1 Market Reform Update 28 July 2005 Andy Brookes Market Reform Programme Office

2 Objective: up to speed in forty minutes…… Contract Certainty Public letter on CC Update on the live issues on CC Progress on LMP slip, checking, Kinnect Back office electronic infrastructure Accounting and Settlement Electronic Claims Files What you should be doing No special topic

3 Why do this? The challenge In London sufficient talent (underwriting, broking,advisory) meets sufficient capital to create a market But business is mobile and….. cost of business process is too high operational risk is too high -lack of audit trail, lack of proper/timely documentation London does not meet increasing regulatory standards -Spitzer – transparency; Tiner – certainty So, London (including Lloyds) must improve its processes to Reduce cost Reduce risk Increase transparency

4 The aims of market reform Contract Certainty Clarity of contract, leading to certainty of coverage, fewer disputes, less time wasted, a reduction in legal bills and improvements in downstream processing. Service to the client Process Efficiency Efficient capturing, storing and reuse of data, reduced error rates, and quicker premium payment processes. Lower costs. To adopt processes that speed up the agreement of the contracts, the issuance of documentation and the subsequent agreement of claims. Londons competitive position Includes defending market share in traditional markets and promoting growth in new markets Global standards To facilitate adherence to (or creation of) accepted internationally standards for accounting, message/business flows, and technology.

5 Principles underpinning reform Reduce Londonisms: international firms must buy-in – governance role Change requires authority and a degree of neutrality: individual firms cannot do it alone; Lloyds and the Associations will lead Commitment to co-operate essential, on design and implementation Network effects: a convoy for implementation Cost / benefit case is rarely convincing on its own. FSA Transparency

6 Vision for market processes Exchange of data and progress of transaction is captured in collaborative electronic systems Placing process built into electronic system Placing data to international standards Standard slip generated by electronic system. Ditto, the policy. slip/policy distinction blurs Policy based on model wordings; changes tracked and audited electronically. Or auditable bespoke wording created. Checking in real time Placing systems retain the data and audit trail Claims: international standard messages for data and claims management. Repositories for simultaneous access Accounting and settlement: ditto

7 Approach To support each stage in the life cycle of a contract: simplified, harmonised business process standardised data structured electronic messages community infrastructure platforms - minimise interfacing costs and enforce discipline Why? Drive changes – including behaviour - within firms. Hence -reduce risk -reduce cost -make process transparent to market users so that they can measure and manage

8 Contract certainty: FSA challenge Tiners speech: end to deal now, detail later End 2006 deadline Lit the already smouldering platform Answering the FSA requires: -clear plan pulling together components -measurable progress against that plan -your participation

9 Contract certainty: Market Game Plan Agree insuring clauses via a fully claused [1] LMP slip or LMP policy (which also meets LMP Standards) before inception Define process measurements and quality standards Understand standards and apply them Raise standard through independent QA Play back errors and publish league tables [1] typically by reference, rather than all wordings spelt out MRG endorsed the following, for implementation by end 2006:

10 Contract certainty: the programme Key projects Achieve CC during bind: agree wordings; get checking done -30% of business end 2005; 85% end 2006 LMP slips CC attributes -95% June 2005; 97% December 2005; 99% March 2006 Evidence of cover – within 30 days Supporting projects Policy checking by Xchanging Model wording Legacy (not strictly CC, but close cousin) Kinnect/placement systems -Consistent with all this, but reduce compliance cost

11 Contract certainty: market progress MRG agreement on definition Measurement: a good thing, so expect more of it. Governance sorted Reporting to FSA regularly -Not dissatisfied…. All firms have received CC briefing and Nick P letter 242 out of 255 firms registered with Programme Office Training material in pipeline, with CII

12 Contract certainty: MRG June letter Definition: Contract certainty is achieved by the complete and final agreement of all terms (including signed down lines) between the insured and insurers before inception. And Full wording must be agreed before any underwriter commits to the contract

13 Contract certainty: implications Use of model wording must rise -Investigating how to achieve this Wordings can change after leader scratch -Changes must be documented Granular standards (= QA tool for Lloyds) -Each broker and U/W to ensure achieved Checks before inception wherever possible

14 Contract certainty: issues to nail Signed lines: how calculated? how communicated? Checking within CC -Early checks for some? How will wordings be presented to U/Ws? -Either referenced or fully worded - brokers call -Up to underwriters to express preferences -Across all business lines ie not targeted – brokers call Renewal peaks -CC checks by XIS (U/W and brokers?) -Policy production Contract Certainty Project Board on the case -Will publish work end September

15 Contract certainty: more issues to nail Measurement -Role of LMP slip audit and XIS checking: raising quality after the event to improve next time -FSA agreed targets - 30%, 85% targets CC -LMP slip: 26 attributes for targets (95%; 99%); more attributes to come Process diagrams with words -Who has what choices? Evidence of cover -Appropriate evidence of cover to be issued within 30 days

16 LMP Slips – wider and deeper CC score for open market: June soon – will be close to target -Up from 92% in March, 93% in April….. -June target is 95% CC score for binder LMP Slips: 95% June -Down from 97% in May CC attributes for slip policies – 93% in May, report out -should be better than others on average Continue to check 25% of Lloyds slips in First IUA slips processed - companies getting first reports LMP Slip published in April Extending to lineslips -LMP standard for lineslips published in June -1 October mandate for Lloyds market

17 LMP Slip Quality

18 Contract certainty: checking Policy checking Xchanging: Lloyds Prudential Practice Requirements Binders -Two binder rejection reports for Q1 05 issued to poorer performing firms (12 Lloyds; 12 brokers) -QA tool re-issued in May -XIS started checking to this list in June -Next report in August Open market – similar approach to binders -Rejection report for Q Q XIS start checking to this list in July -Better stats in Q4 2005

19 Policy production: Quality XIS rejection data - XIS reasons b – excludes Jan-04 The volume of binders is about 15% of the open market contracts

20 Quality Assurance Tool Provides details of checks for market use that will ensure contracts reach the standard required by Lloyds Aims to minimise or eliminate queries raised by XIS during the signing process Aims to eliminate second submissions and achieve a right first time approach to contract certainty QA tool now caters for both Binding Authority Contracts and Open Market Business Do use and feedback

21 QA Tool – Currently Available Bahamas Binding Authority Contract Checks New, Amende d or Deleted Level 5 - Foreign Legislation Checks Level 5 Ref. Categor y Description of Check - Level 5OwnerUltimate Responsibilit y NewBahamas BA Contract 5.001AEnsure that the contract contains provision for certificates to include a service of suit clause nominating a person resident in the Bahamas. Please check the Bahamas page of lloyds.com for the recommended service of suit nominee. WWMUnderwriter NewBahamas BA Contract 5.002Not checked by XIS Ensure that the contract contains provision for certificates to include a law and jurisdiction clause allowing the insured to enforce his rights against insurers under Bahamian law and in any competent court in Bahamas. WWMUnderwriter New, Amend ed or Deleted MarketLevel 4 - Class of business Level 4 Ref. Dir ect R/ICat.Description of check - level 4OwnerUltimate Responsib ility NewNon- Marine Personal Accident 4.001YYACheck that where the policy exceeds 4 years 364 days that underwriters have agreed the use of a cancellation clause and that this is contained in the policy. FPDUnderwriter Non-Marine Personal Accident Open Market Checks

22 Legacy MRG agreed cross-market priority rules Rules available from the Programme Office Investigating new Unsigned Policy List -in accord with new rules Recalculate stats; agree next steps (if any) -Should there be market focussed effort in particular cob? -Is it worth it? Is it doable?

23 Legacy policy data Stage I signing Stage II signing Year accountNumber of legacy policies as atPer cent increase / decease Autumn 2004Spring ,60098,3314% ,63720,0462% ,72020,6310% ,05222,890-5% ,10524,516-13% ,70229,37914% Total212,816215,7731%

24 Kinnect Take up of 1 June release functionality for August incepting risks continues North American Property going well -Slips now being created -First sign down and completion to be this week Terrorism to start in August 17 customers live on platform and three in implementation Beginning to engage with International Property markets Next release due in two drops Q1 and Q2 06 Improved risk class delivery, including generic (data light) template Two way data transfer with underwriter response International Property delayed to Q1 (from Q4) to fit with this ITT for future supplier and review of platform development requirements

25 Contract certainty: each firm LMP slip CC attributes score -June result? Will you hit 97% in December? And 99% in March 06? Process to improve? CC on risks -How will your firm achieve 30% of risks by end year? -Full wording or references? -For brokers – focus on particular lines of business? -But quality matters, not just volume - build in checks Sponsorship, project manager done. Whats the project look like? Training? Incentives? Legacy; Kinnect Management information -How will you know you have done it?

26 End Game Fully-claused placing document (using LMP Slip and policy) Increased use of model wordings and clauses (as basis for negotiation) Wording/technical staff involved in placing process Early agreement and checking of the slip/draft policy by all parties and the back office QA function Interaction, wordings, risk details, negotiation undertaken partly through, and all logged in, Kinnect – the single version of the truth Early delivery of evidence of coverage for the client – ideally before inception but within 30 days of inception – from Kinnect, so no transcription risk Binder placings evidenced by issuance of approved certificates

27 Accounting & Settlement MRG and Project Board review. Result: Measurement of process -Like other checks Looking at a light step 1 -Scanned LPAN into repository Reviewing how to achieve end vision -more efficient and flexible accounting and settlement processes achieved through the use of standard electronic messages in place of both paper and bespoke London messages

28 Electronic Claims File XIS development work Phase 1 – Now live Phase 2 - Now live Overall business process spec signed-off later than planned -Better end outcome for practitioners; but pressure on timelines in Q1 06 DRI functionality issues; LMA, LMBC and Claims Infrastructure Project Board managing Implementation 11 partnerships operational (from 6 in May) Relatively low volumes (140 first advices) -testing out electronic infrastructure 57 (and rising potential) partnerships identified Live issues Cross market procedures and practices

29 Market Reform Training LMP Training Group (LMPTG) established Cross market group - CII and other providers Ensure sufficient, relevant and accredited training Progress to date Contract certainty training plan being developed -Senior management, compliance, technical levels -These are the courses, you should have been on e.g. Placing broker – how to complete an LMP slip Claims and A&S plans to follow Review / Accreditation of current training providers – LMP stamp

30 Market Reform Update 28 July 2005 Andy Brookes Market Reform Programme Office