Recent market figures regarding contract certainty revealed that targets have been exceeded, but there is still work to be done – and no room for complacency, according to David Strachan of the Financial Services Authority. Geraldine Pollock reports.

The timing of a recent Freshfields seminar entitled, “Contract Certainty: will the insurance industry achieve its goal?” could not have been better with the Financial Services Authority (FSA) announcing days before that “regulatory intervention [as regards contract certainty] was on the back burner, but not off the stove.”

David Strachan, insurance sector leader at the FSA, told the audience that, “the market data we have received has exceeded targets and expectations for the end of 2005, with the subscriptions market emerging with 60 percent of contracts were certain against expectations of 30 percent and in the non-subscriptions market 60 percent against expectations of 40 percent.”

Strachan claimed that the results, “indicate a significant shift in attitude and that a really concerted effort has been made in the market to meet the challenge. However, the end of June is a key time for us because we’ll receive details of the January 1st renewals and if there’s a setback at this point then we’ll have to ‘crank up the handle’ -although that’s not something that we are anticipating, or that we want to do as we prefer the need for nonintervention.”

Strachan’s presentation covered reasons why the FSA became involved in the contract certainty issue. “Basically, we established that contract certainty was a symptom of other issues in the industry – primarily the ‘deal now, detail later’ practices in the market. These practices were clearly unacceptable and causing problems for all those involved – the insurer doesn’t have certainty over exposure; the insured doesn’t have certainty over coverage and the broker is exposed to legal and other risks – so there are significant costs implications for all concerned.”

He continued, “contract certainty is in the collective interests of the market to resolve the issues involved. When I first arrived in this industry people talked about contract certainty, but it was hard to find a solution to achieve it and nothing came to fruition, which I think is why the intervention of an outside regulatory body provided the impetus that was needed.”

According to Strachan, the drive for contract certainty (the FSA has stated that 85 percent of all business placed in the market must be achieved by the end of 2006) has raised a number of challenges “not least because the way in which business is done in some areas of the market creates certain additional complexities. As a result, we decided the original focus should be on the subscription market (Lloyd’s and the London Market), whilst identifying problems in the nonsubscription market; cultural and behavioural issues; the lack of market infrastructure and the fact that the answer was not necessarily a technological solution!”

At the end of 2005 the FSA undertook a “stocktake” of progress, after which it reported that: “progress was good, but there’s lots more to do.” “At that point we decided to wait a bit longer for qualitative and quantitative results that we would act upon as regards continued intervention,” said Strachan.

The subsequent results, said Strachan, were encouraging, but he reiterated the fact that: “there is absolutely no room for complacency and there are still challenges ahead.”

These challenges in terms of the subscription market, he claimed, include finalising approaches to signed lines; analysing transactions which may not meet definition; focusing on legacy policies; considering stretch and interim targets and analysing outliers and reasons for failure by some firms.

For the non-subscription market, challenges include: the resolution of legacy issues; analysing outliers and reasons for failure by some firms; a focus on the commercial sector and increasing engagement across the entire market. Finally, challenges for buyers, said Strachan, include the continued need for ownership; the engagement of overseas buyers, including RIMS and FERMA and driving through the change.

The opportunities for the FSA, he said: “include addressing areas of resistance – but we’re happy to work with the steering group to help if firms are not responding in the way they should be.”

Another key issue on the FSA’s opportunities list includes engaging overseas regulators: “we have already started to do this in the US and Bermuda and we will be working with the appropriate bodies to ensure the continued success of London,” he said.

This Special item appeared in issue 106 of JTW News - June 2006

Author: Geraldine Pollock - JTW News