Achieving contract certainty is not just a matter of agreeing insurance wordings, explains Iain Saville

No participant in insurance anywhere in the world should be in doubt about the significance of two recent interventions - one in the US, by New York Attorney General Eliot Spitzer, the other in London, by Financial Services Authority chief executive John Tiner. Each has chosen a rather different approach - but there are significant similarities in the changes they are demanding.

This is not just an American or British matter. In an increasingly interconnected world, no national market can afford to regard itself as a bystander. Regulators talk to each other, and are sensitive to changes in each others' stance. Both the New York and London regulators are acutely aware that pushing standards too high simply drives business offshore - which does not in the end serve the health of the global industry or domestic stakeholders.

The common theme which unites these two regulatory initiatives is the need for greater transparency.

Spitzer wishes to see transparency in relation to the way that intermediaries are paid. This wish is echoed by the majority of London market carriers and a number of brokers.

The Tiner challenge to achieve contract certainty is of course shorthand for a large and complex ambition. Many people suggest that contract certainty is "only" a matter of agreeing insurance wordings. This is very far from the case. Agreeing complete and coherent wordings before bind would be a big step forward. But it still leaves a number of equally important areas to be resolved. Among these is the transparency of the contract itself. I do not see how we can have true contract certainty unless the full contract, including its supporting risk disclosures, is available to all parties in a single, independent repository.

I believe there is another equally important issue - transparency of process. Without which it will be very laborious to improve contract certainty standards. A case in point is agreeing wordings. There needs to be transparency of what has changed when the broker returns to the underwriter with an updated submission or slip - if the underwriter is not to be obliged to read the whole document again.

Improving quality

Improving the degree of contract certainty will only be possible if firms manage quality much more tightly than today. To do that, managements need transparent access to what is going on. This improvement in quality has to be possible in today's paper-based industry. And I am confident that London brokers and carriers will rise to the challenge.

But I am also confident that they will find it laborious, expensive and somewhat of a burden. Quite simply, it is very hard to manage quality in a complex process in a paper-based world. By contrast, in the electronic world, quality can to some extent be engineered in if the electronic system performs the necessary validations. But more importantly, the electronic system provides process transparency to management - they do not need to call for the file because it is already available.

Put simply, transparency is the key mechanism in driving up standards. It enables managers to exert effective control of quality and efficiency during the process - rather than wait for evidence after it is concluded. It also allows competition between firms - based on league tables of cross firm performance - to further reinforce rising standards.

This belief is at the centre of the London Market's move towards electronic infrastructure in relation to its processes for accounting and settlement, claims, and placing.

Set against this background, the challenge to make significant strides by the end of next year may look rather daunting. However, I think the industry is well prepared to make significant progress - and has indeed already done so.

The starting point is, of course, to define what we mean by contract certainty. We have largely completed this task, under nine main headings. The work already completed within London of creating a standard "slip", as the record of the key terms of the contract - has given us an extremely useful start.

The next stage is to construct realistic and quantified targets for relevant attributes within each heading. I firmly believe that measurement is the key to successful management.

Of course, not all the attributes are susceptible to quantified measurement - but there are plenty where objective measurement is possible. So our plan concentrates on building on the measurement already in place and extending this to other attributes and to the whole London subscription market.

Even so, the challenge is significant for some segments of our marketplace. There will be significant costs in reforming processes, collecting data and using that data to drive quality higher. Priorities have to be set based on the importance, cost and measurability of what is required.

This process is now firmly underway and we have a very good foundation for such assessment.

First, the London marketplace has embraced the LMP slip, as a standard placings document which records the key terms of the insurance contract. Virtually every slip placed in the London market now adopts the standard format. Lloyd's has for a year measured slip quality, and now has a central audit process to provide independent verification of quality at the point where the leading underwriter commits.

Our regular reports to the market show that quality has improved from below 80% when first measured in 2003, to 93% in January 2005. This is not a bad result - but there is still a fair way to go. This is perhaps most starkly exemplified by the finding that even in January only 22% of slips were fully compliant.

We will of course continue to drive quality higher through this process. It is likely that it will be extended, in that many non-Lloyd's carriers will volunteer to submit their slips to the process. This will give managers a view as to where they stand in relation to peers in terms of slip quality - a powerful force for improvement.

Second, we are making transparent the quality checks which are undertaken once the contract has been fully placed.

The checking process is carried out on behalf of Lloyd's managing agents by the London communal back office, XIS, so that Lloyd's underwriters can demonstrate that their contracts meet standards specified by Lloyd's. We are codifying and publishing the checks, so that the marketplace is clear what standards have to be met, and can ensure they are engineered in to their submission, slip production, and underwriting processes. The first part of this publication took place in December, for binding authority products.

We are simultaneously working with XIS to ensure that structured feedback on errors is given to Lloyd's and to the marketplace, so that we can analyse common faults, communicate them back to particular pockets of the market as necessary, and construct and publish league tables - just as we do for the slip, at the start of the placing process.

Third, and to support this concentration on quality and measurement, we are working to give the market the necessary tools to help them to manage quality.

High quality process requires structure. This allows a common view of what is done at each stage, and what standard should be achieved - particularly important in a marketplace where the typical slip has three or four underwriters. It also means that one can create supporting IT.

Two separate groups have put a lot of work into creating structured placing processes - and, I am delighted to say, that the results are almost identical. A group working within the LMP has produced a single structured placing process, which is currently being implemented. And an almost identical process is now embodied in Kinnect, which provides electronic support for syndicated market placing.

Both initiatives deliver a market-wide harmonised placing process which enforces a degree of structure to support the creativity of brokers and underwriters. As Nick Prettejohn recently said, shared common process in our language supports creativity, rather than destroying it. I believe that this move is of fundamental importance.

Accordingly, we will encourage all in the market to participate in the implementations, either in the paper-based world through the LMP process, or through Kinnect - the choice is theirs. We will ensure that we collect data and play it back to market participants.

I am confident the London marketplace will respond positively to the challenge of demonstrating that its standards are high and rising in accordance with the regulator's demands. I also believe that, in the process, the transparency of the neutral electronic infrastructure will hasten the move away from serial, paper-based, communications to shared electronic communications.

That move is already well underway in relation to back office processes in London, both for accounting and settlement and for lodging and negotiating claims. It is time to make the same commitment to change in the front office.

- Iain Saville is the head of business process reform at Lloyd's, and a member of the market reform group charged with delivering substantial improvements in contract certainty by the end of 2006.

London Contract certainty - FSA meeting December 2004


5. The FSA is setting the industry a challenge to secure a market-driven solution to the issue of contract certainty within two years. Failure to achieve this will result in regulatory intervention but that is not the FSA's preferred outcome. Regulatory tools could range from operational risk charges, other capital charges and specific rules.

6. The FSA recognises that the industry has in place arrangements to improve the efficiency of the London market for example through the London Market Reforms (contract certainty is a key priority for 2005). Our intention is to accelerate this work and help the various players in the market collaborate to achieve a solution. This may require an expansion of the participants in the London Market Reforms work for example to include representatives of insureds.

7. The FSA has no preference for the solution reached, provided that it deliver the aims and outcomes. The FSA will want to be a partner in the process, be kept informed of progress and provide assistance and feedback where appropriate.

8. There was general support for the FSA's interest in this issue and for setting a formal deadline for a solution.