Has real progress been made with contract certainty or is it just "low hanging fruit"? David Hall explains how tripartite relationships are the key to reaching the higher branches.

Earlier this year the UK's Financial Services Authority (FSA) reported that the insurance industry had met its initial target for contract certainty compliance.

The London Market Principles' Code of Practice defines contract certainty as having the complete and final agreement of all terms, including signed lines, between insurers and insured before inception of the policy. From the nature of the words chosen, it clear the FSA is determined to bring an end to the current "deal now, detail later" culture that has been prevalent througout the insurance and reinsurance industry.

The FSA was appointed as the regulator for the general insurance industry at the end of 2004. One of the first challenges it set insurers was to achieve contract certainty across all business lines by January 2007. A timetable for voluntary compliance was agreed and the initial response from the industry has been positive.

Low hanging fruit?

Just over one year into the programme the FSA published its mid-term report. The report confirmed that the initial target of 65% contract certainty had been met, and all the early indications were that the industry would meet or exceed the next significant yardstick of 85% delivery by January 2007. However, there is the feeling that much of the progress to date has been achieved through the picking of "low hanging fruit". This means it is going to be incrementally more difficult to achieve future targets, once the more challenging policies that had been locked away and forgotten about are brought back into the cold light of day.

In order to gain a more accurate measure of the industry's progress it is important to look beyond the headlines and examine the figures in more detail. A survey conducted earlier in the year by the Association of Insurance and Risk Managers revealed that the rate of contract certainty for some lines of business, such as employer's liability and property were as low as 35%. It is clear that some areas of the market have a great deal of work to do if a consistent rate of contract certainty across all lines of business is to be achieved. Even those lines of business that performed well above the average cannot afford to sit on their laurels.

The FSA's decision to allow the market to achieve contract certainty on a voluntary basis has worked well, with the benefits to the industry far outweighing the time and effort spent on compliance. The industry is all too aware that the FSA has the option to switch to a mandatory compliance regime should the voluntary programme cease to be effective, and question marks remain over how the next 15% will be delivered. But progress to date bodes well enough for all parties to keep the voluntary momentum going.

A cultural change

Real development within the industry will be apparent when matters are elevated beyond mere procedural compliance and become culturally adopted. To take such a significant step requires a cohesive tripartite approach from clients, brokers and insurers alike. At their core, true all-party relationships require the long-term understanding of a client's risks.

A contract certainty partnership, based upon full disclosure and open dialogue between all three parties, has to become central to the way the industry operates. This is important, not only to deliver mechanical compliance with the FSA's requirements, but to ensure that the real benefits lying behind the tripartite concept can be experienced by all parties.

Adopting a tripartite approach leads to more informed underwriting, and thereby certainty of insurance transactions. Insurers will fully understand a client's risk exposure, enabling capital to be efficiently allocated to risk profile. This will allow for a better control of costs and thereby help to avoid mispricing. At the same time, clients will have a clearer understanding of the cover they have purchased and will experience a more straightforward claims process.

Whilst the primary focus of the regulator is on the insurer and the insured, contract certainty will also deliver significant benefits to brokers. It will be easier to compare quotes on a like-for-like basis as policy wordings become available earlier on in the process. Everything is a lot more black and white, especially in relation to claims, meaning that from the outset brokers can be clearer in their service and proposition to clients. By reducing the time spent resolving disputes, brokers will be able to divert their resources to the more profitable areas of the business.

It is important to remember that contract certainty provides a model for best practice which can be articulated to cover the entire insurance transaction from cradle to grave. By driving the industry to look at the way it works, previously ad-hoc practices have been replaced by detailed and streamlined processes, increasing the transactional efficiency and reducing the associated costs. Operating efficiency can be further increased as contract certainty has allowed processes to be monitored with a greater degree of accuracy. This allows potential issues to be identified at an earlier stage, and the workload to be spread more effectively. Operational risk can also be minimised by embracing tripartite relationships.

For tripartite relationships to operate to their highest potential, dialogue between all parties needs to be ongoing throughout the year, not just something that takes place at renewals or after a claim. With client, broker and insurer working together to keep the risk profile as accurate as possible throughout the period of cover, the potential for gaps in cover is minimised. This provides both brokers and insurers with further cost savings, as the likelihood of professional indemnity claims is reduced. In turn, this means that less capital has to be set aside to cover any errors and omissions in the policy.

Pricing in context

The issuing of a policy that best reflects the needs of the client is the ultimate goal for any insurance transaction. Creating a stronger tripartite alignment will help make this a more common occurrence, as the more insurers and brokers know about the client, the more equitable and certain the business link becomes. This will lead to policies becoming better defined and more accurately priced.

It is important to put the issue of pricing in its proper context, which requires clients to think in terms of value and not cost. Clients should be looking beyond the figure at the bottom of the contract and asking themselves, "What is the true value to the business of good risk management and adequate risk transfer?" In nearly all cases the inevitable answer is that a nominal reduction in premium is not worth nearly as much as having the tools available to get the business back on its feet quickly in a time of crisis.

The UK market is seen as one of the pioneers of contract certainty and there is a great deal of international support for the concept. Provided that interpretation issues are tackled effectively, the UK will become a more attractive place to conduct business. By offering overseas buyers reduced risks combined with a greater level of control, the UK is in an ideal position to realise the significant commercial advantages of being a contact certain market.

Far from being the FSA's final challenge, achieving contract certainty is more likely to be the first step. It will ultimately be tied up with the creation of effective tripartite disclosure via open dialogue and listening based relationships. The successful completion of a documented process will only answer the FSA's concerns if it involves the accurate understanding and full articulation of a client's risks. Contract certainty is not an end goal for the insurance industry, but is instead the foundation for its future.

- David Hall is director of client management and broker relations at Allianz Global Corporate & Specialty.


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The reinsurance market is unique in that historically million dollar business deals were often closed with cocktail napkin contracts and a handshake. All that changed on 13 December 2004 when John Tiner (pictured left), chief executive of the Financial Services Authority (FSA), challenged the London market to end its custom of "deal now, detail later". He lamented the risks to policyholders as well as to the insurer and brokers that the lack of contract certainty posed, and laid out his vision for "greater certainty at inception of the contract, with full policy documentation promptly thereafter".

Two main targets were set: the FSA wanted to improve measured slip standards to 99% by March 2006 and the Market Reform Group set an end-game target of 85% of all contracts to be certain by December 2006. So far the market seems set to meet these targets, having already met its interim goal of 65% contract certainty in December 2005. In a vote of confidence to the efforts made to date, Tiner announced in March that the FSA had put on hold contingency plans to develop rules to enforce contract certainty. But the final 15% is expected to be the toughest of all to achieve, with Tiner also voicing concern that the industry had picked "the low hanging fruit" first, leaving the "heavy lifting" until last.