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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 September 2006 between the industry and the FSA.

Attendees

  1. A list of those present is attached.

Background

  1. In December 2004, the FSA challenged the general insurance market to find a solution to the issue of contract certainty and to do so by December 2006. Throughout the course of this challenge, the FSA has made it clear that its preference is for a market-led solution and has noted its ability to intervene if necessary. A series of meetings with the market CEOs has resulted in public records such as this one, that set out the FSA's views of progress and give indications of areas for greater focus. These public records are on the FSA's website.

Key points

  1. The FSA recognised that many firms have made significant progress towards achieving a solution to the lack of contract certainty in the general insurance market. Consequently, the FSA plans for regulatory intervention remain on the 'back burner' as the market enters the last three months of the challenge.
  2. The FSA identified a number of areas where further work is required or where momentum must be maintained across both the Subscription and Non-subscription markets. These are:

      • the quality of data – all firms need to be able to demonstrate that they are achieving contract certainty so should have in place appropriate systems and controls to challenge and support the data reported to the market
      • legacy issues - work on scoping and addressing the backlog of policies across the Subscription Market needs to result in quantifiable progress by the year end; and
      • exceptions - work to assess the value and complexity of those policies that do not achieve contract certainty must continue to enable lessons to be learnt and improvements made.
  1. The FSA noted its concern about the ability of smaller firms, in particular brokers outside the London Market, to demonstrate their commitment to achieving contract certainty. In particular, the Non-subscription Market needs to identify and implement some practical solutions to establish the achievement of contract certainty by regional brokers.
  2. As the end of the challenge period approaches, the FSA will work with the Market Steering Group to identify how it will demonstrate at the end of 2006 that the market solution has worked. This must include both quantitative and qualitative evidence that contract certainty is embedded in the market's operations.
  3. The next meeting will be in January at which the Steering Group will be invited to present its view on whether and how the market solution has met the FSA's challenge.
  4. Contract certainty will continue to be a supervisory priority in 2007. Any firms that fall behind the rest of the market will be subject to the full range of regulatory tools, including where necessary consideration of enforcement action.

Progress

  1. The market working groups presented their views of progress to date. Copies of the presentations are attached to this public record.

Non-subscription market update
Subscription market update

  1. AIRMIC described its support for the achievement of contract certainty and the work of the Steering Group. It continues to encourage risk managers to achieve contract certainty through their insurance buying. AIRMIC is planning a further survey of its members' progress towards securing contract certainty in the final quarter of 2006 or first quarter of 2007.

FSA's views on market progress and areas for further work

 

  1. Based on the presentations provided, the FSA noted that progress has been maintained in the last quarter. The headline data for June suggests around 85% of contracts meet the industry definition of contract certainty when averaging the results across subscription and non-subscription (commercial) market business. This compares favourably with the 80% reported in March. Whilst the figures for the Subscription Market suggest its own stated target of 85% for the end of 2006 has been met, the FSA emphasised the importance of all firms aiming for 100% and noted the significant variations between the results reported.
  2. The FSA is concerned that the figures presented by the Non-subscription market represent only a small number of brokers compared to the total number operating in the market. The FSA raised concerns that, although the insurer data shows that approximately 90% of commercial contracts are being issued within the 30 days required by the market guidance, the broker data suggests that only 63% of commercial contracts are actually being issued to customers within the 30 day period.
  3. It was recommended that the Non-subscription Market Working Group identifies ways to improve the timeliness and quality of issuance of contracts by insurers to brokers so that the 30 day timescale for delivering commercial policies to customers can be met. The FSA also encouraged the Non-subscription Market Working Group to pursue with BIBA alternative ways of demonstrating contract certainty by smaller and regional brokers.
  4. It is clear from the Subscription market's work on outliers, and the FSA's own supervision work, that firms are interpreting the market's code and guidance in different ways. It was agreed that the Subscription Market Working Group works to reduce areas of ambiguity in the next quarter to reduce inconsistencies.
  5. The FSA recognised the work to assess value and complexity of contracts that do not achieve certainty in the Subscription market and noted the market's conclusions that the average value of contracts in the exception category is not materially higher than those which achieve contract certainty.
  6. The FSA noted the renewed focus on legacy policies by the Subscription market, and accept that these represent a very small proportion of commercial business for the Non-subscription market. The FSA asked the Subscription Market to quantify the outstanding legacy policies across the market and to assess the value of those legacy contracts that are more difficult to resolve.

Next steps for the FSA

 

  1. The FSA plans to issue a market-wide communication such as a Dear CEO letter which will provide feedback, including examples of good and bad practice, following its recent supervision work. This will also emphasise the areas for further work by firms in the months ahead.
  2. The FSA has a number of important speaking opportunities where contract certainty issues will be aired. These include opportunities to raise with international counterparts the importance of achieving contract certainty in the insurance markets.
  3. The FSA will support the market’s efforts to address areas of resistance. In particular, contract certainty will continue to be a priority in the supervision of firms in 2007. The FSA will consider whether, based on current and future work, any action is required in respect of individual firms who are failing to achieve or demonstrate contract certainty. This may extend, where appropriate, to referrals to enforcement or the use of s.166 reports.

Conclusions

  1. The FSA sees sufficient progress to keep its plans for regulatory intervention on the 'back burner'. However, a final push from all parts of the market is necessary in this last quarter to ensure the challenge is met. The FSA emphasised the importance of contract certainty becoming part of the natural operation of the market in 2007 and beyond.
  2. The next meeting with the CEOs will be in January. At that time, the FSA expects to make a final assessment of whether the market has succeeded in meeting the FSA's challenge to end the practice of 'deal now, detail later'.

List of attendees

FSA

John Tiner - Chief Executive
Tom Huertas - Director, Wholesale Firms
Sarah Wilson - Director, Insurance Sector Leader
Amanda Bowe - Contract Certainty Project
Andrew Dyer - Contract Certainty Project

Market Steering Group

Dane Douetil - Brit Insurance and Chairman of MRG
Bridget McIntyre- Royal & Sun Alliance and Non-subscription Market Working Group
Andrew Cornish - AIRMIC

Insurers

Tim Carroll - Swiss Re UK
Sue Langley - Hiscox
Stephen Haasz - Lloyds
Andy Brookes, Lloyd's/MRG Programme Office
David Martin - Zurich
Clive Wood - Royal & Sun Alliance

Brokers

Nigel Roberts - Aon
Dominic Burke, JLT
Richard Borgonon - JLT
Richard Bucknall - Willis
Mark Gregory - Marsh

Market associations

Nick Starling – Association of British Insurers
Eric Galbraith – BIBA
Dave Matcham – International Underwriting Association
David Hough – London Market Brokers Committee
Simon Sperryn – LMA

Service providers

Malcolm Forbes-Wilson - Xchanging
Alex Letts - ri3k