Contractual changes

The Market Reform Programme Office has revised its guidance on how best to achieve compliance with the principles of contract certainty.

To date, the insurance industry has either met or exceeded all of the targets laid out in its voluntary timetable for compliance as was agreed with the Financial Services Authority; so why the renewed interest in contract certainty?

One reason could be the ease with which the initial targets were met, but far from resting on its laurels, the industry must remain conscious that it is edging ever closer to achieving total contract certainty across all lines and each step therefore becomes more difficult than the last.

The publication of this consolidated Contract Certainty Code of Practice shows that there is still work to be done. It embodies the valuable lessons learned by both brokers and insurers over the last two years since the FSA began regulating the insurance industry.

Another reason for the renewed interest could be that the CCCoP has altered the definition of contract certainty to include an explicit reference to contract subjectivities for the first time. Contract subjectivities are nothing new and have been a valuable tool when important information has not been available at the time the contract is agreed, however, their incorrect use has the potential to actually decrease the levels of contract certainty. This is especially so where the precise terms of the requirement and the consequences of failing to meet that requirement are insufficiently specified.

In order to be compliant with the revised CCCoP, subjectivities must state explicitly the condition or action that needs to occur (including by whom and to what standard), as well as the applicable timescale, the terms that apply in the interim period and the consequences if the condition is not met.

By removing ambiguity in the terms, the CCCoP now clarifies what constitutes acceptable use of contract subjectivities, yet, the ultimate aim for the industry is to deliver policies that best match clients' needs.

While incorporating subjectivities into the contract certainty equation will certainly help, it is closer ties between clients, brokers and insurers that will lead to more informed underwriting and helping the industry reach its goal.

Practices fostering a more informed approach to underwriting can only be a good thing for the industry, as this will offer the potential for better tailored policies that meet each client's requirements. That must surely be the ultimate goal for all parties.

David Hall, Director, market management and communications, Allianz Global Corporate and Specialty.