Contract certainty

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Contract certainty

• October 2005 Market Reform

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Structure of presentation

• The FSA challenge
• Measurement and targets
• Defining contract certainty
• Responsibilities what must you do differently?
• Resources for market organisations
• Code of Practice and guidance on how to fulfil
  Code
• Checklist
• There is more to come
• FAQs
• Detailed process narrative for Lloyds
• Guidance on signing rules etc.

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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
• Tiners 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 firms measured participation

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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

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

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Contract certainty Quality
Contract certainty attributes of LMP slip
Source MRPO
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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

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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

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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. Whats the
  project look like? Training? Incentives?
• Inform MRPO of formal Board sign-off of Code of
  Practice

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Contract certainty what must insurers do?

• Confirm that the wording is fully specified
  before writing a line
• Quality check the submission for quality
  completeness (or authorise a service provider to
  do so) before formally committing to the
  contract, using the CC checklist and internal
  quality guidelines (e.g. for Lloyds their
  published checking requirements)
• Provide a sample of slips for LMP slip audit
  checking
• Only use line conditions subjectivities in
  accordance with contract certainty guidelines
• Write lines to stand, or request brokers to
  provide signed lines if required earlier than 30
  days after inception
• Ensure that all post-inception changes are
  processed as endorsements
• Record the number of risks meeting / not meeting
  contract certainty

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Contract certainty what must brokers do?

• Prepare fully-claused submissions, including
  clear responsibilities for drafting, checking
  issuance of appropriate evidence of cover
• Quality check the submission against the CC
  Checklist and any internal quality requirements
• Issue appropriate evidence of cover within 30
  days of inception
• Signed lines notified to insurers within 30 days
  and, on request, available at inception
• Do not obtain further lines after inception once
  the order has been filled
• Notify the client of contract certainty
  exceptions, as appropriate
• Record the number of risks meeting/not meeting
  contract certainty and provide these statistics
  to the MRPO on a monthly basis
• Process all post-inception changes as formal
  endorsements

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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)

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• A means of assessing the quality of contract
  certainty that is available now is to monitor the
  Bureaus rejection rate of policy/wordings checks

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Contract certainty Quality
XIS rejection rate of stage 2 checks
Source XIS, excludes slip policies and time on
risk policies
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Contract certainty

• October 2005 Market Reform

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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 clients 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.

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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.

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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

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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
  Lloyds their published checking requirements)
• A follower needs to consider what reliance to
  place upon the leaders quality checking, taking
  into account any service provider input

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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.

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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.

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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

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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

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Guidance spelling out the principles
Appropriate evidence of cover

• Insurance Policy (Bureau or Company)
• Copy of Complete Slip
• Certificate of Insurance
• Broker Insurance Document

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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

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Contract Certainty Checklist
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Contract Certainty Checklist
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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?

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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)

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CoP/Checklist Feedback Received

• A fine Code, but will Insurers do it? -
  Evening Standard
• Can we have 1,000 copies for our staff?
• Im 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
• Insurers responsibility for Evidence of Cover
• Your questions?

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Contract certainty

• October 2005 Market Reform