Contract certainty in the insurance market

Record of meeting on 20 December 2004 between the industry and the FSA

Attendees

1. A list of those present is attached.

Background

2. The meeting followed the announcement in a speech by John Tiner on 13 December 2004 that the FSA, as part of its approach to broker regulation, would be looking to the industry to find a solution to the issue of contract certainty.

Aims and outcomes

3. The work fits within the FSA's strategic aim of promoting efficient, orderly and fair markets, working with the grain of the market wherever possible. The FSA wants to improve confidence in the London insurance market – this initiative on contract certainty is an essential part of this.

4. This work will reduce the operational and legal risks to brokers and insurers and improve service and clarity of offering to customers. It will enhance transparency whilst preserving the diversity and competitive position of the market.

Proposal

5. The FSA is setting the industry a challenge to secure a market-driven solution to the issue of contract certainty within two years. Failure to achieve this will result in regulatory intervention but that is not the FSA's preferred outcome. Regulatory tools could range from operational risk charges, other capital charges and specific rules.

6. The FSA recognises that the industry has in place arrangements to improve the efficiency of the London market for example through the London Market Reforms (contract certainty is a key priority for 2005). Our intention is to accelerate this work and help the various players in the market collaborate to achieve a solution. This may require an expansion of the participants in the London Market Reforms work for example to include representatives of insureds.

7. The FSA has no preference for the solution reached, provided that it deliver the aims and outcomes. The FSA will want to be a partner in the process, be kept informed of progress and provide assistance and feedback where appropriate.

8. There was general support for the FSA's interest in this issue and for setting a formal deadline for a solution.

Defining the issue

9. An agreed definition of contract certainty is needed from the outset. It does not suggest certainty over the outcome of claims or the content of contracts and should include:

   • certainty over underwriting exposures for insurers
   • certainty of terms of coverage for insureds
   • wording agreed at or prior to inception of cover ("i") and policies issued promptly thereafter ("i + # days")
   • policies which comply with local requirements (fiscal, regulatory)
   • recording of what has been disclosed during policy negotiation

10. The key to ensuring contract certainty lies in:

    • standardisation of process delivered by technology
    • standardisation of behaviour delivered by management, measurement and incentives
    • a record and audit trail of disclosures by insureds
    • customers acting as drivers for change

11. It was agreed the difficulties with contract certainty are more acute in the subscription market, but are also present in the non-subscription market as well. Insurers covering 100% of a customer's risk should be able to produce documentation promptly as the process is more straightforward.

Next steps

12. The FSA will be a partner in this work, be kept appraised of progress and agree the overall governance. Our contact points are Julian Adams (Head of Wholesale Insurance) and Amanda Bowe (Insurance Sector Team). A public note of this meeting would be circulated to those present for distribution by the trade bodies to their members.

13. Nick Prettejohn of Lloyd's (and Chairman of the Market Reform Group) offered to speak to all interested parties outside the meeting and propose to the FSA a strawman for the governance framework to take this work forward by the end of January. A further meeting would be arranged for early February to agree the framework and a project outline.

14. After discussion a consensus emerged around the formation of a senior group of industry leaders, with an independent chairperson, to provide strategic oversight, supported by an operational group. This group would steer the overall programme of work, of which the existing London Market Reform arrangements would form part. Other market participants are welcome to send their views to the FSA.

15. The FSA recognises that there may be initial investment costs associated with finding a solution. All agreed that longer term investment in people was vital. Further cost benefit analysis would need to form part of the industry's work.

16. It was noted that efforts to find a solution to contract certainty may well result in improvements in efficiency in other areas of the London Market, such as disclosure and transparency. Although this issue relates principally to commercial contracts, work to define the problem may extend to the retail market. The design of a market solution should have these points in mind and consider the international dimension.