Chasing the laggards

"Contract certainty is boring," says a leading industry figure. Some may agree, but contract certainty is still firmly on the FSA's radar.

Although the regulator said this week that the industry had done enough to avoid tough new rules to achieve contract certainty, behind the scenes there is still plenty of work to be done.

The FSA has warned that individual firms that fail to hit targets will need to explain themselves and face the prospect of tough penalties.

A year after the FSA set the contract certainty challenge in 2004, Lloyd's took its first measurement of how the market was doing. Firms were given a checklist of 38 points –ticking the 'yes' box under all 38 points proved the contract was certain.

In December 2005, the London market reported that 65% of policies were achieving the objective – well ahead of the 30% target. That figure has now jumped to 90% – good enough to avoid further red tape.

"This is a major achievement by the UK insurance industry," says FSA chief executive John Tiner this week.

Achieving contract certainty, says the FSA, will give the UK insurance market a competitive edge when competing on the worldwide market.

Brit chief executive Dane Douetil, chairman of the contract certainty working party, says: "It is a useful stepping stone in getting operational efficiency. [Being] more efficient means we can do business more cheaply. We can attract more business to London."

But the market still faces challenges.

First, business comes into the market from all over the world. The US in particular has problems which need to be solved. Business coming into the market needs to be watertight before the contract can be incepted.

Tiner has urged international insurance buyers to put their houses in order. "It is important for the international community to address this issue," he says.

Douetil adds: "The problem with contract uncertainty is that it is a global issue which has to do with getting the detail done."

There are also legacy issues to sort out. Those policies piled up in a darkened room are possibly the major stumbling block for the market in attempts to make 100% of policies produced contract certain.

The working party set about dealing with legacy policies in the second half of 2006. Douetil claims there has been "substantial progress" and that Lloyd's is "getting the long-tail policies sorted out", but the work is ongoing. It is accepted that legacy policies will have to be sorted through before the market can toast its own success.

Like Lloyd's, the non-subscription market was also commended for pulling together to tackle contract certainty. Unlike Lloyd's, however, the regional market was more advanced when the target was set. But it also seems that culturally the non-subscription market had some way to go in accepting contract certainty as an issue.

In September 2006, the regulator warned that the figures presented to it by the non-subscription working party were taken from too small a sample of brokers. Although the insurers' data showed 90% of commercial contracts issued were contract certain, broker data suggested only 63% of commercial contracts were issued within the 30 days specified by the working party's code of conduct.

The latest measurement suggests that 88% of contracts produced outside Lloyd's are certain.

With 12% of the market still lagging behind on the issue, Tiner says the FSA will not relax when it comes to enforcement. "Where there are firms which have opted out we will look at it and make sure they fall into line," he warns.

Biba also says it will continue to review the market until the job is done. It says there are "issues" around the interpretation of broker statistics. Persuading brokers to dot the 'i's and cross the 't's is not an easy task.

Eric Galbraith, chief executive of Biba, claims that brokers are falling behind because they are failing to tick off all the boxes on the contract certainty checklist. It is considered yet another regulatory task which has fallen down the business agenda.

The biggest challenge to achieving contract certainty in the non-subscription market is overcoming cultural attitudes. Many brokers saw it as an issue which, put simply, did not apply to them.

And when the FSA appeared to back down almost immediately after it set the target it made the cultural shift even more difficult.

As early as March 2006 the FSA publicly stated that it had put on hold any plans to develop regulations after receiving positive feedback from the market.

"Is it any wonder that some brokers haven't bothered to look at this when the FSA appears to be backtracking," one broker comments.

Galbraith insists the majority of the market has made inroads to achieving the targets set by the industry working party, but also concedes that come brokers are hiding behind the statistics. "We are not through this yet," he says. "Biba and the ABI will set up a committee to look at this as an ongoing initiative. The problems of contract certainty are not going to go away."

Technology company Atos Consulting says the contract certainty issue will never be fully resolved unless the market addresses failures in business processes. It says the repetition of insurer and broker data in the market is rife. The absence of reliable data which can be used to track recording errors in brokers' back offices is just one of several problems facing the non-subscription market.

One leading broker agrees: "Intermediaries must embrace technology if they are going to crack the contract certainty code. It is clear that those who are using technology today are already producing strong contracts."

Culturally, the non-subscription market has fallen behind Lloyd's in the race, yet the problems it is facing are less complex than the London market.

The broker says that labelling the issue as "boring" will not buy market players a 'get out of jail free' card when the FSA comes knocking.

Tiner warns: "We can take action if firms don't pick up on this. For the most part the industry has stepped up. But there are those hiding behind the average and that is unfair. We should use our powers to bring those laggards up to speed." IT