Management Forum

Richard Adams: What, at a basic level, does contract certainty mean?

Joe Graham: It's about knowing what you are buying. I can't think of any other goods or service that I would buy where I do not know what I am getting at the outset. So it is really about making sure insurance buyers understand what they are getting.

Peter Staddon: I would go along with what Joe said. We need to explain that to customers as brokers and we need to evidence that.

Richard Adams: A question submitted from Michael Richards, from RMK Insurance Consultants, asks: 'Can the panellists give us clear definition what constitutes contract certainty, for example, are we supposed to be putting a draft wording of the policy documents in front of clients?'

Joe Graham: A clear definition is not easy to give, and it really comes back to making sure the end customer knows precisely what they are being covered for at the outset of the contract. So, when the contract is put in place they can be sure what they have got. From our perspective, we can know how we are going to settle claims.

Peter Staddon: We have also got to take into consideration the financial capability of the purchaser. We have to bear in mind that we may be dealing with the financial director of a multi national company. It is going to be a completely different discussion with him than it would be from the plumber down the road. So do we send policies out? Some brokers will actually do a key fact document. What we need to make sure is that we know what is being offered. This is one reason why the insurer market has moved to making the policy documents available on the web. So we can say to the customer this is the document and these are the areas you need to be aware about. When we have bound that, you will get it within 30 days.

Richard Adams: So if policy details are available on the internet, does the broker still need to put a draft in front of the client?

Peter Staddon: I know some brokers who will send the policy document and some who will ask the customer to download it. However, if you are looking at a garage, will he have the capability to actually download that policy?

Joe Graham: It depends on what you mean by draft. In most reasonably standard policy circumstances the policy document is available on the web. The broker can either give access to the client via the web or he can print it off and send it. If you have more complex contracts, where the terms and conditions and the clauses are going to be up for negotiation then you may well have several drafts of a contract. However, where the terms are under discussion, it is paramount that on inception of the cover you actually know what is covered while these discussions are going on. Otherwise you get can into huge disputes over claims. The World Trade Centre is still in dispute because there was not contract certainty over what constituted the loss.

Peter Staddon: You have to remember there are really only three types of contracts - the insurer's contract, the broker's contract or an amalgam of them both. If the broker is using his own contract that must have been arranged before. What we are doing here is we are taking an off-the-shelf product and tailoring it specifically for the client's needs. So, in theory, we should be able to tell them what contract they are buying.

Richard Adams: Joe Butcher from Martin Harvey and Company has asked: 'Does the panel agree that the approach by the Financial Services Autority is pointless? All the elements wrapped up within the contract certainty issue today have been a natural part of our business for many years now.'

Joe Graham: I couldn't agree that it is pointless, I think if you look back over time, it has been a consistent feature until relatively recently that policies were issued late, with lots of subjectivity - subject to survey, subject to proposal, subject to all sorts of things - that brought uncertainty into the situation. So the company and the client and the broker did not have the certainty of knowing what covers were in place. I would not agree that it has been a natural part of the business for many years. We have got better at it but we need to get better still. It is difficult to see a situation where we could achieve absolutely 100% but we could get an awful lot closer to it and, if we are going to get the sort of reputation that we ought to have, we ought to be all committed to doing that. It isn't rocket science.

Peter Staddon: I think what Joe Butcher is probably saying is 'are we not already doing this?' And I would say, yes, we probably are. What we are not doing is evidencing the fact. If we can evidence the fact and embrace contract certainty then I think we will see a change in our errors and omissions exposure because everybody knows what is going on. We should also be able to obtain good business management that should help the broker contain his business a little better.

Richard Adams: There was also a strong view that came through from brokers in the programme's research that the issues the regulator wants to eradicate are coming more from the London market. Is that where the majority of the problems are?

Joe Graham: I would say certainly there are more issues there than in the provincial market by the very nature of the way the business is handled. I am not sure I would take the view that it should be hugely difficult to achieve much closer to contact certainty across the piece. It might mean moving the time scales. It is going to vary in the types of contract. So, if you have got, for example, electronically traded contracts or the small end personal lines or small to medium sized-enterprises, where it is a standard contract then it is much easier to achieve. If you are talking about the more complex commercial risks, then that is a different situation entirely.

Peter Staddon: Looking at the way we transact business in the UK today there are variant factors and pressures on both sides. What John Tiner is looking for is evidence - he's not saying we are doing it wrong, he just wants us to provide evidence. The London market is different from the provincial market and they have got different pressures but they are getting to grips with their issues. It is going to be a little more difficult, certainly in relation to the policy production, because it has to go through the Lloyd's policy signing office, through its signing office, and those sort of issues. However, the whole market is embracing this and I am a believer that the UK financial market is the best in the world and that this exercise will prove it.

Richard Adams: Simon Hickman, from Access Underwriting, has asked: 'How much of a risk is it that the regional markets will be disadvantaged by having industry wide restrictions imposed on the back of the London market not getting its act together? And is there any likelihood that the FSA will be regulating these two areas - regional and London - as two separate entities?'

Joe Graham: I think the London market is different, there is no doubt. Everybody says it is more complex and in some ways it is. However, it should not be that difficult, all it requires is moving the timeframe in order to make sure that we know on inception what is actually being covered. The contract and the policy wording is only the evidence of the contract, after all, and getting that issued within 30 days would not seem to be beyond the wit of mankind in the technology age.

Richard Adams: Another area that provincial brokers cite as problematic is getting the terms from insurers before placing a client on cover.

Peter Staddon: It is very easy for me in a broking trade association to blame insurers when in fact the delay could be the client or brokers' fault. How can the insurer get the policy out if they have got the wrong information? I have done some analysis on this and unfortunately I am getting silly situations where we are getting Harrogate near Yorkshire, or the other one, a Mr Coggeshall when it is Mr Cotteshaw. These are silly mistakes and we really ought to strive to get past that.

Richard Adams: That sort of thing is not going to void the entire claim though is it?

Peter Staddon: No but it can create a problem. Go back six to eight months and see where some claims are being bounced by certain insurers for what I feel are very loose grounds. You mentioned there about renewals and their change in terms. One of the biggest issues that I think we need to embrace is a thing called subjectivity - subject to the proposal form, subject to survey, we need to make sure what we are talking about. More importantly, we need to make sure that the client understands what is required and then failing to comply will mean the insurer is left with two options - either to terminate this policy or take it on the chin and move on.

Joe Graham: It would be easy for brokers to say it is all down to the insurers and just as easy for me to say it is mostly down to brokers and clients but this is an issue which we all share in and all have a part to play. From the insurers' perspective, if I take renewals first, most insurers these days are running renewals six to eight weeks in advance. So there really should not be an issue with contract certainty there. Where it is more bespoke commercial and actually needs re-underwriting, on a regular basis, then I think insurers have an obligation to start that process in good time. If we are only getting started on the process of renewing a policy two or three weeks before renewal, then it makes it very difficult for anyone to get contract certainty. Insurers have got to shoulder the burden of responsibility for that particular part of the process and certainly we aim to get renewal terms out to brokers no less than four weeks prior to the renewals. As far as the brokers are concerned, I think they need to be aware of the time pressures and they might need to start that process earlier particularly with commercial clients to give the insurer a fair chance to actually produce the goods for them.

Richard Adams: Another question submitted asks: 'Is there a check list of facts about contract certainty that brokers need to understand?'

Peter Staddon: Beyond do it once and do it right, a checklist is difficult because brokers are unusual animals. Two brokers in the same area, working in the same class of business, will operate two different ways. So I don't think we should be telling them how to do their business, that is down to them. What they need to do is to make sure they are telling the client what we are doing, when we are doing it, how we are doing it. And then we can show the evidence. Once the client has the policy we can move on to the next account and if the claim comes in, everybody knows where they stand.

Richard Adams: Right, thanks Peter. Joe, do your brokers ask you for a checklist about this?

Joe Graham: I think gathering the relevant information in time is crucial and the situation is not helped by some underwriters who will underwrite risks with very little information. You need to get that information; after all it is due every year, it is not as if it comes up by surprise out of the blue.

Peter Staddon: On the British Insurance Brokers' Association web site we have got information on contract certainty in relation to the various codes, information about the guidelines and also frequently asked questions and answers. I don't want to be too prescriptive about this - we have got to retain the flexibility in the system to allow brokers to get on and do what they are really good at.

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THE PANEL

- Richard Adams, Editor, Professional Broking magazine

- Joe Graham, Intermediary operations manager, Ecclesiastical Insurance

- Peter Staddon, Head of technical services, British Insurance Brokers' Association.