The quest for reform

Disasters - from the events of 11 September 2001 to Hurricane Katrina - have highlighted the inherent problems with regard to contract certainty, with wrangles over agreed terms adding unwanted problems to already difficult and complex situations. In addition, the Financial Services Authority has set a December 2006 deadline for the insurance industry to implement the necessary changes or face regulation.

As far as awareness and commitment to achieving contract certainty is concerned, the issue has certainly gone up a gear or two in recent months. The publication of the Contract Certainty Code of Practice has helped of course, and the FSA has had a number of meetings with representatives from across the insurance industry. John Hobbs, director of market services at the International Underwriting Association, asserts: "The Contract Certainty Code of Practice is the result of a huge amount of hard work across the London Market," adding that: "The final documents represent an extremely high degree of consensus between the company market, Lloyd's and brokers."

John Ludlow, head of risk with Hiscox, agrees that commitment to reform is evident across the industry. He comments: "The Association Of British Insurers and Lloyd's recognise that change has to happen and real steel has been added to the process by the FSA. The broking organisations are also committed to change and the market agreements include a monitoring process for both insurers and brokers with regular reporting."

However, there is still work to be done and there are still obstacles to be overcome. Some brokers point to the age-old issues of speed of service and accuracy of policy documentation. Stuart Reid, chief executive of Stuart Alexander, agrees that these areas need to be addressed by insurers, although he adds that: "To be fair, it goes both ways - in that it is also the broker's responsibility to ensure that information is passed to insurers accurately and in good time."

John Muir, Willis' business sponsor for contract certainty, is concerned that there is a certain unwillingness among insurers and brokers to be the first to implement change. He comments: "There seems to be a certain angst that everyone is waiting for somebody else to go first because they fear for the commercial consequences of doing something different to the way it has been done in the past." Muir emphasises the need for the industry to work together: "This exercise will be much less painful if the whole industry moves together in concert and the time really is now."

There is general consensus that the greatest challenge in achieving reform is the need for a change in working culture. As Duncan Boyle, outgoing UK chief executive, Royal & SunAlliance, explains: "It is really about achieving a cultural change in the mindsets of insurers and brokers that we absolutely have to have agreement on coverage at the time of inception."

Muir agrees: "We recognise that to deliver contract certainty demands fundamental change in structure and process as well as culture and behaviour."

So how difficult will it be to push through this level of cultural change? Patrick Devine, partner at law firm Reynolds Porter Chamberlain, observes: "It is human nature that some people will resist change - and this is a change to 300 years of practice. It is fairly embedded in the way everyone has been brought up in the industry."

Devine also points to certain cost issues: "If you are in the broking community and have already had to bear the costs of regulation, this now brings with it another set of costs - whether that is in investing in areas like training or technology."

Opinions differ widely on how important the role of technology will be in achieving reform - with some maintaining that it is vital and others believing it has no relevance. Boyle asserts: "The issue is nothing to do with technology, whether in the London or non-London markets. It is about the discipline of an underwriter and a broker agreeing that, when they go on cover, they know exactly what they are going on cover for. It is all about having absolute clarity. It is basic common sense."

Technology

Devine treads a middle ground - agreeing that it is not all about technology but believing that it serves a purpose. "Technology is a facilitator," he explains, "Certainly, people who believe it is simply about buying IT systems are at risk of not seeing the wood for the trees."

Muir agrees: "It is part of the solution but not the overall driver." He points to accessibility and usage of model wordings and clauses as a key component in achieving contract certainty, adding that some form of model wording and clause library will work better through technology. "Technology is important but, unless actual behavioural change is adopted, all the technology in the world is not going to deliver contract certainty," he concludes.

Ludlow points, in particular, to the role of IT in speeding up the process of issuing documents and adding to changes in working practices that eventually lead to less 'double keying'.

As far as developments in IT resources are concerned, Xchanging and RI3K recently announced an initiative to allow early checking of contracts online. This allows subscriber reinsurers to have their reinsurance policy wordings checked online prior to being signed. At the time of the launch, Roger Townsend, an executive director of Xchanging, said: "This joint initiative will give impetus to contract certainty, which is designed to reduce the operational and legal risks to brokers and reinsurers while improving service levels through speedier processes and improved visibility."

Practical steps

But, whether it is about looking at cultural change or technological developments, the question is, what practical steps can companies take? Nick Prettejohn, who chairs the MRG, is keen to emphasise the need for companies to act now. He comments: "Contract certainty is a commercial imperative for the London Market. We are nearly halfway to the FSA's deadline and every firm should be taking the issue very seriously. It is each individual firm's responsibility to meet the deadline and I urge them all to ensure that they are taking the appropriate action, and taking it now."

So, in practice, what can brokers across the insurance industry be doing now to prepare for reform? "They could be looking at the code, examining what it says and making sure they and their staff are familiar with it," says Boyle, adding: "It is about co-operation between insurers and brokers to get this thing right." Boyle also recommends that if brokers have any doubts or queries, they should talk to their trade associations to get further advice.

As far as insurers are concerned, Ludlow advises they should be: "First, checking all their current processes for compliance, then reviewing their approach to agreements on cover and creating a bank of key standardised documents to be used as templates. It is possible that wordings departments will need to be strengthened, but I also think that underwriters have a significant role to play in clearly stating the cover they are offering at any point in time."

In addition to a change in working practice among the insurance industry, some have also pointed to the need for the insured to understand the implications. While most customers would welcome, and indeed demand, contract certainty, Devine points out that they will also have to understand that last-minute requests will be more difficult to accommodate. "They are going to have to appreciate that perhaps renewals are going to have to start earlier and that last minute cannot really be last minute any more."

Asked about the pros and cons of introducing contract certainty reform, most insurers and brokers across London and non-London markets agree that the advantages far outweigh any disadvantages. If there are any 'cons', they generally lie in the need for additional resources to make the necessary changes but, again, general consensus is that this is a price worth paying. Muir emphasises that there are clear benefits to clients, brokers and insurers. "These benefits come in multiple forms," he explains, pointing in particular to higher efficiencies, less re-work, more professionalism and fewer disputes.

Devine points out, however, that contract certainty reform will not entirely remove the risk of litigation. "It is about the creation and delivery of contracts on time," he explains, "Litigation occurs sometimes because of problems outside the contract - such as non-disclosure or misrepresentation." Certainly, it is worth recognising that it will not stop disputes although, as Ludlow points out, at least both parties should be using the same contract.

The FSA itself has noted that it would prefer a market-based solution to contract certainty, rather than regulatory intervention. There is no doubt that insurers and brokers are stepping up their efforts to address the issue and there have been definite advances in awareness of the problems and commitment to tackling them. Whether the industry is making enough progress and with sufficient speed to meet the regulator's 2006 deadline remains to be seen.

A DEFINITION

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

- The full wording must be agreed before any insurer formally commits to the contract.

- An appropriate evidence of cover is to be issued within 30 days of inception.

SOURCE: Contract Certainty Code of Practice.

TARGETS AND MEASUREMENTS

The following targets have been set for the proportion of contracts to meet the definition of contract certainty:

- 30% of monthly volume by end 2005;

- 60% of monthly volume by end June 2006; and

- 85% of monthly volumes by end 2006.

Aggregate market progress will be reported to the FSA by the Market Reform Programme Office, based on data collected by each broker monthly.

Each organisation is responsible for its own performance to the FSA. It will thus need to collect and maintain data on contract certainty performance for each individual contract. The market has developed a check list, which organisations may use in helping to assess whether a contract is certain.

The London Market Principles Slip Audit team additionally measures compliance with LMP slip standards based on the sample submitted by insurers.

SOURCE: Contract Certainty Code of Practice.