Contract certainty

October 2005 Market Reform

3

Contract certainty: the Challenge

● Absolute contract certainty is not achievable

● Contract certainty is an important commercial issue

Primarily about agreement of terms

● Contract certainty is an important issue for our regulator

● Tiner’s speech: end to “deal now, detail later”

End 2006 deadline; lit the already smouldering platform

- commercial imperative was hot anyway

● Answering the FSA requires:

Clear plan pulling together components

Measurable progress against that plan

Each firm’s measured participation

4

Contract certainty: meeting FSA challenge

● Key targets agreed with the FSA

LMP slips CC attributes

- 95% June 2005

- 97% December 2005

- 99% March 2006

Achieve contract certainty

- 30% of business end 2005

- 60% mid 2006

- 85% end 2006

Appropriate evidence of cover – within 30 days

5

Assessing LMP slips against a standard set of criteria is one way of assessing the quality of contract certainty

6

Contract certainty: Quality

Source: MRPO

Contract certainty attributes of LMP slip

80%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

Jan

-Ap

r 2

00

4

Ma

y-Ju

l 20

04

Se

p-2

00

4

Oct

-20

04

No

v-2

00

4

De

c-2

00

4

Jan

-20

05

Fe

b-2

00

5

Ma

r-2

00

5

Ap

r-2

00

5

Ma

y-2

00

5

Jun

20

05

Jul 2

00

5

Au

g 2

00

5

Se

p-2

00

5

Oct

-20

05

No

v-2

00

5

De

c-2

00

5

Jan

-20

06

Fe

b-2

00

6

Ma

r-2

00

6

Ap

r-2

00

6

Ma

y-2

00

6

Jun

-20

06

Jul-2

00

6

Au

g-2

00

6

Se

p-2

00

6

Oct

-20

06

No

v-2

00

6

De

c-2

00

6

Open market score Binders score Target

7

Contract certainty: the definition

● Agreed definition

- “Contract certainty is achieved by the complete and final agreement of all terms (including signed lines) between the insured and insurers before inception.”

And

- “Full wording must be agreed before any underwriter formally commits to the contract”

8

Resources for market organisations

● Early October publication

Code of Practice with principles and guidance on how to fulfil the CoP. Some examples:

- Signed lines

- Stamp conditions

- Underwriter subjectivities

Two page CC checklist

- Is this risk contract certain?

● Quality assurance checks

● Centrally collected data: LMP slip audit and XIS sourced data

● CII training courses

MRG/MRPO stamp of approval

9

Contract certainty: what must firms do?

● Apply the Code of Practice and accompanying Guidance

● Improve checking pre-bind

Follow the Checklist; build it into routine processes

Use internal quality assurance guidelines

● Measurement: managerial magic wand will not satisfy the FSA

Must be able to demonstrate achievement of CC

LMP slip targets; sample of slips for LMP slip audit checking

● Agree wordings presentation

Either referenced or fully worded - brokers’ call/Insurers’ response

Note: Across all business lines – brokers lead Sponsorship, project manager done. What’s the project look like?

Training? Incentives? Inform MRPO of formal Board sign-off of Code of Practice

Contract certainty

October 2005 Market Reform

16

Contract Certainty Principles

● Broker will provide submissions that satisfy the contract certainty definition and checklist to obtain firm quotes and place firm orders.

● Each insurer will be satisfied that the submission meets the contract certainty definition and checklist before formally committing to the contract, ensuring that any conditions or subjectivities are clearly expressed.

● Brokers will notify all terms to their client and obtain their client’s agreement before inception.

● Brokers will calculate signed lines by inception and notify them to each insurer no later than 30 days after inception date, or by inception date on request.

● Brokers and insurers will not take part in post-inception over-placing.

● Brokers and insurers will ensure that post-inception amendments are documented and agreed as endorsements

● Brokers and insurers will collect and maintain data on their contract certainty performance at individual contract level.

● Brokers and insurers will ensure that appropriate evidence of cover, including security, is issued within 30 days of inception date.

17

Guidance: spelling out the principles Form of presentation

The full wording of the submission to insurers will be a combination of:

● wordings and/or clauses;

● either referenced and/or full text;

● bespoke and/or model material.

18

Guidance: spelling out the principles Quotes

• A firm quote should be given only where the insurer has ensured that the submission meets the contract certainty definition

• An indicative quote may be given where the submission is not compliant or has not been checked

• An indicative quote supported by a follower may, if they have so specified, become firm once the slip leader has changed his indicative quote to a firm quote or bound line

19

Guidance: spelling out the principles Quality checking

● For consistency insurers will use the same checklist as brokers to demonstrate contract certainty

● Insurers may wish to outsource technical checking to a service provider

● The aim will be to perform all necessary contract certainty checks before formally committing to the contract (using the contract certainty checklist and any internal requirements; e.g. for Lloyd’s their published checking requirements)

● A follower needs to consider what reliance to place upon the leader’s quality checking, taking into account any service provider input

20

Guidance: spelling out the principles As original wording

● The London Market may follow the policy form of another insurer i.e. “As Original”, “As Co-Insurer”, “As Warranty Company”, “As Underlying/Overlying”

● The wording may then be considered to be specified as long as the prior wording is either attached or clearly identified, and hence could be obtained to resolve coverage disputes.

21

Guidance: spelling out the principles Stamp and line conditions

● Insurers will seek to phase out the use of stamp conditions

i.e. the routine use of a condition within their underwriting stamp, irrespective of whether it is relevant to a specific contract

● Relevant conditions should be a ‘line condition’

For LMP Slips, under the appropriate heading

● There may be conditions that cannot be expressed efficiently under existing LMP slip headings

Analysis to confirm

Modify the LMP Slip format, in due course.

In the interim such stamp conditions may continue to be used, providing their meaning is fully and clearly expressed.

22

Guidance: spelling out the principles Underwriter subjectivities

● Issues may remain outstanding after inception, e.g. subject to survey

● Subjectivities should be imposed within the placing document

● The responsibilities and timescales for resolution, and the consequences of failure, must also be clearly specified

● Where a subjectivity is outstanding at inception then it must be stated as a fully-claused condition of the coverage given

23

Guidance: spelling out the principles Signed lines

● Calculation method to be explicit on the slip, that allows the insurer to determine how their line will be calculated (but subject to client wishes)

● Brokers to calculate signed lines by inception

● Available to carrier by inception: By writing “line to stand”; or, asking broker

● Broker will routinely provide to carriers within 30 days (normally via de-linked closings)

● Carriers using the bureau may need to change their systems to receive this information.

● Brokers and insurers commit to no post-inception over-placing

24

Guidance: spelling out the principles Appropriate evidence of cover

● Insurance Policy (Bureau or Company)

● Copy of Complete Slip

● Certificate of Insurance

● Broker Insurance Document

25

Guidance: spelling out the principles Monitoring performance

● Each organisation is individually responsible to the FSA for its own performance, and should collect data using the contract certainty checklist

● Failures to achieve contract certainty should be recorded

● Insurers may seek to use data collected by a service provider

● Brokers will provide aggregated data to the Market Reform Programme Office monthly, as follows: overall contract volumes, the percentage achieving contract certainty, and the percentage evidenced within 30 days of inception date

● Brokers will notify the client appropriately where a failure of contract certainty materially affects coverage

● The Market Reform Programme Office will continue analysis of exceptions/challenges and publish further guidance on this topic as soon as possible

26

Contract Certainty Checklist

Pre-Inception Requirements

Full wording and all clauses are clearly specified and agreed before any insurer

formally commits to the contract.

Contract certainty attributes are satisfied; together with any internal quality

requirements (e.g. for Lloyd’s insurers, the contract certainty aspects of the Lloyd’s

published checking requirements).

Subjectivities are stated clearly as conditions of the contract, with responsibilities

and timescales for resolution, and with the consequences of failure clearly specified.

All terms are agreed between the insured and insurers before inception.

Signed lines are calculated by the broker before inception.

27

Contract Certainty Checklist

Post-Placement Requirements

Signed lines are available to all insurers at inception on request.

Signed lines are notified to all insurers within 30 days of inception.

Appropriate evidence of cover, including security, is to be issued within 30 days of

inception.

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Contract Certainty Attributes

• Is the submission clear and unambiguous?

• Is law and jurisdiction and arbitration clearly referenced and complete?

• Are all terms clear and unambiguous?

• Are all duties clearly allocated, including processing of contract changes, document production and claims processing?

• Is any supporting information clearly referenced?

• Is the submission compliant with regulatory requirements?

29

2006 Objectives

● Fully-claused placing submissions

● Increased use of model wordings and clauses (as basis for negotiation)

● Wording/technical staff involved in placing process

● Early agreement and checking of the submission by all parties

● Early delivery of evidence of cover for the client – ideally before inception but

within 30 days of inception

● Declarations under Binding Authorities evidenced by issuance of certificates in an

approved form (guidance to be issued shortly)

30

CoP/Checklist – Feedback Received

● “A fine Code, but will Insurers do it?” - Evening Standard

● “Can we have 1,000 copies for our staff?”

● I’m fine with them – but will everybody else stick to them?

● Some points of clarification requested:

Guidance or Prescriptive?

Need to phase out all Stamp Conditions?

Status of Firm/Indicative Quotes? + workload implications.

Checklist guidance on Supporting Information.

“Broker will notify all terms to their client …”

Insurer’s responsibility for Evidence of Cover

● Your questions?

Contract certainty

October 2005 Market Reform