Contract certainty in the insurance market

Record of meeting on 7 December 2005 between the industry and the FSA

Attendees

1. A list of those present is attached.

Background

2. The FSA is setting the industry a challenge to secure a market-driven solution to the issue of contract certainty by December 2006. 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. It 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. Failure to achieve a market solution will result in regulatory intervention but that is not the FSA's preferred outcome.
   
   
3. Three previous meetings with the industry took place on 20 December 2004, 2 February 2005 and 5 July 2005. Since then, the FSA has been following the work of the two industry working groups (covering the Subscription Market and "Non-slip" (non-subscription) Market), overseen by an industry Steering Group which includes the Chairs of the working groups and representation from insurance brokers and insureds.
   
   
4. The purpose of the meeting on 7 December was to assess the industry's progress at the halfway point in the challenge. As this is a market initiative the FSA was keen to hear feedback from the industry in an open forum. The FSA also outlined its views of progress and its plans for the next 12 months. This is a public a record of the meeting.

Progress

5. The FSA received progress reports from Nick Prettejohn, representing the Steering Group and Subscription Market, Nick Starling (on behalf of Duncan Boyle) representing the Non-subscription Market and Andrew Cornish, representing the insureds.
   
   
6. Copies of the presentations are attached to this note: Subscription Market presentation; Non-subscription Market presentation; and insureds presentation.
   
   
7. The definition of contract certainty, agreed by all parties ahead of the July meeting, is being implemented through market codes, supplemented with guidance and industry presentations.
   

   "Contract certainty is achieved by the complete and final agreement of all terms (including signed down lines) between the insured and insurers before inception."

8. There remain a number of issues which require further guidance or resolution by the market. These include:
   
   • In the Subscription Market, the approach to signed lines is a big challenge for brokers and underwriters and further guidance is needed; the transactions which fall outside the market's targets will require detailed analysis; and targets for resolving legacy items are desirable.
     
   • The Non-subscription Market has identified that legacy issues require early resolution; that issues are most acute in the commercial sector; recognises the importance of communicating with the market; and the different rates of change between firms.
     
   • The recent survey of insureds (AIRMIC members) had raised awareness and started to change buyers' behaviour. However, there is more to do to ensure that buyers take ownership of contract certainty and, by their own actions, drive change within the market.

FSA's views of progress

9. The FSA summarised its own views of market progress. Although momentum has been gained, there is still much work to be done to change behaviours and working practices at the coal face. Proof of progress will be seen once data is available from the market. The FSA noted the continuing need for strong leadership and market buy-in.
   
   

10. There are some key issues to be resolved with practical implementation of the Codes of Practice, for example the agreement of signed lines by inception.
    
    

11. Uncertainty over reinsurance rates post-Katrina has been cited by the market as an obstacle for timely 2005 renewals. The FSA understands that market conditions are difficult but would not expect them to prevent progress; it has seen good examples of progress on wording agreed ahead of decisions on price, which is encouraged.
    
    

12. There was general agreement that contract certainty should result in increased efficiency and competitiveness for the UK insurance market and the initial costs associated with achieving contract certainty would be outweighed by the long term benefits.

FSA's timeline

13. The FSA's stocktake at the end of 2005 will be based on the results of the recent firm visits, the presentations made at this market meeting, and analysis of the data provided by the market at that stage. Early feedback of the stocktake will be provided at the Old Library on 10 January.

14. In spite of the progress to date demonstrated by the market, and although it is not the preferred outcome, the FSA remains committed to introducing new requirements if the stocktake and subsequent year-end data determine that this is necessary. To ensure that any new requirements can be consulted on and put in place by the end of 2006, it is necessary to consider now the options for regulatory intervention and take a formal decision at the end of the first quarter of 2006.

15. The FSA presented an outline timetable together with high level options for regulatory intervention which would apply to insurers and brokers. It would also look at raising the awareness of the importance of this issue on the part of insureds. These would be designed to support the market's solution, recognise those firms which are making real progress but incentivise those which are not. Any new requirements would be subject to further detailed cost benefit analysis.
    

16. In the meantime, the FSA noted its ability to make targeted use of its existing regulatory tools should the need arise.

Conclusions

17. FSA acknowledges the significant progress made by the market halfway through its two year challenge. In parallel with the market's own work, the FSA has developed some options for regulatory intervention, but remains of the view that a market-based solution is preferable. It reminded the market of the need for all firms to be engaged and confirmed that the FSA will focus on individual firms or sectors which are making insufficient progress, using existing tools where necessary.
    

18. The FSA plans to engage with other regulators and relevant stakeholders to support and reinforce the market's own work to date.
    

19. In a formal 'stocktake' in early 2006, the FSA will determine whether sufficient progress has been made to meet the December 2006 challenge. The results will be announced in early January with a formal decision about regulatory intervention by the end of Q106.

20. The next meeting will be held in late February/early March 2006.