own members, who include insurance buyers at the UK's largest companies and who form a large segment of the London market's customer base.
Its questionnaire asked whether buyers had achieved contract certainty at their last renewal. The findings were qualified with warnings about the need to maintain momentum and avoid complacency, but the overall message was clear: "This research demonstrates that the market is on the right track," they said.
AIRMIC asked members whether they had achieved certainty at their last renewal; between 35% and 61% said they had, depending on the class of business. While there are no earlier surveys with which to compare, it is clear that these figures represent a giant leap forward. It is reasonable to assume, furthermore, that they would have been significantly higher if AIRMIC had stripped out those buyers who renewed during the first half of last year when the drive to increase certainty had barely started.
Looking ahead to the next renewal, the percentages of buyers confident or somewhat confident of achieving certainty next time around rises sharply, with fewer than 10% of buyers in any major class taking a pessimistic view.
Bearing in mind that commercial insurance for large international corporations is often highly complex, this is a pretty good start. Achieving certainty in this area is more difficult than in some others such as treaty reinsurance, so the overall year-end target of 85% for the market as a whole looks eminently achievable provided everyone continues to work hard towards this objective. Indeed, we should be looking to exceed it.
Sceptics will argue that the regulator had to threaten punitive action before the market actually took notice about contract certainty. They would be correct to a large degree, but the success to date is also a result of work that has been going on behind the scenes for years. Most notable has been the creation of a standard slip (the document containing details of a shared insurance and reinsurance contract).
Previously, there were many different slips, often inconsistent with each other, which made processing policies a slow and confusing exercise. The new LMP slip, by contrast, is widely-used and accepted. Furthermore, it imposes disciplines that demand clarity in contract terms. It may not be the most exciting subject in the world, but the LMP slip has been a vital building block in the delivery of contract certainty and in many other improvements now taking place.
Perhaps the other hot topic, in London as much as on the other side of the Atlantic, is how brokers are remunerated. Two other reports, when taken together, indicate how companies that buy their insurance in the international markets - and specifically in London - are getting a more transparent package than those who go to large provincial brokers within the UK. It would be interesting to see if the same were true of other countries.
The International Underwriting Association (representing companies in the London market) and the Lloyd's Market Association recently commissioned the biggest-ever survey of 500 commercial insurance buyers in the UK.
The survey found a widespread lack of understanding about the level and breadth of broker remuneration. More than two thirds of corporate insurance buyers wanted to know how much their broker was receiving, and the majority felt that this information should be mandatory. When asked to guess the percentage commission, the figure they produced underestimated on average by about 50%. Only one respondent in five was aware that brokers earn commission over and above the percentage they charge their clients, even though this has long been common practice.
The sample was taken overwhelmingly from companies that use provincial brokers in the UK. Many of these intermediaries reacted angrily to the findings, arguing that buyers at medium-sized and smaller companies neither need nor want such information. Their arguments were undermined somewhat when the Federation of Small Businesses contradicted this view, arguing that their members valued transparency as a way of promoting competition and helping them to achieve good value.
Brokers in the London market, by contrast, have developed new business models to accommodate the post-Spitzer era. Typically, they continue to charge underwriters for administrative services. Now, however, these are usually declared up-front and are significantly lower than they used to be.
The IUA-LMA survey detected a difference between the experiences and attitudes of the largest insurance buyers (companies with turnovers above £250m a year) and the rest. The key point here is that the big players tend to use London market, whereas smaller firms usually go to provincial brokers.
Another report, also from AIRMIC, confirmed this difference. It found that its members had experienced something of a breakthrough, with nearly two thirds receiving information about broker remuneration without even asking for it. Furthermore, once they could see what they were paying, a large majority were satisfied with how much they were paying. AIRMIC expressed concern, however, at the emergence of a two-tier market. "We remain concerned that these benefits are available mainly to the large, knowledgeable buyers; smaller companies are not always receiving the same consideration from their brokers."
Together, contract certainty and transparency of dealings with brokers do not quite add up to a cultural revolution, but they are a good start. They show the London market is capable of developing modern business processes. Provided the momentum is maintained and extended to other areas, then it augurs well for the future.
- Dave Matcham is chief executive of the International Underwriting Association.
- Buyers demand greater broker transparency.