Meeting the FSA's deadline for reform will not be an easy task for Lloyd's, says Michael Faulkner

' The journey towards contract certainty in the Lloyd's and London market is now well underway.

The industry group set up to devise a solution to the problem of contract uncertainty has now split into two working parties to address the fine details. One will look at commodity risks, the other complex risks.

The working groups must work fast. The FSA requires a workable solution to be devised within a year.

If the industry fails to deliver this, it will face the full weight of the FSA's powers, which could mean increased capital requirements on insurers and restrictions on brokers' business activities. As one industry source says: "Tiner will get his stick out to beat the industry into shape."

Meeting the FSA's deadline will not be an easy task for the Lloyd's and London markets. The industry will need to change practices that have been in place for hundreds of years. Lack of contract certainty is not just a process issue, but a cultural one that is ingrained in the market.

So how to achieve such a fundamental shift in working practices? Bronek Masojada, chief executive of Hiscox and deputy chairman of Lloyd's, says: "Contract certainty does not need a fundamental change in processes, it requires a mental change.

"The first thing that we need is full [and mandatory] commission disclosure. It will make people look at the economic value they are giving and whether it can be justified. As a market we should be transparent. It is inevitable there will be full disclosure within the next 12 months."

The view that greater transparency will be a vehicle for wider reform is shared by Lloyd's chief executive Nick Prettejohn, who said earlier this month: "Mandatory disclosure is not just about a reaction to Spitzer. It represents the single most effective way of generating positive change in our industry."

Accepted practice
Patrick Milna, chief executive of Marsh UK's client and market services practice, says Lloyd's should be putting pressure on the market to bring about the necessary cultural change.

"At the moment it is accepted practice to get the policy documents several months after inception. But if this was an M&A [merger and acquisition] contract this would be unacceptable.

"Lloyd's needs to say the current approach is not acceptable. I can see a draconian approach where policies would be void if deadlines for delivery are not met."

Masojada says the industry must also to look to other professions to provide pressure for change. He focuses particularly on the banking sector.

"When a company looks for a loan the bank should ask for proof that an insurance policy is in place, not just a cover note, but a signed insurance policy," he says.

Beyond the broad issue of transparency and cultural change, the working groups addressing complex and commodity risks will be looking at developing a road-map to contract certainty.

On the commodity risks side, technology is likely to play an important role, argues Milna. He says electronic trading platforms, such as Kinnect, will help to achieve greater contract certainty.

In relation to complex risks, achieving contract certainty will be more of a challenge. Milna says the market needs to examine the processes that underlie the placement of complex risks. He argues the market needs to be "stricter" in developing and applying common standards.

"There needs to be industry standards with more clarity," he says. "The use of LMP (London Market Principles) slips [which allow key data about the contract to be documented upfront] and consistent wordings will help."

Masojada agrees: "The quality of LMP slips needs to be higher and there should be public naming and shaming of those who perform badly."

But Lloyd's will have its work cut out if it is to achieve the FSA's deadline for reform. One only has to look at the slow progress of developing and using the LMP standard.

While 90% of the market uses LMP slips, the quality is poor - only 9% are perfect - and reaching this position has taken years.

As Prettejohn admits: "Changing behaviour is inherently slow". IT