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Contract Certainty

Market Reform Forum

21 April 2005

End the “deal now, detail later” culture

Iain Saville

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Contract Certainty Governance

Market Reform Group Executive (MRGE)

STRATEGY & DECISIONS

•Design•Buy-in across mkt•Manage resources•Define projects•Feasibility

LMA CEO, Lloyd’s COO, IUA CEO, LMBC CEO, franchisor

Contract Certainty Imp’n Group (CCIG)

•Oversight of implementations & issues

Major brokers, managing agents, companies, Xchanging, Project team

IMPLEMENTATION & MONITORING

DESIGN & CONTROL

London Market Standards Committee (LMSC)

•Oversight of benchmarking activity

Major brokers, managing agents, Project team

Market Reform Group (MRG)

•Approving strategy•Commitment•Setting priorities

Chairmen andreform

champions LMA, LMBC,IUA,

Lloyd’s

Contract Certainty Steering Group (CCSG)

Influences Reports to

Market & FSA

London subscription, retail/personal lines & AIRMIC

Recently strengthened by wider market involvement.

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Introduction

MRG agreed at last meeting

A London market wide project

Project disciplines

Delivering measured improvements

Against stretch targets

Using LMP slip as basis

Developed through the CCI process (or equivalent in electronic systems)

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Summary

Firms are individually responsible to FSA

And Their efforts need to be closely co-ordinated, in the subscription

environment, through LMP and MRG One definition of contract certainty One set of measures (which we need to develop) – but starting with

the slip One set of market wide targets Common philosophy for quality assurance (publish standards) One approach, through CCI, to wordings completeness Common umbrella for approach to FSA

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This means within 2 years the Market will processnearly all risks in the following manner

• Fully-claused placing document (using LMP Slip and policy)

• Use of model wordings and clauses, wherever possible (will increase over time)

• Wording/technical staff involved during placing process

• Early agreement and checking of the slip/draft policy by all parties and the bureau

• Early delivery by broker of an evidence of coverage for the client – ideally before inception but within 30 days of inception

• Binders will achieve contract certainty by issuance of an approved certificate

Thus achieving documented Contract Certainty

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Objectives: Step 1 – good slips

KEY ACTIONS FOR YOU

1. Drive up slip quality and coverage; and

2. Prove and implement CCI in order to Agree full wordings by bind Do QA during placing

To achieve contract certainty pre-inception – a fully claused, high quality slip

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Objectives: Step 2 – evidence of cover

Sustained high slip quality is the essential prerequisite for efficient and quick supply of evidence of cover to the client. So we have some time in hand – but not much.

Agree end game for how evidence of cover is produced and transmitted - by June

Implement thereafter .. Timing to be agreed by MRG

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Definition - summary

Contract certainty is achieved by the complete and final agreement of all terms[1] between the insured and insurers before inception.

[1] Including signed down lines

Note that this fits Step 1 – does not extend to evidence of cover

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Definition - detail

Nine attributes1. Wording

2. Law, Jurisdiction and arbitration

3. Commercial terms

4. Risk disclosures

5. One version of the truth

6. Compliance

7. Sound legal basis

8. Other (so far, this contains only comprehensibility)

9. Duties clearly allocated

Need to be disaggregated to be made measurable - please see grid for details

NB Adopted by the “other” CC group

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Definition – low priority items

We have put aside some important issues where measurement is hard, pro tem. E.g.

Wording – “Complete and consistent”

Risk disclosures – except as seen on slip

Sound legal basis – “fully agreed by client”

Comprehensibility

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Tools, Barriers and Levers

Tools are resources which help firms to improve certainty, or reduce the cost of achieving it – for present purposes, those which might require some central co-ordination

Barriers are the obstacles to be overcome

Levers are the mechanisms available to the market to overcome the barriers

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Tools

LMP slip development * (line slip standards) CCI process - see below * Training* Partnership with CII – train the trainer, and proactive design to anticipate needs PPRs * Enables Lloyd’s to drive standards and timeliness What is the non-bureau equivalent? Kinnect*, ri3k GUA* Threatened by outsourcing principles?

Model wordings(*) Only exist for binders? Repositories(*) Brokers’ and underwriters’ proprietary repositories – interoperability XIS repository(*)? LMA exploration underway MWD

Default wordings May not be credible except as unsatisfactory backstop Earlier submissions Hard to achieve, commercially Legal advice Especially important for law and jurisdiction – but better to spend up front,

than on litigation Model subscription agreement Credible?? PPS XIS policy preparation Note: Needs to be subject to same QA as other suppliers

* means a CC project (*) means a potential project

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Barriers and levers

Main barrier is attitudes on the floor Levers:

Enforcement by FSA (threat..) Lloyd’s mandate and Byelaws

Slip Measurement/benchmarking Error data from Checking Enforcement through systems

Top management – can use the above levers

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Measurement

We have measures for 26 of about 50 “sub-attributes”, through the slip audit programme. So we are doing the GCSE foundation level, not the “A” level.

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Measured performance

Contract Certainty Attributes

70%

75%

80%

85%

90%

95%

100%

Jan-Apr 2004(n=388)

May-Jul 2004(n=803)

Sep 2004(n=494)

Oct 2004(n=497)

Nov 2004(n=693)

Dec 2004(n=727)

Jan 2005(n=663)

Feb 2005(n=484)

Pe

rce

nta

ge

of

att

rib

ute

co

mp

on

en

ts

(qu

es

tio

ns

) c

om

ple

ted

co

rre

ctl

y

Wording#Q=2

LawJurArt#Q=1

ComTerms#Q=11

RiskDscl#Q=1

SndLegalBase#Q=1

DutiesClrAllo#Q=10

ContractCertainty#Q=26

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Setting slip targets

This is the easy bit – familiar territory, good achievement in last year.

Now at 91% - 9% shortfall 5% shortfall in June 3% by year end 1% shortfall on current basis in March 2006

We must get these basics right, quickly, to be have a chance of completing the job

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Completing the job - developing the slip

Adding items to the checks – from grid

Lineslip (and declaration) standards

Auditing slips led outside Lloyd’s

Issues:

Endorsements

Risks placed under binders – evidence of cover

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Completing the job - Bureau checking

(For Lloyd’s – but should raise standards everywhere)

In principle, picks up all slip checks and applies them to fully placed slip and policy – but after inception

Being codified and published (end June completion)

And measured, to improve standards and timeliness

1. This QA needs to be focused during placing, to get it right first time – one of the CCI deliverables

2. And we need to converge the LMP and XIS measures

Issue: equivalent standards and QA for non-bureau business?

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Contract certainty news

February LMP Slip BSA headline 91% (from 93%)

Continue to check 25% of Lloyd’s slips in 2005; and IUA company slips

Updated LMP slip guidelines published

LMP Lineslip to be issued shortly

Revised PPR’s for Binding Authorities issued

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Kinnect

5 new customers Functionality

Enhanced placing functionality June Slip creation through Kinnect June Endorsement functionality Oct.

Risk class expansion North American property Now Terrorism June International property Nov.

Further risk classes agreed for 2006 Financial plan (including tariff) well under way

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Completing the job - CCI

to agree wordings during placing; and

to incorporate XIS checking into the placing process, rather than leaving quality audit till after inception; and

to ensure the client receives evidence of coverage for the client within a “prompt” [1]timescale (as required by the FSA)

[1] As a working definition of “prompt” we have adopted within 30 days of inception.

Issue: Market resources

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CCI timelines

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Major next steps

Write to major firms for project structures (due by 7/5)

Co-ordinate their plans (especially for CCI) (31/5)

CCI proof of concept assessment (31/5)

CCI roll out (30/6 onwards)

Adopt line slips (by 31/5)

Proposal on converging measurement (31/5)

Paper on evidence of cover (31/5)

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CCI details

Initial Implementations Q1-Q2 2005; 300 risks across all classes.

Classes identified: Aviation; PI; D&O; FI; NA Property Fac R/I; Treaty; Binders; Marine

Performance Monitoring in parallel (broker spreadsheet returns) to monitor key dates achieved.

Brokers committed to participate within initial implementations: Aon, Benfield, Heath Lambert, JLT, Marsh, Miller, NCG, Willis

Now engaging with markets (43 IUA, LMA & non-IUA companies proposed) 11/43 carriers signed up (and 45 risks are in the market) 9/43 carriers pondering ….

More is needed!

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Contract Certainty