Global Reinsurance continued its countdown to contract certainty with a second panel discussion event in April Post renewals, Helen Yates discovered a distinctly more upbeat mood.
Isn't it amazing the difference six months can make? Gone is the general feeling of apprehension, confusion and (excuse the pun) uncertainty that featured so strongly at Global Reinsurance's first contract certainty panel discussion back in October 2005. This has now been replaced by a general patting of backs. In March, the results of the first formal measurement by the Market Reform Group (MRG - the body responsible for process reform and modernisation in the London market) were released. They revealed that 65% of contracts agreed during December 2005 were certain, exceeding the market's original target of 30%. This news was followed closely by the UK Financial Services Authority (FSA) giving its vote of confidence to the efforts being made by the market by announcing that it had put on hold contingency plans to develop rules to enforce contract certainty. "In fairness to the FSA they have often said that they prefer a market-based solution ... if only because there is basically no point in whipping the staff until morale improves," deduced Patrick Devine, partner in the regulatory group of Reynolds Porter Chamberlain, addressing attendees at the panel discussion.
To recap, the quest for contract certainty began in 2004 when FSA CEO John Tiner challenged the London market to end its "deal now, detail later" approach. In April 2005, the MRG produced a blueprint to help market firms meet the FSA's requirements which outlined two interim targets: to improve measured slip standards to 99% by March 2006; and to adopt new processes to ensure that policy wordings have been checked and agreed. In October 2005, the Contract Certainty Code of Practice was issued by the MRG, along with a series of guidance notes and a checklist, where a definition of contract certainty was provided, which classified it as "the complete and final agreement of all terms (including signed lines) between the insured and the insurer before inception". With all this in place, it was just a matter of standing back and watching patiently to see how the market would fare.
Confidence in numbers
The MRG figure of 65% achieved during December 2005 was welcomed with a sigh of relief, although there was some debate about the accuracy of the measurement amongst the panel members. "This is an immature measurement regime," said Andy Brookes, head of the Market Reform Programme Office at Lloyd's. "You have a number of firms measuring things that previously they have not measured ... so it may overstate, it may clearly understate, we don't know." Not that the FSA seems to be overly concerned. "That's not a figure we have looked into in any detail," admitted David Strachan, director of retail firms and sector leader for insurance at the FSA. To a certain extent backing up the 65% figure were the results of a survey carried out by the Association of Insurance and Risk Managers (AIRMIC), which cannot be directly compared to the MRG figure but do reveal the market is making good progress. AIRMIC asked its members whether they had achieved contract certainty across different classes of business, at their last renewal, and whether they were confident of achieving it at their next renewal (see figure 1).
There were some frank comments from the panel that although a lot of hard work had gone into achieving the progress to date, this had not always been the case. "The Chaucer team were trying very hard in the autumn, but were actually quite confused and really hoping that most of the work would be done by the brokers," admitted Ewen Gilmour, CEO of Chaucer, chairman of LMA's Market Processes Committee and deputy chairman of Lloyd's. "They got a rude awakening sometime in December." This rude awakening may have helped bring about a change in culture that many believed was impossible post-December 2005. "If you look at the hardest people to change, certainly in our organisation, it's the underwriters," said Gilmour. "They're now actually quite keen on this." For Brookes it is simply a case of new incentives, where the underwriter now realises "if I cock this up, in terms of contract certainty, my bonus will be lower as a result".
Not in the bag yet
While progress, and attitudes, at this stage seem overwhelmingly positive, there are still issues to be dealt with and the concern is that complacency could set in before the industry meets its end-game target of 85% in December 2006. "It is going to become incrementally more difficult to achieve advances from where we are today," warned Geoff Bromley, chairman for Europe and Asia at Guy Carpenter. "I'd say the last 15% will be the most difficult of all". Other concerns involve updating legacy policies, how to incorporate bespoke wording and a residual worry that in the interim period London could lose business to rival markets. For Bromley, while the London market's awareness of contract certainty is now very high "the biggest challenge that we're finding ... is how we educate colleagues and clients overseas." But drawing too much attention to the transition process is not something Patrick Devine would encourage. "You have to develop a swan-like approach ... just make it look easy and try and accommodate the international markets," was his advice.
The challenge of updating old policies whilst striving to meet current FSA renewal targets is clearly a concern, despite quick assurances from Andy Brookes that the Legacy Code of Practice, designed to provide guidance on those insurance contracts which have been underwritten for which no appropriate evidence of cover has been prepared, is not intended to make "the industry creak desperately under ever-more things to do now". The panel was somewhat cagey when asked by event chairperson Jeremy Vine how many "dusty" old legacy policies their respective businesses had yet to update. "I couldn't give you a number," Eileen McCusker finally admitted. Geoff Bromley was willing to come forth with a figure - 3,000 - of which he said many were short-tail policies. For Gilmour, the issue with legacy policies is more a question of tracking them down in the first place. "I think when you get to the dusty old room you will actually find it empty!" he warned. "There are a hell of a lot of insurance contracts that have been entered into and actually no policy ultimately issued."
Choosing your words carefully
On the 25 April, the Lloyd's Market Association announced it had reached the next stage in its bid to provide a wordings database to the London market. ISO has been appointed to provide the IT infrastructure for the repository. While useful, it is only intended to be a source for commonly-used model wordings and clauses. The real headache, according to the panel, was more likely to be present in cases which require bespoke wording. While it was generally acknowledged that greater standardisation of wordings would clearly improve process efficiency, David Gamble, executive director of AIRMIC, was sure that the association's members were still very much in favour of bespoke wording. "That's where my members, who are probably some of the more difficult people to achieve contract certainty with," admitted Gamble, "have to start the process early and work very closely with the brokers and the insurers, if they want something special. Otherwise they are going to end up with standard wording." Douglas Pennycuick, general manager, Allianz Global Risks UK, concurred. "Some of our clients are very large and very complex," he said. "If they want a bespoke wording, it is no problem as far as we are concerned, but can we please start the process much earlier?" Pennycuick recommended beginning discussions two to three months ahead of renewal in cases that involve bespoking.
One of the more controversial questions of the evening, posed by Simon Burtwell, head of the London market and reinsurance practice at Atos Consulting, was on whether the London market had openly tolerated process failure until now. "Certainly as a marketplace we've got to ask why we tolerated this for 300 years," conceded Gilmour, who had earlier, in reference to the "occurrence" debate following the collapse of the World Trade Center towers, said "we don't really want to go through that one again". However, at the other end of the spectrum the panel was quick to shoot down the suggestion that contract certainty could quell the market's entrepreneurial spirit. "I'm not sure that delivering a product on time in its entirety is contrary to entrepreneurial spirit," said Patrick Devine, while Gilmour pointed out that Lloyd's "golden era" was not that golden. "Ten years ago we lost £8bn over the course of about three years, and only five years ago we lost another £6bn." While not opposed to an entrepreneurial spirit, he added, "We would like to cut out a degree of entrepreneurialism, we'd like something that is a bit more hard driven in terms of processes and to make sure that we get the paperwork right. You can have some degree of entrepreneurialism on what risks you take but not on risks that don't require it."
What role technology?
Strangely, technology was mostly absent from the discussion, which could be an indication that post-Kinnect - Lloyd's would-be hub solution - technology has become somewhat separated from the contract certainty initiative. Not that it isn't still seen as a crucial component. "We are basically improving a paper-based process and in the end-vision there has got to be some degree of electronic support for this process," said Andy Brookes. He described the frustration of seeing brokers going up and down the Lloyd's lifts carrying paper files, which can easily be left "in the wine bar or the cloakroom", as a result of the un-integrated claims process. "Some poor person has slipped on the ice in Milwaukee and his blinking claims file is sat there," he said, referring to a batch of files left in the Lloyd's locker room for posterity. "At some point I'm going to settle the blinking claim because I'm sick of looking at it!"
If the market perseveres the promise is for lower operational risks, greater efficiencies, fewer court cases and an overall competitive advantage. "It's always very difficult to argue for the court cases that haven't happened or won't happen," said Brookes. "But that's what we're pitching for." Bromley argued that it was too soon to tell whether contract certainty is a benefit or a detriment for the market and that it was just "in an unusual state at the moment". Gilmour even suggested that the ultimate advantage could be an altogether cheaper business for the client, because of reduced legal expenses and more efficient processes. "But that's not a promise!" he was quick to add.
The overall message at this stage is not to lose momentum. If the market fails to meet its December target it could have dire repercussions for future regulation, especially in light of the FSA's decision to take a step back. "Just to look at the dark side for a moment," said Strachan. "If this initiative does run into the ground then I think that will understandably make us a bit more cautious about these things in future." Brookes put it slightly more bluntly. "The story that John (Tiner) will want to tell when he turns up at his international conference is the success that has come from this approach. If we renege on that as an industry ... I think that their reaction would be perhaps even less measured than David's (Strachan) measured words."
- Helen Yates is deputy editor of Global Reinsurance.
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London Global Reinsurance asked the market
1. Do you think that you have been kept well-informed of the contract certainty initiatives and their implications for placing risks in the London market?
Yes - 80% No - 20%
2. Do you believe that it was necessary for the Financial Services Authority to issue its December deadline to put the subject of contract certainty firmly on the table?
Yes - 76% No - 24%
3. Are you in favour of the establishment of a public league table to show how individual companies are performing in terms of achieving contract certainty?
Yes - 58% No - 42%
4. Do you believe that the successful implementation of the contract certainty requirements will prove a competitive advantage for the London Market?
Yes - 76% No - 24%
5. Do you expect other international markets to implement similar processes if contract certainty proves a success?
Yes - 68% No - 32%
6. In your opinion, will the London market succeed in meeting the requirements for effective contract certainty by the December 2006 deadline?
Yes - 60% No - 40%.