Andy Brookes: Paul, are your members up for that?
Paul Hopkin: Yes I believe they are. I was just having a wry smile at the thought of the broker being stuck in the middle, but that is the case almost by definition. There is an increasing understanding on the part of risk managers that contract certainty is desirable from the point of view of all parties. If I reflect on the case of the change of risk manager’s views on this – insofar as perhaps risk managers have lagged behind the market and in terms of understanding the performance of this – it comes down to a lack of transparency and understanding that contract certainty really is a big issue and something that huge resources have been put into. I am not sure that the average risk manager understands just how much effort has been put into this. If they did they would have a better understanding and would therefore be more engaged in what is a step change in the market. This is not something that should happen to or around the insurer, it is something that they need to get more engaged in. They are now becoming more engaged because, as you pointed out Martin, the rules of engagement have changed. Risk managers who worked to the old model – who got their price and an indication of coverage and if it seemed okay, would negotiate afterwards – find those old rules of engagement are increasingly not available.
Andy Brookes: Are insurance buyers willing to get their act together earlier?
Paul Hopkin: That is part of it. That process in large continuous risks is a continuous process and they are forever collecting and updating information. The further steps of getting that information into a presentable, easily understood presentation to the market is an issue that risk managers are looking at; having got all the spreadsheets, how do they compile them into a coherent story to take to an underwriter so they get the best understanding from the underwriter and then hopefully the most appropriate and best price. Risk managers are working on that. There is huge increase in the understanding and motivation of risk managers to engage in this process earlier, partly because the rules have changed and they have to change their ways. But there is definitely a willingness to do so.
Kristin van Niekerk: I suspect it is an issue of constant vigilance from all the players so the certainty and quality that Barbara stressed as so important is achieved.
Andy Brookes: We have talked about what behavioural changes have gone on in firms; locating wording experts in the process, preparing the contract earlier and the trade-off between quality and efficiency and how we need to improve on both. Is there anything else you would like to add to that before we turn to the tools available to help people do this?
Simon Robinson: We see on the global side that there is definitely a shift, especially if look back five or ten years when the client was kept well away from the business and the broker was in the middle dealing with the insurer. I think that today we are seeing a fundamental difference and that there is much more of a three-way relationship of talking through and acknowledging these issues. This is especially true with global clients; they have to do it anyway. That is of value to them and they need to get their operational risks sorted out and know what they are transferring to insurers or reinsurers, so they can talk about it before the event as opposed to when the event has just happened.
Andy Brookes: Excellent, thank you. I would like to turn to think about what tools are available to help market processes and the use of model wordings in particular.
Barbara Chandler: I think that the most widely publicised tool that we have available to us in terms of sharing other wordings is the Model Wordings Library. We are very fortunate to have that available to us in the London market as a tool and it has been in place in some shape or form for over 20 years. The Model Wordings Library has become an international standard, so we have clients across 300 countries that use it and they see the London wordings contained within it as being at a very high standard, and ones that they want to use and adapt for their own marketplaces. I think it is a credit that the London market is driving these sorts of standards forward.
Andy Brookes: Thank you. Martin, the LMA has also been busy in this space.
Martin Roberts : Yes, at the start of this year, a group of managing agents wanted to create a new repository, and we delivered that in August. They wanted to focus on the wordings in current use and were not interested in creating a historical record of every clause that there has ever been. Those wordings are reviewed by our members, Lloyd’s underwriters, to confirm they are in current use and are regularly reviewed to make sure that the content is contemporary. It has got some dynamic search facilities and was actually developed as an underwriting tool rather than a library. The managing agency that developed it wanted it for use by their underwriters not just their wordings people so that it speeds up face-to-face negotiations and drives efficiency. It was launched in August and so far just over 50% of the capacity of managing agents have signed up for that. It is in its very early stages and we are now talking about how we might develop that tool further. It is very useful in determining which wordings are in use.
Andy Brookes: Thank you Martin, I am going to ask you in a moment what tools you are all using, but first of all, what tools are available? I have certainly seen one other tool that fits in this space, are there any others that you want to refer to?
Steve Hulm: ISO have got a database on that and I think they feed in to both of yours. They have got their own separate library.
Martin Roberts: They feed into ours, yes.
Andy Brookes: I have seen at least one other product, The Insurance Workplace. One aspect that might be confusing some of you is this use of the words “repositories”, “document management systems” and “database”. All these are “electronic filing cabinets” which can be used to share information. If I put something in the electronic filing cabinet I can decide who can see it, who can edit it and who should be unaware of its existence. My observation is that these different tools offer different degrees of “shared governance” ie control over what is published. For example, firms using The Insurance Workplace can store and share whatever documents they individually choose. The Xchanging product has more shared governance with some checking of documents by Barbara’s colleagues prior to publication. With the LMA’s product, governance is deliberately much heavier in terms of the permission required from the relevant LMA committee before a document is published. There are those tools available, so are you using them in your firms and how much?
Simon Robinson: I know that on a reinsurance level Allianz does globally use the Model Wordings Library. We have never used it in the UK because it is not fast or flexible enough. However, it is also because we prefer our own wordings and we know what they say. Having said that, I think the world is rapidly changing around us and we need to address that and decide what the most efficient tools for doing that are. I know we are actively looking at the Model Wordings Library and anything that comes along to see what the best solution is. There needs to be a framework for making sure that information and the ways to use it is available to the market participants. Therefore it makes sense to us to use a standard with certain protocol around it, rather than each person trying to develop something else.
Andy Brookes: Steve have you got a perspective on the use of tools?
Steve Hulm: I think that tools are very valuable. I think that the biggest challenge is to get a real model wording, so you can get a tool that has 50 or 100 wordings for the same class of business that different people are using. As we agreed, there is a potential benefit in that, but the challenge is to get the market to agree two or three wordings that we use in this class, and to get the governance, structure and usage of those tools, because at the moment everyone goes their own separate way.
Andy Brookes: Simon, is that right? Is the governance on the use of these rulings the key difficulty rather than the tools themselves?
Simon Kilgour: I think the information and tools are there, it is just what people are doing with it. We all agree that having model wordings and having systems in place to measure the deviation would be a good thing and may be achievable, but the only difficulty is what we end up with when we put it into the market. If we all said, “the Ford Escort is great and this is a Ford Escort wording”, in the marketplace, people are not always going to want to buy or sell a Ford Escort. That is the trouble. When we come up with a standard that is acceptable and reasonable, people are going to play on both sides of it, and who is going to take the lead? If it is managing agency X, do they get credit for being a recognised market leader? In which case it gets a competitive advantage. If that is the case, managing agency Y may come up with a slightly different Ford Escort Plus wording a month later. We have to realise that things will not always be the same; the difficult bit is measuring the differences.
Andy Brookes: So that is what you want the tools to help you to do presumably?
Simon Kilgour: Yes, I think that the car analogy is a useful one. With all these wordings, some of them may be out of date. Although fine for their time, they may need a bit of updating. It would be useful to know what is and is not current, and probably to have a smaller body of wordings from which one can work. If you know that all wordings have the same basic chassis, all have four doors and standard features, and you are basically buying a family saloon, then the question is whether it is Ford, Renault, Citroën or BMW, and why.
Andy Brookes: As you were saying earlier, there seems to be a tension here between saying, “we would like people to use a smaller number of wordings so we can refer to them”, and the actual market reality that firms will bespoke these. In your car analogy, they will “Pimp My Ride”. Are the insurers pimping their rides?
Simon Robinson: Are we asking the market to do something that it should not do? Because of the quality of a couple of wordings and their recognition, especially a couple from American companies, there seems to be market standards in that regard. That company actually works hard every six months to keep ahead of the game and the market, and to maintain that advantage. What happens is that the product becomes recognised as a market standard and everything coalesces around it. You are quite right Simon, it does not work like that, and people will start sitting on either side of it. It is dynamic, so the market will only coalesce around products that are seen to be good.
Andy Brookes: Where you are a market leader on the D&O clauses, why is it in their interests to do all that works and then make it public? Are they not making their intellectual capital available for everyone else to use?
Simon Robinson: Yes, but I do not think there is an intellectual copyright in that sense in a policy.
Andy Brookes: On reinsurance, have you got wordings that you do make public and you think of as part of your intellectual property?
Kristin van Niekerk: By selling the contract to either a cedant or insured, you have made them public. There is no way of keeping them to yourself because it is something that you are selling on to a third party. I suppose those policies that have become market practice, such as the D&O policy that Simon was referring to, have become so because they were sold on to a particular insured cedant, it worked, and they told the other carrier at renewal that this was the cover they wanted and asked the price. I cannot imagine that a policy could be protected.
Andy Brookes: However, some people do, do they not? What do the model wordings tools do Barbara? Martin? Can I put documents on there that are mine and which I only want to show to particular people?
Barbara Chandler : Absolutely, and we find some organisations which are more than happy to share their wordings with us, and others who feel that it is commercially sensitive and want to retain theirs in a secure area of the Model Wordings Library. You have a complete range, and that is a call that organisations need to make. I think that you are right, Kristin, once you have issued it to a client, it is in the public domain whether you like it or not.
Simon Robinson: Having said that, the important part of the wording from our point of view is not public. It is the secret “herbs and spices” as to why that clause looks like that and why we have the insuring clause as it is and how we are going to use it. That is the bit that should not go public.
Paul Hopkin: From a buyer’s point of view the thought of libraries, model wordings and so on, is beneficial. I agree that these things get into the public domain once they are sold, because the insured has the wordings. However, once you park your wordings on the street outside your house, everyone can come and look at it. I think that where the insurer will often have a difficulty, and it was alluded to a few minutes ago, is when the broker says to the risk manager that a company has their own wording. You are then up against a brick wall – and it is a bit like having a Microsoft-compatible computer and being offered Apple Mac software or peripherals. As the insured would sometimes be forced to choose a company that offers their wordings which would mean they have to change their whole office from Microsoft over to Apple. If they want that wording, that is what they would have to do. All the tools and collections of model wordings are only as good as everyone buying into them. I think that from a risk management perspective, I cannot see any disadvantages.
Andy Brookes: By making the wordings public do you not lose the incentive to innovate that Kristin has talked about?
Paul Hopkin: Again, as a purchaser, I do not necessarily see the innovation as innovation. I see it as an improvement, but why should there not be half a dozen policy wordings with deferential pricing in there. In my mind, that rounds the circle.
Andy Brookes: I was interested in the “herbs and spices” that Simon referred to as going into making the curry taste so good. You have done some work in analysing, if you like, the “bitter” herbs. Can you tell us a little bit about that?
Simon Kilgour: To give you one example in the reinsurance context, if you insert the two words “sole judge” into a standard clause, they effectively create a very big discretion on the part of the cedant to do whatever they want to do. If you put those words into an institute clause – for instance a “follow-the-settlements” clause – it would have a huge legal impact. If an underwriter does not know that and does not check for it, and agrees the institute clause as amended with those words in it, it makes a huge difference on the herbs and spices analysis. If a broker is doing his job properly, he might be wanting to put lots of spices like that into the wording, and while those variations might only constitute one or two percent of the overall menu, if they are not identifiable they could create controversy. I back up what Paul says, that most people do not expect to pay a Skoda price for a Mercedes, but the question is whether people are willing to make these additional risk exposures visible and to pay money for them. If they are not visible, and the name of the game is that they hope no one will spot it, then that is a different sport.
Martin Roberts: I think that contract certainty transparency comes alongside that and one of the features of our new repository is that wordings should be viewable by all underwriters, in fact by everybody. Brokers do not quite agree with that and there is a facility for them to consider wordings from other brokers, but for underwriters, the large group of managing agents that formed the board that developed this felt that all wordings should be viewable. They are increasingly getting scenarios through contract certainty, particularly when they are following on slips where private wording is referenced, it creates a certainty, but one they are unaware of. It is not a great situation. To go back to the quality, they do not even know where they can obtain that wording from. I think it is important that whatever tool is used, you have a reliable and transparent source.
Andy Brookes: Do insurers want that, where if something is used as model wording it is always made public?
Victoria Price: I do not know what tools they use, but it seems quite dangerous to use a repository when the clauses do not have health warnings. This is for the reason that Simon has mentioned, that you might pick one from the library but will not necessarily know the problems associated with that. I can see that it is a useful tool, but not without risk.
Andy Brookes: Martin, how do you manage that risk?
Martin Roberts: That is a risk for individual businesses. Obviously behind a clause that has been published by members and is therefore available publicly there is an intent as to why it was produced and what it was produced in conjunction with. As an association, we are prevented from releasing information on that. There is some commercial advantage, but it is up to individual businesses to manage that.
Andy Brookes: So you do not publish safety reports, to pursue the car analogy?
Martin Roberts: No, within Lloyd’s we operate in many territories, so there are increasing regulatory requirements. There are, through use of the QA [quality assurance] tool and information at www.lloyds.com, there is information on certain clauses.
Andy Brookes: You might want to explain what the QA tool is.
Martin Roberts: It is a Lloyd’s developed checking tool to ensure that your slip meets the regulatory requirements in the territory in which the risk or exposure is situated. You are able to search by territory and it gives you the mandatory checks and requirements in those territories, as well as by class. In some cases it points you in the direction of a certain tool you should use and in others, it may say that should not use a particular tool because it contravenes regulation.
Simon Robinson: Are we not getting slightly away from the debate? Of course insurers are competing against other insurers and reinsurers against reinsurers, but we are ultimately trying to get a product which suits the needs of the client. The debate about transparency is relevant in that context, because we want to put together a product that is useful for the client and meets the needs that the brokers articulated to us, but we do not necessarily want to just produce a wording that the co-insurers might not possibly be able to understand. I do not think that people are going down the route of trying to pull the wool over their competitor’s eyes and getting them to sign up to something that they do not understand either. To an extent, a level of transparency is good for everyone in the market and can enhance competition: you have to stay ahead of the game.
Andy Brookes: So it is good for the client?
Simon Robinson: Ultimately, I think so.
Andy Brookes: Up until now we have been quite London focused in this debate. Are we doing something of benefit for the rest of the world insurance market? Have we described an international perspective?
Martin Roberts: I think we have. Probably all of our senior members have got a foot in and outside of Lloyd’s these days, so I do not think that you can look at it parochially at all.
Simon Kilgour: Well, who else is leading it? The world looks to London to see what it is doing by example. I am not saying that London is leading it, but I am not aware that anyone is leading this more than London is.
Martin Roberts: We have not spoken about legacy wordings, and so in a rather hypothetical situation, if we had have been using more legacy wordings ten years ago, we would not have had as big a legacy.
Andy Brookes: Before we come on to the tips, are there other big issues that we should have covered which are, if you like, elephants in the room? We want to discuss the legacy wordings, but is there anything else?
Simon Kilgour: There is one thing that has just struck me. You can have a perfect wording, but you can still have a dispute. I am sure Victoria would back me up on this, but if you have a bad relationship, you can always have a dispute about something. There might be a dispute over quantum or non-disclosure, even if you have a good wording. Having a good wording will not necessarily get rid of all your problems. Another point is that when Simon referred to underwriter’s intent, we have always had a market that is relationship driven and where underwriter’s intent was important. Lawyers would always say that this does not actually mean anything, and that what matters is the words that you have in the contract. Having said that, if cedants actually talked about their PML [probable maximum loss] risk scenarios and tested those in the buying process it would be interesting to examine how the policy was intended to cover the PML loss scenarios. The parties would have debated what they thought they were buying and examined whether it was suitable for those PMLs. We do not see underwriting presentations with that sort of approach. We are assuming that the language of the contract is going to solve all of our problems but at the end of the day, the product is there for a large loss scenario. Wouldn’t it be sensible to hypothetically road-test the coverage at renewal/inception? One way to test it would be to say, if X, Y or Z happens, will you pay me?
Simon Robinson: So you are talking about a higher level of a “demands and needs” statement in that sense. This is what you have articulated to us and this is what we think our product responds to that.
Simon Kilgour: Yes, and if it did not, but you intended it to, how do you deal with that as an insurer? If you really believed it would be covered in that scenario, but the wording did not quite work.
Andy Brookes: This is something that the clients would value?
Paul Hopkin: Yes, I have been to workshops with my insurance company on policy wording, and the intention of that was to stress test the wording. A discussion about, if this happened, how would the policy respond? One particular workshop was six people from the country I was working for and six people from the insured and two or three people from the insurer. However, you could clearly not do that for each client could you?
Simon Kilgour: In terms of a buying requirement, I do not see why the cedant or the insured cannot say why they are buying the insurance and state why they are worried by the following loss scenarios.
Andy Brookes: Would not any dialogue be in effect an addition to the contract? Any scenario that the insurer wrote down as “intented to cover”, would effectively be part of the contract would it not?
Simon Kilgour: Yes, but it does not normally work that way. The underwriting information usually describes what business an organisation writes, and then there is a contract to cover whatever those exposures are. You do not tend to see any underwriting information with precise PML (probably maximum loss) large loss scenarios by way of illustration, but it is interesting to postulate it.
Paul Hopkin: There are practical examples from Katrina, where the storm surge, or tidal wave if you like, did more damage than the wind. Several insurance companies actually said, that they knew they were on the Gulf of Mexico, but that the insurance was actually against wind damage and that was flood. They were not covered for a storm surge. The insured says, “hang on, I am on the Gulf of Mexico with a $200m facility and will not be assured against the consequences of the hurricane”. There are a lot of examples of still-derelict casinos where that sort of argument is going on, so it is a very valid point.
Andy Brookes: Right, let us kick off with the tips.
Victoria Price: I am pinching Barbara’s tip, but I think that having more input from the policy wordings expert rather than picking out individual clauses would make a big difference to reducing ambiguity and making a policy more contract certain going forward.
Steve Hulm: My tip would be to start local. Irrespective of what other people do in terms of market wide wordings, if you want to book a business with your counterpart, you can start to agree model wordings, your base model and optional extras and have a basis for talk in between. You can do that irrespective of what everybody else is doing.
Paul Hopkin: My tip would be to start early. I am looking at this from a buyer’s perspective and therefore my comment initially targeted buyers. The information collection exercise should also be at the start of the wording evaluation exercise, but I think that the advice of “start early” is equally applicable to all parties in this.
Simon Kilgour: Clarification of variation from perceived model wordings and norms.
Kristin van Niekerk: Training and vigilance would be my two key words. Training to keep up the quality, so short and sweet.
Barbara Chandler: We need to recognise that model wordings are only a tool and a tool is only as good as the person that uses it. It is about using the right people with the right skills to produce the wording, and remember wordings people are still cheaper than lawyers.
Simon Robinson: I would agree with all of what has been said. The danger that we find is that it remains a high goal and it is difficult to drill it down into specifics. The tip is to choose your targets for the short or medium term, drill it down to specific actions and put those in people’s targets to be measured and reported on, otherwise they will not get done.
Martin Roberts: One thing that we have not discussed is the increasing focus on operational costing in the London market by brokers, insures and underwriters. Under today’s topic, if there is scope for the greater use of model wordings to improve efficiency and drive those costs down, then the benefits are for ourselves and our clients.
Andy Brookes: Thank you very much for participating, it is much appreciated.