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Speech by John Tiner, AIRMIC Annual Conference

The role of the regulator and the responsibility of the buyer in the insurance chain

Record of meeting on 19 June 2006 between the industry and the FSA.

Attendees

  1. A list of those present is attached.

Key points

  1. The FSA sees sufficient progress to keep its regulatory intervention plans on hold for now, but expressed some concerns about the level of progress since the meeting with the market on 21 March. These concerns relate to:-

    • the quality of data;
    • the ability of some firms/sectors to provide accurate and timely data; and
    • progress on key areas which the FSA asked the market to focus on in March.
  2. The FSA sought commitment from those present to support the market bodies in key actions to demonstrate continued momentum, in particular:-

    • more challenge and assurance over data, so that the market has full opportunity to factor in lessons learnt and good practice into work in the next three to six months;
    • focus on the key drivers which are likely to inhibit cultural change by analysing outlier firms, the contracts which don't meet contract certainty (for example, the 15% residual in the Subscription market), and the extent of late orders; and
    • greater clarity over the extent of the legacy issue, with milestones for resolution.
  3. The FSA asked the market, through the Steering Group, to consider what needs to be done to demonstrate that the market solution has worked at the end of 2006 and will not falter in the years ahead.

Background

  1. The FSA is setting the industry a challenge to secure a market-driven solution to the issue of contract certainty by December 2006. Since the start of the challenge in December 2004, the FSA has made it clear that its preference is for a market solution to resolve the issue of contract certainty; however, if the market solution does not deliver, the FSA will consider regulatory intervention although that is not the FSA's preferred outcome.
  1. The FSA has been following the work of the two industry working groups (covering the Subscription Market and Non-subscription Market), overseen by an industry Steering Group which includes the Chairs of the working groups and representation from insurance brokers and insureds. Through these industry working groups, the market now has an agreed definition of contract certainty and put in place market Codes and Guidance to assist market participants in achieving contract certainty. It has also been monitoring progress towards achieving contract certainty – in the case of the Subscription Market, progress against targets it has set itself.

    In parallel with the market's own work, the FSA has been working on its options for regulatory intervention, should the market solution not succeed. An overview of these options were presented at the meeting with the market in December 2005.

Progress

  1. The market working groups presented their views of progress to date. Copies of the presentations are attached to this public record. In addition, AIRMIC updated the meeting on its own efforts to improve insurance buyers' awareness of their role in achieving contract certainty, including the production of a Guide to Contract Certainty which is also attached below.

Subscription market update
Non-subscription market update
AIRMIC Guide to Contract Certainty

FSA's views on market progress

  1. The FSA noted the signs of progress over the last three months: the headline data for March suggests that around 80% of wholesale and commercial contracts are now meeting the definition, compared to around 60% in December.
  2. It is apparent that engagement across the market has increased and progress has been made to find practical ways to resolve issues including signed lines and late orders, following the issue of market guidance. These were two key areas where further progress was needed in March. The FSA also noted the strategic initiatives under way across the market that have the potential to facilitate further progress provided they run in parallel to, and do not distract from, efforts to achieve contract certainty.
  3. However, the FSA raised concerns about the lack of challenge to, and analysis and consistency of, the headline data collected by the market. The concerns were particularly relevant given the limited time remaining to the end of the challenge for the market to factor in lessons learnt and develop good practice. The FSA also had some concerns with levels of progress on the key areas for market focus which were discussed at the meeting in March. The FSA noted the risk that progress might decelerate and reminded those present that there is no room for complacency in the vital months ahead.
  4. The FSA continues to rely on the Steering Group's assurance of market progress, holding it accountable for delivering the solution on behalf of the market.

Next steps for the market

  1. In order to maintain momentum, the FSA set out its expectations for the market over the next quarter leading up to the next assessment in September:–

    First, more challenge and analysis of the data at market-wide and individual firm level, to maximise the opportunity of factoring in lessons learnt and good practice, for example:-

    • to understand why binder results are so close to open market contract results;
    • challenge of whether the data submitted by each firm is consistent with other knowledge of the firm;
    • further detail on validation of individual firms' contract certainty results – by way of systems and controls, Board oversight, senior management challenge, and levels of independent assurance (e.g. internal audit);
    • the IUA to provide more quantitative analysis to demonstrate progress, so that performance in this major part of the overall market can be compared to other sectors;
    • market bodies to contact all firms/outliers considered unlikely to meet the 2006 targets so that they have no doubt about what needs to be achieved in the next six months; and
    • consider sharing individual firm data (not just aggregate) with the FSA.

Second, further analysis of the key drivers which may inhibit cultural change in the medium/longer term, for example:-

    • an in-depth analysis of the value and complexity of contracts which fall into the exception category, including by insured value, premium value, class of business, and trends over time and at key renewal periods;
    • analysis of the impact of the late orders guidance which has the potential to give firms an incentive to obtain good overall contract certainty scores whilst not making sufficient effort to ensure that late orders reduce over time; and
    • consideration of how the market will demonstrate in December that the ‘market solution’ will meet the FSA's challenge this year, and maintain continually improving levels of contract certainty in the medium/longer term.

Third, clearer evidence of progress on the quantum of legacy issues and milestones for reducing the risk in the back book.

Next steps for the FSA

  1. The FSA shared its priorities for contract certainty over the coming months.
  2. Greater emphasis and assessment of individual firms' progress with specific supervisory work on contract certainty, both in the Subscription and Non-subscription markets. The conclusions of this work will be shared with the market as appropriate.
  3. Continuing to emphasise the role of the insurance buyer in achieving contract certainty. John Tiner gave the keynote speech at the annual AIRMIC conference on 13 June at which he sent some strong messages about the buyer's role and met the Presidents of FERMA and RIMS.
  4. Continuing to engage with overseas regulators with a view to influencing the behaviour of overseas buyers and market participants. The FSA noted that the International Association of Insurance Supervisors had agreed at a meeting in May to take forward contract certainty as a global insurance issue.

Conclusions

  1. The FSA concluded that progress at this point in the challenge is sufficient to keep the options for regulatory intervention on the 'backburner' for the next quarter. However it is concerned that more demonstrable progress is required on:-

    • quality of data;
    • issues likely to deter behavioural and cultural change, such as exceptions and late orders; and
    • reducing the legacy issue.
  2. A further assessment would be made in September. It was agreed that this is a vital staging post in the challenge: the market was encouraged to focus on those areas where greater emphasis is needed in the months ahead.
  3. The next meeting will be in September.

List of attendees

FSA

John Tiner
Hector Sants
Sarah Wilson
Julian Adams
Amanda Bowe
Ambika Siva

Market Steering Group

Dane Douetil - Brit Insurance and Chairman of MRG
Clive Wood - Royal & Sun Alliance (on behalf of Bridget McIntyre)
Paul Hopkins - AIRMIC (on behalf of Andrew Cornish)
(Apologies from Steve Matanle – Marsh)

Insurers

Dan Glaser - AIG
Chris Giles - Chubb
Tony Medniuk – Global Aerospace
Sue Langley - Hiscox
Chris Smith - Limit
Richard Ward – Lloyd's
Steven Haasz- Lloyd's
David Martin - Zurich

Brokers

Nigel Roberts - Aon
Dennis Mahoney - Aon
Kevin Lugg – JLT
Richard Bucknall - Willis

Market associations

Nick Starling – Association of British Insurers
Peter Staddon – BIBA
John Hobbs (on behalf of Dave Matcham) – International Underwriting Association
David Hough – London Market Brokers Committee
Simon Sperryn – LMA

Other

Malcolm Forbes-Wilson - Xchanging