At the time of writing there are 424 days remaining in which the London market must revamp its processes in order to meet the requirements of contract certainty
It is difficult to ascertain how far the market has come towards achieving contract certainty - as now defined - by the regulator-imposed deadline of 31 December 2006, but with the release of the Contract Certainty Code of Practice, guidelines and checklist by the Market Reform Group, at least practitioners now have a framework upon which to base any measures they take to achieve something which has successfully eluded the market for the last 300 years.
It may come as a surprise to some to learn that, as Nick Prettejohn, CEO of Lloyd's and chairman of the Market Reform Group said, speaking at the Global Reinsurance "Countdown to Contract Certainty" panel discussion in October, "The biggest misnomer in the whole situation is the label 'contract certainty'. There is no such thing as contract certainty." The goal for the market is to achieve greater clarity in the contract so that all parties have a full understanding of its content at the time of inception. "What we are asking the industry to do is something that most other industries have achieved many years ahead of us - and that is to know exactly the product we are selling, at the time we sell it, so we can price it correctly, and the client knows exactly what they are buying, so there are no misunderstandings at a later date," Dane Douetil, group chief executive of Brit Insurance told attendees.
What the contract certainty documentation from the Market Reform Group will serve to do is to "put a bit more flesh on the bones to enable organisations now to see how it is going to affect their processes and their procedures within their operations," said John Hobbs, director of services at the International Underwriting Association of London.
This is not to say that the market has not already been taking steps to achieve greater certainty in the process to inception, with a prime example of this being the implementation of the LMP slip. Introduced into the London market in 2002, the slip is designed to provide all the information required to place a risk with increased contract clarity in a standard format. In fact there is much frustration amongst those who are championing the contract certainty drive that the FSA have had to step in and issue a deadline backed up by threats of regulator intervention should the market fail to achieve the required level of contract certainty. Steve Hulm, a consultant at the Market Reform Programme Office, in a recent Market Group Forum, said, "Contract certainty has become an important issue for the regulators, with the target set for the end of 2006. We have got to move, we have no choice, but we were intending to do it anyway."
"It is deeply frustrating that it has needed the FSA to intervene in this situation to make those parts of the market which didn't realise that this was an important issue wake up," Nick Prettejohn stated.
However, no matter how disappointed these leaders may be that the authorities have had to get involved to force the issue, one thing is clear - the intervention of the FSA has added a much greater level of seriousness to the proceedings, with the threat of punishment hanging over the whole market. And those who assumed that the FSA would not be taking off the gloves until January 2007 have had a rude awakening following the recent confirmation that the authority will be making a formal review of how far down the contract certainty road the market has come and will also be knocking on the doors of individual companies demanding proof as to what stage they are at in the journey towards adequate contract certainty. "And if they don't like the answer to that," warned Prettejohn, "they won't wait until the end of 2006 to start taking action."