Market Reform Forum 24 November John Muir / John Harvie / Steve Hulm

Page 2 Objective: Update on reform Quick run down of what is going on Implementing contract certainty a brokers perspective Contract certainty - How does the process change? Contract certainty - Questions we have been asked Your questions

Page 3 Quick run down on whats going on

Page 4 Accounting & Settlement Radical review of options for A&S end vision – supported by MRG – consulting with market associations Q4 Introduce Step 1 repository (e-LPAN), progress market take up – detailed supplier negotiation Q4 – supplier decision at 29 November MRG Meeting Introduce measurement regime and performance monitoring – scope agreed Q3 – QA requirements produced Q4 – statistics published Q1 06 MRG and A&S Project Board review. Result: three workstreams:

Page 5 Electronic Claims File XIS development work –Phase 1 and Phase 2 - Now live –Phase 3 – (partial) DRI: Now live –Phases 4.5/5.5 CLASS at Lloyds data through GUI/Seamless link Implementation –27 partnerships operational (from 6 in May, 27 in November) –Relatively low volumes (291 first advices) –testing out electronic infrastructure and developing procedures Replanning of delivery dates: mid-May (from January), then MAT Publicity published on lmp-reforms.com

Page 6 Contract certainty Publications –14 th Nov –Slides, including material for internal sponsors –FAQs –Guidance on measurement –14 th Dec –Batch 2 guidance –Further FAQs –More to follow in the New Year Communications –Sessions for sponsors and project managers –70% attended –Public Q+As –1 st Dec –14 th Dec –Plus Market Association sessions –Plus more planned for New Year

Page 7 Implementing contract certainty – A brokers perspective

Page 8 Implementing contract certainty – A brokers perspective Internal communication External communication Implementation Measurement involving: – Contract Certainty by inception – Signed Lines by no later than 30 days after inception – Evidence (s) of Cover by no later than 30 days after inception Challenges Structure / process Culture / behaviour STOP BEING PART OF THE PROBLEM AND START BEING PART OF THE SOLUTION!

Page 9 Contract certainty - How does the process change?

Page 10 High-Level Process Changes The purpose of these slides is to highlight the differences in processes required to implement and support Contract Certainty. The focus is on the changes, they do not attempt to fully document existing processes. They represent the typical process likely to be followed by most market business.

Page Contract check by XIS (Stage 2) 7. Broker sends Evidence of Cover to client 3. Place Firm Order8. XIS Lloyds Policy signing (if required) 5. XIS Stage 1, Accounting and closing 1. Quote 4. Determine signed lines Achieving Contract Certainty, Current : Lloyds Process: does not always take place Process: always takes place 2. Broker & insurer check slip

Page 12 Achieving Contract Certainty, Proposed Process : Lloyds 6. Contract check by XIS (Stage 2) 7. Broker sends Evidence of Cover to client 2. Broker & insurer check slip 3. Place Firm Order ** CC achieved and recorded ** Single broker submission to XIS 8. XIS Lloyds Policy signing (if required) - Checking 100% - QA Tool-based 5. XIS Stage 1, Accounting and closing using CC checklist & Lloyds compliant submission Timing now within 30 days of inception with all terms & the full wording** Process: does not always take place Process: always takes place Red text/line indicates change from current process 1. Quote 4. Determine signed lines by inception No post inception overplacing Signed lines to underwriters within 30 days Early Check using QA Tool & CC Checklist Early Check using QA Tool & CC Checklist using CC checklist & Lloyds compliant submission No post inception overplacing by inception ** CC achieved and recorded ** Single broker submission to XIS Signed lines to underwriters within 30 days - Checking 100% - QA Tool-based ** As per CC checklist

Page Contract check by XIS (Stage 2) 7. Broker sends Evidence of Cover to client 2. Broker & insurer check slip 3. Place Firm Order 8. XIS Lloyds Policy signing (if required) 5. XIS Stage 1, Accounting and closing Process: does not always take place Process: always takes place 1. Quote 4. Determine signed lines Achieving Contract Certainty Current : Bureau Company Bureau

Page Contract check by XIS (Stage 2) 7. Broker sends Evidence of Cover to client 2. Broker & insurer check slip 3. Place Firm Order ** CC achieved and recorded ** Single broker submission to XIS 8. XIS Lloyds Policy signing (if required) - Checking 5. XIS Stage 1, Accounting and closing using CC checklist compliant submission Process: does not always take place Process: always takes place Red text/line indicates change from current process 1. Quote 4. Determine sign lines by inception No post inception overplacing Signed lines to underwriters within 30 days Achieving Contract Certainty, Proposed Process : Bureau Company X% - QA Tool-based Bureau 100% Early Check using QA Tool & CC Checklist * Companys internal checking procedures Early Check using internal * & CC Checklist -Company Bureau checks Timing now within 30 days of inception with all terms & the full wording** ** As per CC checklist

Page Broker sends Evidence of Cover to client 2. Broker & insurer check slip 3. Place Firm Order 8. Company Policy production (if required) Process: does not always take place Process: always takes place 1. Quote 4. Determine signed lines Achieving Contract Certainty Current : non Bureau Company 5. Accounting and closing

Page Broker sends Evidence of Cover to client 2. Broker & insurer check slip 3. Place Firm Order ** CC achieved and recorded ** 8. Company Policy production (if required) using CC checklist compliant submission Process: does not always take place Process: always takes place Red text/line indicates change from current process 1. Quote 4. Determine sign lines by inception No post inception overplacing Early Check using Checklist & internal procedures Achieving Contract Certainty, Proposed Process : non Bureau Company Early Check using Checklist & internal procedures using CC checklist compliant submission No post inception overplacing ** CC achieved and recorded ** by inception 5. Accounting and closing Signed lines to underwriters within 30 days Timing now within 30 days of inception with all terms & the full wording** ** As per CC checklist

Page 17 Contract certainty - Questions we have been asked

Page 18 Contract Certainty: Recent FAQs How should Service Company business be measured? Contracts written under delegated underwriting arrangements with London Market bureau participants are classified as London Market, and hence checked against MRPO checklist. Insurers need to determine whether any other S/C business should be measured against London or non-London checklist (they will be very similar!). It will be helpful to distinguish types of business in your stats e.g. binders, line-slips, open-market.

Page 19 Contract Certainty: Recent FAQs What if an order arises very close to inception? Brokers should explain CC to clients and the contribution they can make towards its achievement. However these situations will continue to occur, and: –Model or fallback wordings may be used where an appropriate manuscript wording is not available. An endorsement can then be used once final terms are agreed. –Recognise that CC may not be achieved by inception in all cases, but principles should be observed as far as possible. We are working on further guidance & principles regarding late orders. (Possibly CC could be maintained ).

Page 20 Contract Certainty: Recent FAQs References to a separate document may also be embedded in clauses e.g. all terms … to follow original policy. Provide policy or wording reference, or Key identifying fields: Insurer; Type; Insured; Period; Interest; and Policy Limit(s). Some insurers may wish to go further than the above requirements and insist upon a reference or attached wording. –Need to weigh risks versus practicalities How do you clearly identify an As Original or similar prior wording if it not attached?

Page 21 Contract Certainty: Recent FAQs How will the market manage renewal peaks? Recognise that all market participants face a challenge to meet CC requirements during renewal periods. Some possible mitigating actions are: –Early consideration of renewal wordings; –Ensuring (for renewals as expiring) that the expiring contract was satisfactory in all respects; –The greater use of model wordings; and –Use of service providers.

Page 22 Contract Certainty: Recent FAQs Once the insurance policy has been signed, the status of the slip to evidence the contract(s) of insurance may be unclear. It depends on whether the parties intended the policy to supersede the slip. What is the legal weight of a fully-claused slip versus an insurance policy?

Page 23 Contract Certainty: Recent FAQs No ! It is not the intention to use the CC Guidance to create or confer any new or additional rights on the insured or insurers, nor to try and deprive the insured or insurers of any existing rights they may have. The document does not affect the legal relationship between the parties to insurance/reinsurance contracts. Is the Guidance relating to a copy of the complete slip intended to be used as evidence of the parties intent as to the legal effect (or otherwise) of slip provisions ?

Page 24 Contract Certainty: Recent FAQs How is CC achieved for Treaty Reinsurance contracts? The requirement to meet the CC definition for these contracts is that the scope and terms of the reinsurance cover are fully defined. This requirement does not extend to defining the terms and scope of individual cessions which may be covered under the reinsurance.

Page 25 Contract Certainty: Recent FAQs Are there other types of appropriate evidence of cover? Other forms of EoC are possible, as long as they specify the coverage as fully as those types listed in the CoP, and make clear who has produced and authorised the document. One specific example is where an electronic placement system has been used, and the (re)insured may have no requirement for a separate EoC.

Page 26 Contract Certainty: Recent FAQs Initially raise the matter with your contacts within the other organisation; Then escalate to their Compliance Officer; If unresolved, take forward with your own Trade Association; and If still unresolved, consider referral to MRPO/MRG. What is the escalation procedure if one of my trading partners is hindering my efforts to achieve CC?

Page 27 Contract Certainty: Recent FAQs Does CC mean more cost for the market? Operational expenses could increase, in the short-term, to meet the requirements of CC. This is expected to be offset, over time, by a reduction in costs arising from re-work, together with the downstream processing benefits of CC. Also reductions in legal fees and claims dispute costs are expected as CC is achieved. CC will have the effect of improving efficiency and ultimately removing cost across the market. The costs borne by the market as a result of a lack of CC are significant: legal expenses; E&O exposure; excessive claims costs; inappropriate rating; and potential capital misallocation.

Page 28 Contract Certainty: Recent FAQs Is technology the key to achieving CC? Behaviour is the main issue, not technology. Changes in behaviour are necessary to change fundamental working processes. Nevertheless, technology is increasingly expected to play a part in supporting these behavioural changes.

Page 29 Contract Certainty: Recent FAQs The implementation of the CC principles is a commercial and regulatory imperative for the market. Potential initial delays, arising from lack of familiarisation with new procedures, can be minimised by: –Good preparation; –Sensible co-operation; and –Avoiding over-bureaucratic implementation. Will achieving CC slow down the placing process and drive business elsewhere?

Page 30 Contract Certainty: Future FAQs To be published December/January (& ongoing?) Sample of questions raised: –How do we achieve CC for foreign language wordings? –Is there anything that can be done to achieve CC for late orders? –Can cover be back-dated? –Clients may benefit from post-inception over-placing, how can we meet their needs? –How do we handle CC failures that are outside the control of the London Market? –How do we prevent London being traded against by markets with different regulatory requirements? –Are there some forms of stamp condition that are still valid?

Questions Market Forum 24 November John Harvie/Steve Hulm