Update on Contract Certainty John Harvie, Steve Hulm Contract Certainty Sponsors and PMs 22 November 2006

Market Reform Page 1 Contract Certainty –Good news - Market set to achieve 2006 targets – August broker figure 88% –FSA are satisfied with progress to date but see key issues as… –Quality and robustness of data –Exception reduction, including value –Legacy reduction NOTE: Data for December is only available at the end of February 2007 Industry Assessment of Success based on October, possibly November* data * Trying to get November Data earlier from LMBC

Market Reform Page 2 Time line to conclusion of FSA challenge

Market Reform Page 3 Key observations on the data The overall score for Contract Certainty includes complete placements before inception, incomplete placements and late placements. The overall score reduced slightly but still exceeds end of year targets. Evidence of cover within 30 days score increased by 2% in total to 83%, with an increase in open market contracts; certificates of insurance score remained the same. Summary Brokers self-assessed score for open market August returns, reported in October, was 84% certain, down from 86% in July. Brokers self-assessed score for certificates of insurance August returns, reported in October, was 92% certain, down from 93% in July. Overall, the volume of contracts that were certain in August decreased to 88%, from 89% in July. The volume of broker contracts between July and August decreased by 24% from 33,066 in July to 25,288 in August. Broker Contract Certainty Report for August 2006 (reported in Oct 2006)

Market Reform Page 4 Broker Contract Certainty Returns for August 2006 – breakdown for incomplete and late placements Key observations on the data Contract certainty achieved in August for open contracts and certificates was 88%. Order completed by inception decreased in August by 2% compared to July. Now at 72%. Order completed after inception decreased in August by 1% compared to July. Now at 5%. Firm order post inception increased in August by 1% compared to July. Now at 10%.

Market Reform Page 5 Underlying supporting statistics for Broker Contract Certainty Returns

Market Reform Page 6 Underlying supporting statistics for Broker Contract Certainty Returns – breakdown for incomplete and late placements

Market Reform Page 7 Data from Managing Agents and Companies continues to support Broker data Managing Agent Contract Certainty 89% - Total Contract Certainty in Sept 06 September performance remained same as August 06 89% - Open Market in Sept 06 September performance remained same as August 06 90% - Binding Authority in Sept 06 September performance UP 1% from August 06 Company Market Contract Certainty 94% - Total Contract Certainty in Sept 06 September performance UP 1% from August 06 93% - Open Market in Sept 06 September performance remains same as August % - Binding Authority in Sept 06 September performance remains same as August 06

Market Reform Page 8 Legacy challenge –The number of Lloyds Priority 2 and Priority 3 items are reducing as Managing Agents focus on legacy reduction –The number of Priority 1 items is continuing to rise. –Change request needed to allow current items with Alternative Evidence of Cover (AEC) not to appear on LUPR –Agreed by LMBC (Concert) –Agreed by Lloyds (& funding) –Agreed by LMA (XRB) –Intent for implementation by the end of 2006 –G6 insurers have written to brokers with legacy reduction proposals –Brokers writing to managing agents with legacy reduction proposals –G6 and LMBC have a consolidated approach to legacy agreed.

Market Reform Page 9 MR Slip adoption –MR Slip format published June 2006 –Originally Lloyds mandated for October 2006 inceptions –Whilst MRS in current use –Some brokers still amending their templates –Lloyds mandate put back to November 2006 –Further guidance on Order, Fiscal & Regulatory and licencing –MRS being used for Contract Documentation Pilot –Issue regarding variant (CD format) outstanding Press on with MR Slip adoption

Market Reform Page 10 Measurement FAQs –What is the issue? –Clear that organisations are applying the Code of Practice & Checklist in different ways –Result - inconsistency of measurement –What are we doing? –Clarifying the recommended approach wherever possible via FAQs. –Reviewing the Code

Market Reform Page 11 Key messages to feedback to firms –Data quality –Firms need to ensure that they are able to demonstrate that they are achieving contract certainty and have in place appropriate systems and controls to ensure that their reported data is robust. –Legacy –Firms in the Subscription Market need to work on scoping and addressing the backlog of policies and on ensuring that they are in a position to demonstrate quantifiable progress by the year end. –Exceptions –Organisations need to have a clear understanding of the value and complexity of those policies that do not achieve contract certainty and have a process defined by which lessons learnt on failures can be captured and fed back into further improvements. Contract certainty remains a regulatory priority for the FSA through 2007

Market Reform Page 12 Key messages to feedback to firms –Contract certainty is one apspect of operational risk. The FSA will use their powers under ICA and existing insurance regulation to regulate firms: –Firms need to ensure that they understand this relationship and are prepared to respond. –Solvency II is just round the corner. This takes a broader view of risk, contract certainty is only one aspect: –Firms need to recognise that this approach to regualtion is here to stay. Just look at banking if you are in any doubt. –Ultimately it is not the CC score that matters, it is a firms ability to demonstrate a mature approach to operational risk management. –Through 2007 the emphasis will shift from the FSA focusing on the market as a whole to focusing on individual firms, be prepared. Dont be a laggard

Market Reform Page 13 Plan for 2007 –FSA Liaison –Continue existing information flow for 2007 –Build on existing levels of CC performance –Guidance –Revision of guidance into a consolidated set in order to simplify, remove inconsistencies and ambiguity, improve clarity - strictly retaining the principles-based guidance approach (Q1 2007). –Measurement –Continue to reduce exceptions and demonstrate reduction to a set target (by volume of contracts) (end of Q2 2007) –Late placements –Continue to reduce late placements and demonstrate reduction (end of Q2 2007) –Stamp conditions and subjectivities –Continue to drive through agreed approach –Signed lines and Signing provisions –Review in the light of practical experience –Legacy –Work for the remainder of 2006 and into 2007 will be to devise and implement a coherent plan and monitoring regime to demonstrate progress and eradication to the FSA. CCSC and CCPB will stay in place through to the end of 2007

Market Reform Page 14 Are we there yet? 10 minutes in groups. 3 questions: –What things have we missed from the CC forward agenda for 2007? –How do we maintain the momentum for change? –Should the market set targets for 2007? If so what should they be? back to me at: