Citing Insurers' Progress, U.K. Regulator Backs Off Threat of Contract Certainty Rules

By David Pilla
March 22, 2006

LONDON (BestWire) - The United Kingdom's insurance regulator put on hold its proposal to implement contract certainty rules, temporarily freezing a dispute with industry representatives over whether such rules are necessary.

The decision by the Financial Services Authority was announced at an FSA-sponsored conference on insurance in a speech by the agency's chief executive officer, John Tiner. Acknowledging the industry had made progress in working toward contract certainty since the FSA first challenged insurers to end the "deal now, detail later" approach to contracts in 2004, Tiner said the FSA is willing to back off for now, after having received "data from the market showing that it had exceeded its own targets for achieving improvements" in contract certainty by the end of 2005.

"To demonstrate our good faith in the market's ability to reach its goal, we will not be pressing ahead with our work on the contingency plan of regulatory intervention," Tiner said. "We are putting it on the back burner, although we are not taking it off the stove altogether."

Tiner said he would "strongly caution against complacency in these next few crucial months," as the FSA continues to assess the industry's progress beginning with the next quarter.

U.K. trade groups representing London market insurers, which had been skirmishing with the FSA over whether contract certainty is a regulatory matter or one for the market to handle, hailed Tiner's announcement as sensible.

"Contract certainty is a commercial imperative," said Dave Matcham, CEO of the International Underwriters Association. "London is leading the way and we welcome regulatory intervention being placed on the back burner. You can be sure that for us, it is on the front burner. It is embedded, ahead of schedule, and we have exceeded the FSA's expectations."

Matcham also spoke at the FSA conference. In his speech, he said the industry gave itself an interim target of achieving contract certainty for 30% of all insurance contracts by the end of 2005, and 60% by June 2006. "In fact, we achieved 65% by last December; in other words, more than double our target," he said at the conference. "So far, so good. But we still have a long way to go to achieve our target of 85%."

"The FSA has always said it prefers a market solution and we have welcomed their support for our long standing commitment to contract certainty," said Simon Sperryn, CEO of Lloyds Market Association. "We have shown we can deliver and FSA is right to support our efforts."

Tiner had first challenged U.K. insurers on contract certainty in a speech delivered in New York at the end of 2004 (BestWire, Dec. 15, 2004). At that time, he defined contract certainty as "greater certainty at inception of the contract, with full policy documentation promptly thereafter."

"We want to see the end of a practice which is 'deal now, detail later.' The lack of contract certainty creates risks for the policyholder as well as the insurer and the brokers," Tiner said.

Last fall the Market Reform Group, which had been created by the industry to work on contract certainty, sent to members a code of practice and a checklist designed to help insurers meet the industry's goals (BestWire, Oct. 18, 2005).

The urgency of the FSA's approach to contract certainty in the London market was fed by the fallout following the destruction of the World Trade Center on Sept. 11, 2001. The speed of London's subscription market had allowed coverage to be put in place before the terms had been settled completely, leading to legal battles about what actually had been covered.

In the United States, contract certainty was at the center of two high-profile civil trials between the World Trade Center's insurers and leaseholder Larry Silverstein. The question over whether the destruction of the twin towers in the Sept. 11 catastrophe was one event or two for insurance purposes was clouded by the lack of final contracts between Silverstein's company and the insurers.

Silverstein lost in the first civil trial against one group of insurers, but he won the second against a different group. Both decisions are being appealed.

The FSA and the London market since had agreed that a continuing lack of contract certainty would threaten London's leading position in the international insurance market.

Source: Financial Times Information Limited.
Copyright 2006 A. M. Best Company.

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