Contract Certainty John Harvie 30 May 2007

Market Reform Page 2 How did this issue arise? –Global, historic practice and culture, a legacy of the past. Not just an issue for the UK. –Ever-increasing demand for complex coverage. –A focus on the deal rather than on the detail of the contract. FSA provided the catalyst for the industry to progress further and more quickly. “Deal now, detail later” to “deal now, detail now” December 2004, John Tiner challenges the market to end “deal now, detail later” culture

Market Reform Page 3 Contract Certainty – what has happened so far… Market led response developed definition, principles and guidance Firms implemented Market target set of achieving 85% contract certainty by Dec 2006 – achieved and recognised by FSA Jan 07 FSA cite the work as a considerable success and an excellent example of “principles based regulation” at work

Market Reform Page 4 Contract Certainty in 2007 Ongoing market target of keeping contract certainty achievement above 90% in 2007 March figures – Brokers 94%, Managing Agents 94%, Company Market 96% FSA will focus on quality of data and management of issues (eg late placement) when it visits firms AND – consolidating the guidance and principles 11 sub and all non sub documents into one.

Market Reform Page 5 Summary of the guidance re write Modifies the definition Consistent structure Timeless principles Requires firms to demonstrate performance One code applicable to the whole UK general insurance industry Defines the scope of contract certainty.

Market Reform Page 6 The scope of contract certainty This guidance applies to general insurance[1] contracts either entered into by an FSA-regulated insurer[2], or arranged through an FSA-regulated intermediary.[1][2] [1] See FSA definition of general insurance. Insurers and brokers must be able to justify the criteria used to establish any exemptions from this scope.1] [2][2] The guidance applies equally to reinsurance, insurer may also be read as reinsurer and insured as reinsured throughout.

Market Reform Page 7 The new CC definition Contract certainty is achieved by the complete and final agreement of all terms between the insured and insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter.

Market Reform Page 8 The structure of CC 1. All terms clear and unambiguous including basis of participation 2. Contract Documentation provided to the insured promptly 3. Contract changes need to be certain 4. And documented promptly 5. Final participation provided promptly 5 key elements to contract certainty……. …. but demonstration of performance on 1 and 2

Market Reform Page 9 The structure is reflected in the new guidance

Market Reform Page 10 Demonstrating performance C:Insurers and brokers must be able to demonstrate their achievement of principles A and B. Examples of how contract certainty can be demonstrated include: Verification against a checklist Sample or File audits System or Process controls

Market Reform Page 11 Where the principles have not been met G:The insurer and broker (where applicable) have a responsibility to resolve exceptions to any of the above principles as soon as practicable and without undue delay..

Market Reform Page 12 Plan for publication MRG signed off CCSC (non subscription market) signed off FSA “acknowledge and support” AIRMIC signed off CII supportive Publish June, code of practice, before and after comparison, quick reference guide. Available from Association or via web site. Communication June

Market Reform Page 13 Contract certainty is delivering reduced operational risk, improved client service and improved process efficiency Improved clarity in process definition and responsibility. Improved contract checking. Increased development and use of operational management skills. Increased recognition and use of operational performance data. Greater use of independent checking and verification e.g. internal audit. Improved process effectiveness. Earlier start to the placement and renewal process. Greater emphasis on provision of accurate information at an early stage in the process. Improved quality and completeness of placing documentation. Technical resource involved earlier in the process. Checking criteria more clearly defined. Improved clarity of insurers’ exposures (model signing provisions). Improvements in clarity of placing documentation (abbreviation and ambiguity removed, subjectivities fully specified). Earlier calculation and notification of signed lines. Client receives evidence of cover earlier. Reduction in the level of rejection and rework. Placing process Meeting The Challenge

Market Reform Page 14 Reinforcing the industry’s competitiveness Is an illustration of what can be achieved A catalyst for the further modernisation of the industry and a solution to addressing a threat to the UK Insurance Sector’s efficiency and competitiveness. An opportunity for the UK insurance industry to take a lead in an area that is a global issue. A solution that is commensurate with the risk faced. A set of guidelines that has gained wide acceptance quickly, because they had been built by the industry, for the industry. A set of guidelines compatible with the FSA’s existing regulatory powers. And………….

Market Reform Page 15 Legacy Clean up the policies which have been put on risk but where evidence of cover may not have been issued Measured by index number – volume as recorded in July 2006 is used as the base Target is to reduce the index to 60% by end June and 40% by end 2007 Lloyd’s index currently 59% (ahead of target) IUA data soon to be available But don’t relax yet Demonstrate that contract certainty is embedded, no going back. Continue to monitor instances where contract formation post dates inception. Remember that contract certainty is still a regulatory priority and that the FSA has all the powers it needs.