Contract Certainty Update March 2006 CCPB Members: Dick Roberson (Miller), Martin Roberts (LMA), Simon Williams (AIG) MRPO: John Harvie, Steve Hulm.

Market ReformProgramme Office

Contract Certainty Update

March 2006

CCPB Members: Dick Roberson (Miller), Martin Roberts (LMA), Simon Williams (AIG)

MRPO: John Harvie, Steve Hulm

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Agenda

• Introduction

• Contract certainty snapshot

• New Guidance; will cover for each topic:

– Background

– Guidance

– Action required

• Late Placement Guidance

• Model Signing Provisions

• Legacy Code of Practice

• Questions & Close

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Contract Certainty Snapshot

• December CC statistics published

– Market average (open-market + binders) @ 65%

– Encouraging start – but it’s only the beginning

• FSA Liaison

– Progress presented to FSA by CCSC/Associations 20 & 23/2

– FSA will advise CCSC of their view of progress 10/3

– FSA public statement 20/3

– Consultation to start, or not ?

• Guidance

– Late Placements & Legacy Code of Practice published

– Signing Provisions – agreed, subject to legal review

Market ReformProgramme Office

Late Placement Guidance

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Late Placement Guidance - Background

• This is a priority issue. Its resolution is important as we move towards achievement of 85% target.

• The Contract Certainty Project Board (CCPB) has received input from market organisations and proposed guidance.

• This was unanimously supported by MRG, noting that:

– A reduced occurrence of late placements is desirable for our clients.

– Nevertheless we can achieve contract certainty for these cases.

– The guidance sets out best practice to deal with them.

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Late Placement Guidance - Definitions

• Two categories of late placement are defined, as follows:

Late orders are defined as client firm orders received after the start of the (re)insurance period.

Incomplete placements are defined as those where the order has not been fully subscribed by (re)insurers by the start of the (re)insurance period.

• “Client firm order” refers to the authorisation given to the broker or (re)insurer by the client to commit the (re)insured to legally binding contracts.

• “Client” refers to the organisation introducing the business to the London Market, and hence may be a (re)insured or an intermediary.

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Late Placement Guidance - Outcome

• Adoption of these principles by London Market organisations will result in the achievement of contract certainty for contracts where placement activity occurs after the start of the (re)insurance period.

i.e. Providing all other aspects of the CC definition & checklist are met …

… they can be treated as a CC pass.

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Late Placement Guidance – Principles 1-2

1. Brokers and (re)insurers will ensure that the agreement of terms and the placement of the risk are completed promptly.

• There is still a requirement to move quickly!

2. Brokers will provide firm order submissions that satisfy the contract certainty definition and checklist to place firm orders, excepting only those provisions relating to inception date.

• There is still a requirement for brokers to meet all other aspects of the CC definition & checklist.

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Late Placement Guidance – Principles 3-4

3. Each (re)insurer will be satisfied that the submission meets the contract certainty definition and checklist before formally committing to the contract, excepting only those provisions relating to inception date.

• There is still a requirement for (re)insurers to meet all other aspects of the CC definition & checklist.

4. Brokers will calculate signed lines by the placement completion date and notify them to (re)insurers within 30 days of placement completion date, or earlier on request.

• Not ideal, or final, position. Recognised as a compromise.

• All lines written after inception date should sign in full.

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Late Placement Guidance – Principles 5-6

5. Brokers and (re)insurers will ensure that appropriate evidence of cover, including security, is issued within 30 days of the placement being completed.

• There is still a requirement to move quickly!

6. (Re)insurers will ensure, where they agree to commence cover before the date of formally committing to the contract, that:

– This is permissible, having regard to the class of business and all appropriate laws and regulations

– Need to avoid misrepresentation, especially for compulsory classes.

– The scope of coverage for claims, which arise in respect of the period between the start of the (re)insurance period and the date on which they commit to the contract, is clear.

– The requirement is clarity.

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Late Placement Guidance – Principles 7-8

7. Brokers will ensure that they keep clients informed of the progress of the placement until completion.

• Need to be clear what coverage is in place.

8. In order to allow monitoring of the occurrence of late orders and incomplete placements, brokers and insurers should maintain key data regarding these placements, at individual contract level.

• Need to understand their occurrence, and take action to reduce it.

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Late Placement Guidance – Key Points

In a covering letter, Dane Douetil (MRG-Chair) stressed that:

1. Where instances of late orders & incomplete placements do occur they should be progressed to completion as rapidly as possible.

2. It will be important for each organisation to monitor their occurrence, so that action can be taken to reduce it.

3. The MRG have reconfirmed their view that the practice of post-inception over-placing should cease. Market organisations are asked to take the necessary steps to achieve this.

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Late Placement Guidance – Action Required

• Communicate to all affected staff.

• Implement process changes (where necessary):

– Keep process timescales for late placements to a minimum.

– Check submissions before committing to the contract.

– Brokers – notify signed lines within 30 days of completion.

– Issue evidence of cover within 30 days of completion.

– Brokers - advise clients of placement progress.

– Discontinue post-inception over-placing.

• Implement measurement changes

– Need to achieve CC. If so, treat as CC pass

– Keep separate statistics (CC pass/fail, on-time/late)

• Implement action-plan to reduce their occurrence

– Communicate with clients

Market ReformProgramme Office

Model Signing Provisions

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Model Signing Provisions - Background

• Model signing provisions are needed to help market organisations implement the signing principles.

– Submission should clearly state the calculation method for signed lines.

– Obtain client instructions before inception, wherever possible.

– Post-inception changes to be agreed by all parties.

• Signing Provisions should meet the above principles & provide certainty of signed lines at inception.

• There will be two versions:

– Without disproportionate signing;

– With allowance for disproportionate signing before inception at the election of the (re)insured.

• The broker will select the appropriate version based on client needs.

• As for other slip clauses, (re)insurers may accept/amend.

• “Line to Stand” or equivalent is clear. Other signing instructions may be ambiguous.

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DRAFTModel Signing Provisions – Without Disproportionate Signing

In the event that the written lines hereon exceed 100% of the order, any lines written “To Stand” or equivalent will be allocated in full and all other lines will be signed down proportionately to complete the balance of the order without further agreement of any of the (re)insurers.

The basis is lines “To Stand” then proportional.

However:

a) In the event that the placement is not completed by the inception date then all lines written by inception date will be signed in full. Lines will be certain at inception.

b) If the lines written and accepted by (re)insurers “To Stand” or equivalent exceed 100% of the order then a proportional signing between all (re)insurers will apply. Caters for reduced orders.

c) The signed lines resulting from the application of the above provisions can be varied, before or after inception date, by the documented agreement of the (re)insured and all (re)insurers whose lines are affected by the variation. Such a variation will take effect only when all affected (re)insurers have agreed. Allows for variation, by agreement.

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DRAFTModel Signing Provisions – With Disproportionate Signing

In the event that the written lines hereon exceed 100% of the order, any lines written “To Stand” or equivalent will be allocated in full and all other lines will be signed down proportionately to complete the balance of the order without further agreement of any of the (re)insurers.

However:

a) In the event that the placement is not completed by the inception date then all lines written by inception date will be signed in full.

b) If the lines written and accepted by (re)insurers “To Stand” or equivalent exceed 100% of the order than a proportional signing between all (re)insurers will apply.

c) The (re)insured may elect for the disproportionate signing of (re)insurers, without further specific agreement of those (re)insurers, providing that any variation of (re)insurer lines is made prior to the inception date, and that lines written “To Stand” or equivalent may not be varied without the documented agreement of the affected (re)insurers. Allows for disproportionate signing prior to inception date.

d) The signed lines resulting from the application of the above provisions can be varied, before or after inception date, by the documented agreement of the (re)insured and all (re)insurers whose lines are affected by the variation. Such a variation will take effect only when all affected (re)insurers have agreed.

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Model Signing Provisions – MRG/MRPO Next Steps

• Draft clauses are being reviewed by a QC

• Insurer Signing Instructions:

– E.g. “20% to sign 8%”, “20% to sign with a minimum of 8%”

– Can be ambiguous & hence lead to uncertainty.

– Used in some market areas.

– MRG would prefer to avoid, if possible.

– Associations consulting on usage/requirements.

• Will review findings at MRG

• Then publish finalised clauses

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Model Signing Provisions – Action Required

• Broker - review current usage of signing provisions.

• Insurer - review current usage of signing instructions.

• Communicate model provisions to all affected staff (when finalised).

• Implement process changes:

– Adopt model signing provisions.

– Avoid use of bespoke variations.

– Avoid, or clarify, use of insurer signing instructions.

• Implement measurement changes

– Reflect certainty of signed lines in statistics.

Market ReformProgramme Office

Legacy Code of Practice

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Legacy Policies

Background

• Initially not seen as the main priority by some in the market

• MRG with encouragement from the FSA, wanted to see if there was any value in some central activity

• Instigated a study to find out more

– Questionnaire

– Consultation with a small number of Brokers and Underwriters

– Categorisation of Legacy into priority

• Formation of Legacy Policy Group

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Legacy Policies

• Legacy Policy Group

– Confirmed and refined the priorities for categorising legacy issue

– Refined into Code of Practice

• Code of Practice

– Agreed by MRG and associations

– Agreed by non-London practitioners group, including ABI, BIBA and IIB

– Published on 17 February 2006 with full UK Insurance Market branding

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Legacy Policies

• Milestones

• Q1 2006 Publish Legacy Code of Practice (17 February 2006)

• Q1 2006 Market asked to adopt Legacy Code of Practice

• Q1 2006 Proposed framework for Legacy reduction

• Q2 2006 Market implementation underway

• Q3 2006 Substantial progress expected

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Legacy Policies

• Code of Practice

• Priority 1 - Definition

– Business incepting on or after 01/01/05 and any unexpired policies as at 01/01/2005 (current work in progress)

• Priority 2 - Definition

– 2004 expired short tail and long tail which expired prior to 2005 (priority legacy policies)

• Priority 3 - Definition

– Expired 2003 and previous short tail (other legacy items)

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Legacy Policies

• Guidance - General

– G1 - Priority should always be given to meeting a client request for evidence of cover – This is key

– G2 - It is for each insurer and broker to determine its own legacy statistics, drawing on a variety of data sources including the bureau records where relevant – “Sizing the problem”

– G3 - The broker should determine the requirements of its client for any legacy that is no longer planned for preparation and issuance of appropriate evidence of cover – “Ask the client”

– G4 -In absence of any instructions to the contrary brokers should commit to issuing any insurer-approved evidence of cover to its clients – “It doesn’t sit in a drawer!”

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Legacy Policies

• Priority 1 - Definition

– Business incepting on or after 01/01/05 and any unexpired policies as at 01/01/2005 (current work in progress);

– The highest priority is to stop adding to the legacy backlog – Comply with the C/C Code of Practice

• Priority 2 - Definition

– 2004 expired short tail and long tail which expired prior to 2005 (priority legacy policies);

– A decision not to produce an appropriate evidence of cover is the responsibility of the insurer rather than the broker – So the insurer runs the process

– Insurers should assess, among other things, both the intrinsic risk of the contract and the quantum of cover in agreeing priorities for resolution – and makes the risk decision

– Particular attention should be paid to any unresolved claims or disputes, and the options for addressing those situations – Reflecting these facts

… continued overleaf

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Legacy Policies

• Priority 2 – (Continued)

– Having made these assessments, insurers should agree guidelines with each broker in respect of the characteristics of legacy policies which are not to be issued – Need not be on a case by case basis

– Accordingly following insurers are encouraged in this respect to review and seek to accept the guidelines adopted by the leader – The leader should normally run the process

– Legacy policies should be issued where required, even where the underlying slip is of high quality – Client wishes are paramount

• Priority 3 - Definition

– Expired 2003 and previous short tail (other legacy items).

– All the above principles remain relevant.

– As a general principle priority three policies need not be produced.

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Legacy Policies – Action Required

• Next Steps

– Adopt the code of practice

– Give thought to how your Legacy project can be resourced

– Further guidance and process to implement Code of Practice

– Measuring success – Lloyd’s process already working; See Legacy Policy Reports

Market ReformProgramme Office

Questionsand Close

Market ReformProgramme Office

Contract Certainty Update

March 2006

CCPB Members: Dick Roberson, Martin Roberts, Simon Williams

MRPO: John Harvie, Steve Hulm