Contract Certainty

On 24th January 2007 the FSA confirmed that the insurance industry had met the challenge to achieve a solution to contract certainty. There is an enormous sense of satisfaction in the industry that this challenge has been met, and we should be grateful for all the hard work that both the London Market Reform group and the non-London / non-subscription group have dedicated to this task.

Many hours have been spent capturing information, and analysing data to demonstrate how the provincial market has achieved a solution to contract certainty. The FSA's response reflects how keenly regional brokers have embraced the concept and woven contract certainty into their everyday practices. In my view, this further demonstrates the professionalism of insurance brokers.

Some have argued that contract certainty isn't worth all the effort, but I strongly disagree with this point of view. If only for the effects that it will have on our own professional indemnity insurance.

One of the main areas of concern for the FSA was the industry's old practice of 'deal now, details later'. This was one of the unique ways in which the insurance market operated in the UK. However, the culture of the industry needed to change. Our clients wouldn't buy a car without looking at it first, and nor should we expect them to purchase insurance cover without full knowledge of the details of their contract.

Contract certainty is beneficial to all parties. Brokers must know what terms have been negotiated with the insurance company so they can relay that information to their customers in accordance with the ICOB rules. That becomes particularly relevant if the insured party should claim that they did not know the full terms of their contract, or that the broker did not perform their role as instructed.

Essentially, customers expect policies to be clear, agreed up-front and issued in a timely way, and it is right and proper that we provide this service. This is certainly a challenge for many in the industry but it is our responsibility to ensure that customers are treated fairly.

Subjectivity conditions

Subjectivity conditions have also been a topic for debate. Subjectivities must take the form of clearly expressed terms, specifying the responsibilities and timescales for all parties, and the consequences of failure to complete them. These terms are agreed for a set period of time, which can range between 30 days and a year. Importantly, they have no impact on the initial period following inception of the contract.

Once the contract has been written and the terms set out, the insurer agrees that they will provide cover and that all parties will endeavour to complete their obligations within the preset time limit.

For example, if a theft survey is included in the subjectivity conditions, the insurer may choose to provide cover, but with an excess of ?5,000. If the insurer carries out the survey and finds that all is in order then the excess could be removed or reduced. However, if the insurer finds that the risk is not acceptable, they have the right, in accordance with the condition, to terminate the risk providing the client with a pro rata return. But be cautious here as the London market could cancel the contract ab initio for fundamental breaches.

Premiums, or premium warranties, are no different from the 'subjectivity conditions' above. The client has an obligation to pay the premium within the set time period. Therefore, if the client has agreed to the contract, we should seek to issue the evidence of cover which would contain the premium payment warranty. If the client defaults then the policy could be cancelled. This cancellation would affect the brokers' remuneration as the commission is linked to the premium. Therefore no premium - no commission. This is yet another reason for the need to ensure that the broker has terms of engagement with their clients.

Looking forward

Contract certainty will remain one of the FSA's supervisory priorities in 2007, and the FSA has asked the market to focus its efforts on reducing the number of contracts that do not meet contract certainty standards.

BIBA via the London Market Reform group and LMBC, and with the ABI in respect of the non-subscription market practitioners group, has agreed to meet to ensure the BIBA review progresses throughout 2007. The challenge is to attain 100% coverage. Our aim should be to reach at least 90% by the end of the 1st Quarter of 2007.

Embracing the culture of contract certainty has been important for the industry and has shown the benefits that can be provided by brokers. Most importantly for the future, it will help to underpin the fact that we treat our customers fairly.