Market Reform Forum 29th September 2005 Andy Brookes Market Reform Programme Office

Market Reform Forum 29 September Objective: up to speed in forty minutes…… Contract Certainty CC guidance to be published early October -Checklist -Code of Practice -Guidance on how to fulfil Code Back office electronic infrastructure Accounting and Settlement Electronic Claims Files

Market Reform Forum 29 September Why do this? The challenge In London sufficient talent (underwriting, broking,advisory) meets sufficient capital to create a market But business is mobile and….. cost of business process is too high operational risk is too high -lack of audit trail, lack of proper/timely documentation London does not meet increasing regulatory standards -Spitzer – transparency; Tiner – certainty So, London (including Lloyds) must improve its processes to Reduce cost Reduce risk Increase transparency

Market Reform Forum 29 September The aims of market reform Londons competitive position Includes defending market share in traditional markets and promoting growth in new markets Contract Certainty - Clarity of contract, leading to certainty of coverage, fewer disputes, less time wasted, a reduction in legal bills and improvements in downstream processing. Process Efficiency - Efficient capturing, storing and reuse of data, reduced error rates, and quicker premium payment processes. Lower costs. Service to the client - To adopt processes that speed up the agreement of the contracts, the issuance of documentation and the subsequent agreement of claims. Global standards - To facilitate adherence to (or creation of) accepted internationally standards for accounting, message/business flows, and technology.

Market Reform Forum 29 September Principles underpinning reform Reduce Londonisms: international firms must buy-in – governance role Change requires authority and a degree of neutrality: individual firms cannot do it alone; Lloyds and the Associations will lead Commitment to co-operate essential, on design and implementation Network effects: a convoy for implementation Cost / benefit case is rarely convincing on its own. FSA Transparency

Market Reform Forum 29 September Vision for market processes Exchange of data and progress of transaction is captured in collaborative electronic systems Placing process built into electronic system Placing data to international standards Standard slip generated by electronic system. Ditto, the policy. slip/policy distinction blurs Policy based on model wordings; changes tracked and audited electronically. Or auditable bespoke wording created. Checking in real time Placing systems retain the data and audit trail Claims: international standard messages for data and claims management. Repositories for simultaneous access Accounting and settlement: ditto

Market Reform Forum 29 September Approach To support each stage in the life cycle of a contract: simplified, harmonised business process standardised data structured electronic messages community infrastructure platforms - minimise interfacing costs and enforce discipline Why? Drive changes – including behaviour - within firms. Hence reduce risk reduce cost make process transparent to market users so that they can measure and manage

Market Reform Forum 29 September Contract certainty: the FSA challenge Tiners speech: end to deal now, detail later End 2006 deadline Lit the already smouldering platform -Commercial imperative was hot anyway Answering the FSA requires: Clear plan pulling together components Measurable progress against that plan Each firm to take responsibility

Market Reform Forum 29 September Contract certainty: meeting FSA challenge Key targets agreed with the FSA LMP slips CC attributes – GCSE -95% June % December % March 2006 Achieve contract certainty for -30% of business end % mid % end 2006 Evidence of cover issued by broker -Faster, within 30 days -Better, more detail including full wording

Market Reform Forum 29 September Assessing LMP slips against a standard set of criteria is A sound way of assessing the quality of contract certainty

Market Reform Forum 29 September Contract certainty: Quality Source: MPRO, as at 31 August 2005 Contract certainty attributes of LMP slip

Market Reform Forum 29 September LMP Slips – wider and deeper CC score for open market: August 96%, up from 95% in July Steadily rising 97% target for December Full compliant slips up to 42% -must be at least 75% by March Continue to check 25% of Lloyds slips in And IUA slips rising LMP Slip 2005 published in April Extending to lineslips LMP standard for lineslips published in June 1 October mandate for Lloyds market

Market Reform Forum 29 September Contract certainty: the definition Agreed definition -Contract certainty is achieved by the complete and final agreement of all terms (including signed down lines) between the insured and insurers before inception. And -Full wording must be agreed before any underwriter formally commits to the contract Key to hitting the CC targets -30% of business end % mid % end 2006

Market Reform Forum 29 September Contract certainty: what must firms do? Apply the Code of Practice and accompanying Guidance Improve checking pre-bind Follow the Checklist; build it into routine processes For Lloyds business, use quality assurance tool Measurement: managerial magic wand will not satisfy the FSA Must be able to demonstrate achievement of CC LMP slip targets; sample of slips for LMP slip audit checking Wordings presentation Either referenced or fully worded - brokers call Underwriter response Note: Across all business lines – brokers lead Sponsorship, project manager in place? What does your project look like? Training? Incentives?

Market Reform Forum 29 September Resources for firms and service providers Centrally collected data: LMP slip audit and XIS sourced data CII training courses: LMP stamp of approval Lloyds QA tool on Prudential Practice Requirements Equivalent for companies and IUA bureau business Early October publication Two page CC checklist -Is this risk contract certain? Code of Practice with principles Guidance on how to fulfil the CoP. Some examples: -Signed lines -Underwriter subjectivities Kinnect

Market Reform Forum 29 September Another means of assessing the quality of contract certainty today is the Bureaus rejection rate of policy/wordings submissions

Market Reform Forum 29 September Contract certainty: Quality Source: XIS, excludes slip policies and time on risk policies XIS rejection rate of stage 2 checks

Market Reform Forum 29 September Stage 2 Checking by Lloyds managing agents Includes slip checks as well as checks to secure Lloyds licences and permissions Set out as work lists, via the Lloyd s QA tool on Lloyds website Aim is de-mystification Feedback please Next stage is detailed error reports – like the slip reports – so you get targeted feedback Why? To help firms get it right first time – echoes of the slip story Shift from post placing checks to pre placing checks Use XIS to pre-check complex risks (the checks are not usually complex) Franchisor samples quality post placing Important for brokers that quote process isnt slowed down

Market Reform Forum 29 September Contract Certainty Checklist Pre-Inception Requirements Full wording and all clauses are clearly specified and agreed before any insurer formally commits to the contract. Contract certainty attributes are satisfied; together with any internal quality requirements (e.g. for Lloyds insurers, the contract certainty aspects of the Prudential Practice Requirements). Subjectivities are stated clearly as conditions of the contract, with responsibilities and timescales for resolution, and the consequences of failure clearly specified. All terms are agreed between the insured and insurers before inception. Signed lines are calculated by the broker before inception.

Market Reform Forum 29 September Contract Certainty Checklist Post-Placement Requirements Signed lines are available to all insurers at inception, on request. Signed lines are notified to all insurers within 30 days of inception. Appropriate evidence of cover, including security, is to be provided within 30 days of inception.

Market Reform Forum 29 September Contract Certainty Checklist Contract Certainty Attribute Guide as to whether attribute met Is the submission clear and unambiguous? Are the wording and all clauses attached /referenced in the submission? Are all provisions relevant to the risk, or its administration? Are any stamp conditions applied by an insurer relevant to the risk and expressed in full? Are any stamp conditions applied by an insurer relevant to the administration and expressed in full? Can it be confirmed that there are no TBAs or other terms that are ambiguous? Where a wording is dependant on another wording (for example, as expiring or as original), is the latter either attached or clearly identified?

Market Reform Forum 29 September Contract Certainty Checklist Is law and jurisdiction and arbitration clearly referenced and complete? Are the choice of law, arbitration (where applicable), and jurisdiction (where applicable) present and completed correctly?' Where a Service of Suit or similar clause is referenced on the submission, is the nominee also referenced?

Market Reform Forum 29 September Contract Certainty Checklist Are all terms clear and unambiguous? Is the insured or reinsured clearly stated? Is the period or voyage correctly completed? Are the sum insured or limits present? Is the several liability notice included? Is the premium or rate clearly expressed? Are any payment terms clearly identified? Is the brokerage clearly expressed? Are other deductions from premium clearly expressed? Are all currencies referenced e.g. via use of three letter ISO currency codes? Are taxes payable by the insured and administered by the insurer clearly stated? Are taxes payable by the insurer clearly stated? If any signing provisions are present, are the provisions clearly stated?

Market Reform Forum 29 September Contract Certainty Checklist Are all duties clearly allocated, including processing of claims and contract changes, and document production? Are all broker/insurer arrangements and agreements clearly stated in the submission? Is the leader clearly identified? Are details of any other parties to the agreement clearly identified? Is the basis of agreement to contract changes clearly identified? Does the submission state who will produce and who will agree the policy? Are the claims agreement parties clearly identified? Is the basis of claims agreement clearly identified? Is claims administration specified correctly? Are the rules and extent of any other delegated claims authority specified correctly? Are arrangements for collection of expert fees clearly stated?

Market Reform Forum 29 September Contract Certainty Checklist Is any supporting information clearly referenced? Does the contract include details of any information provided to underwriters to support the assessment of the risk at the time of placement?

Market Reform Forum 29 September Contract Certainty Checklist Is the submission compliant with regulatory requirements? Have all regulatory issues that affect the contract, or certainty of the contract, been addressed (e.g. avoiding use of clauses which breach local regulations)?

Market Reform Forum 29 September Code of Practice Principle 1 Brokers will provide submissions that satisfy the contract certainty definition and checklist to obtain firm quotes and place firm orders.

Market Reform Forum 29 September Code of Practice Principle 2 Each insurer will be satisfied that the submission meets the contract certainty definition and checklist before formally committing to the contract, ensuring that any conditions or subjectivities are clearly expressed.

Market Reform Forum 29 September Code of Practice Principle 3 Brokers will notify all terms to their client and obtain their clients agreement before inception.

Market Reform Forum 29 September Code of Practice Principle 4 Brokers will calculate signed lines by inception and notify them to each insurer no later than 30 days after inception date, or by inception date on request.

Market Reform Forum 29 September Principle 5 Brokers and insurers will not take part in post- inception over-placing. Code of Practice

Market Reform Forum 29 September Principle 6 Brokers and insurers will ensure that post-inception amendments are documented and agreed as endorsements. Code of Practice

Market Reform Forum 29 September Code of Practice Principle 7 Brokers and insurers will each collect and maintain data on their contract certainty performance at individual contract level.

Market Reform Forum 29 September Code of Practice Principle 8 Brokers and insurers will ensure that an appropriate evidence of cover including security, is issued within 30 days of inception

Market Reform Forum 29 September Guidance: spelling out the principles Signed lines Ambition: Calculation method to be explicit on the slip, that allows the insurer to determine how their line will be calculated (but subject to client wishes) Brokers to calculate signed lines at or immediately after inception Available to carrier at inception: By writing line to stand; or, asking broker Broker will routinely provide to carriers within 30 days (normally via de-linked closings) Carriers using the bureau may need change their systems to receive this information. Brokers and insurers commit to no post-inception over-placing MRG

Market Reform Forum 29 September Guidance: spelling out the principles Underwriter subjectivities Issues may remain outstanding after inception, e.g. subject to survey They should be put within the placing document If the subjectivity has been resolved prior to inception then it need not be in the finalised contract Where the subjectivity is outstanding at inception then it should be included within the contract as a condition - which affects the scope/terms of coverage The responsibilities and timescales for resolution, and the consequences of failure, must also be clearly specified Analysis is required to identify types of subjectivity & how to apply the above principles MRG

Market Reform Forum 29 September Kinnect Kinnect has handled more than 600 risks across North American Property and Terrorism, representing over 2,000 signed lines and $900 million in premiums. 19 customers live on platform including 8 out of top ten managing agents Next release due in Q Improved risk class delivery, including generic (data light) template Two way data transfer with underwriter response ITT for future supplier and review of platform development requirements at final stages.

Market Reform Forum 29 September Contract certainty: Market Game Plan MRG endorsed the following, for implementation by end 2006: Agree insuring clauses via a fully claused [1] LMP slip or LMP policy (which also meets LMP Standards) before inception Define process measurements and quality standards Understand standards and apply them Raise standard through independent QA Play back errors and publish league tables [1] by reference or all wordings spelt out

Market Reform Forum 29 September Contract certainty: the programme Key projects Achieve CC during bind: agree wordings; get checking done -30% of business end 2005; 85% end 2006 LMP slips CC attributes -95% June 2005; 97% December 2005; 99% March 2006 Evidence of cover – within 30 days Supporting projects Policy checking by Xchanging Model wording Legacy (not strictly CC, but close cousin) Kinnect/placement systems -Consistent with all this, but reduce compliance cost

Market Reform Forum 29 September Contract certainty: market progress MRG agreement on definition Measurement: a good thing, so expect more of it. Governance sorted Reporting to FSA regularly Not dissatisfied…. All firms have received CC briefing and Nick P letter 242 out of 255 firms registered with Programme Office Training material in pipeline, with CII

Market Reform Forum 29 September Contract certainty: MRG June letter Definition: Contract certainty is achieved by the complete and final agreement of all terms (including signed down lines) between the insured and insurers before inception. And Full wording must be agreed before any underwriter formally commits to the contract

Market Reform Forum 29 September Contract certainty: implications Use of model wording must rise Investigating how to achieve this Wordings can change after leader scratch Changes must be documented Granular standards (= QA tool for Lloyds) Each broker and U/W to ensure achieved Checks before inception wherever possible

Market Reform Forum 29 September Contract certainty: issues to nail Signed lines: how calculated? how communicated? Checking within CC Early checks for some? How will wordings be presented to U/Ws? Either referenced or fully worded - brokers call Up to underwriters to express preferences Across all business lines i.e. not targeted – brokers call Renewal peaks CC checks by XIS (U/W and brokers?) Policy production Contract Certainty Project Board on the case Will guidance at end September

Market Reform Forum 29 September Contract certainty: end-September Measurement and targets Checking within CC Early checks for some? How will wordings be presented to U/Ws? Either referenced or fully worded - brokers call Up to underwriters to express preferences Across all business lines ie not targeted – brokers call Renewal peaks CC checks by XIS (U/W and brokers?) Policy production Contract Certainty Project Board on the case Will guidance at end September

Market Reform Forum 29 September CC: end-September publication Clarification of practical implications of CC definition for FSA Measurement and targets -FSA agreed targets - 30%, 85% targets CC -LMP slip: 26 attributes for targets (95%; 99%); more attributes to come -Role of LMP slip audit and XIS checking: raising quality after the event to improve next time Process diagrams with explanation Guidance on issues How will wordings be presented to U/Ws? -Either referenced or fully worded - brokers call -Up to underwriters to express preferences -Across all business lines i.e. not targeted – brokers call Signed lines; stamp conditions; underwriter subjectivities; challenges to CC

Market Reform Forum 29 September Contract certainty: checking Policy checking Xchanging: Lloyds Prudential Practice Requirements Binders -Two binder rejection reports for Q1 05 issued to poorer performing firms (12 Lloyds; 12 brokers) -Q2 report in this month Open market – similar approach to binders -Rejection reports for Q Q Q2 report end this month -Better stats in Q QA tool for both binders and open market

Market Reform Forum 29 September Quality Assurance Tool Provides details of checks for market use that will ensure contracts reach the standard required by Lloyds Aims to minimise or eliminate queries raised by XIS during the signing process Aims to eliminate second submissions and achieve a right first time approach to contract certainty QA tool now caters for both Binding Authority Contracts and Open Market Business Do use and feedback

Market Reform Forum 29 September QA Tool – Currently Available Bahamas Binding Authority Contract Checks Non-Marine Personal Accident Open Market Checks

Market Reform Forum 29 September XIS policy rejections Source: XIS, excludes slip policies and time on risk policies XIS rejection rate of stage 2 checks

Market Reform Forum 29 September XIS binder rejection data - QA checks BA QA Tool referencePercentage of QA checks failed General % Contract % Endorsement % General % General % General % Contract % Contract % Endorsement % Contract %

Market Reform Forum 29 September BA QA Tool check General Ensure that the LMP slip schedule details have been completed clearly and completely, eg there are no missing details, incomplete or unclear statements, vague expressions or ambiguities between terms and conditions.

Market Reform Forum 29 September Legacy MRG agreed cross-market priority rules Rules on the LMP website Road testing new Unsigned Policy List in accord with new rules New stats using priority rules Reports on legacy numbers for big firms Should there be market focussed effort in particular cob? Is it worth it? Is it doable? Working Group suggest not

Market Reform Forum 29 September Legacy policy data Year of AccountAutumn 2004Spring 2005 Per cent increase/ decrease 1993 – ,60098,3314% ,63720,0462% ,72020,6310% ,05222,890-5% ,10524,516-13% ,70229,37914% Total212,816215,7731% Stage I signing Stage II signing

Market Reform Forum 29 September Legacy policy data by priority Year of account Priority 1Priority 2Priority 3Total ,1729,75611, ,1677,7029, ,15811,17814, ,60510,08012, ,93611,79214, ,20813,04716, ,05514,38918, ,95216,02120, ,48016,04220, ,67617,02222, ,73418,26624, ,63917,740029,379 Total12,59557,883145,295215,773 Stage I signing Stage II signing

Market Reform Forum 29 September Legacy priorities Priority 1 From 2005 and current long tail and short tail (current work in progress) Priority expired short tail and pre 2005 long tail (priority legacy items) Priority and previous short tail (other legacy items).

Market Reform Forum 29 September Kinnect – July slide Take up of 1 June release functionality for August incepting risks continues North American Property going well -Slips now being created -First sign down and completion to be this week Terrorism to start in August 17 customers live on platform and three in implementation Beginning to engage with International Property markets Next release due in two drops Q1 and Q2 06 Improved risk class delivery, including generic (data light) template Two way data transfer with underwriter response International Property delayed to Q1 (from Q4) to fit with this ITT for future supplier and review of platform development requirements

Market Reform Forum 29 September Kinnect Take up of 1 June release functionality for August incepting risks continues North American Property going well -Slips now being created -Signing down and completions taking place Terrorism starting in August 17 customers live on platform and three in implementation Next release due in two drops Q1 and Q2 06 Improved risk class delivery, including generic (data light) template Two way data transfer with underwriter response International Property delayed to Q1 (from Q4) to fit with this ITT for future supplier and review of platform development requirements

Market Reform Forum 29 September Contract certainty: each firm Dont wait for end-Sept guidance LMP slip CC attributes score June result? Will you hit 97% in December? And 99% in March 06? Process to improve? CC on risks How will your firm achieve 30% of risks by end year? Full wording or references? For brokers – focus on particular lines of business? But quality matters, not just volume - build in QA checks Sponsorship, project manager done. Whats the project look like? Training? Incentives? Management information and measuring CC How will you know you have done it?

Market Reform Forum 29 September End Game Fully-claused placing document (using LMP Slip and policy) Increased use of model wordings and clauses (as basis for negotiation) Wording/technical staff involved in placing process Early agreement and checking of the slip/draft policy by all parties and the back office QA function Interaction, wordings, risk details, negotiation undertaken partly through, and all logged in, Kinnect – the single version of the truth Early delivery of evidence of coverage for the client – ideally before inception but within 30 days of inception – from Kinnect, so no transcription risk Binder placings evidenced by issuance of approved certificates

Market Reform Forum 29 September Accounting & Settlement MRG and Project Board review. Result: Measurement of process -Like other checks Looking at a light step 1 -Scanned LPAN and slips into repository Reviewing how to achieve end vision -more efficient and flexible accounting and settlement processes achieved through the use of standard electronic messages in place of both paper and bespoke London messages

Market Reform Forum 29 September Electronic Claims File - August XIS development work Phase 1 – Now live Phase 2 - Now live Overall business process spec signed-off later than planned -Better end outcome for practitioners; but pressure on timelines in Q1 06 DRI functionality issues; LMA, LMBC and Claims Infrastructure Project Board managing Implementation 11 partnerships operational (from 6 in May) Relatively low volumes (140 first advices) -testing out electronic infrastructure 57 (and rising potential) partnerships identified Live issues Cross market procedures and practices

Market Reform Forum 29 September Electronic Claims File XIS development work Phase 1 – Now live Phase 2 - Now live Phase 3 – ACORD DRI (Subset) MAT Sept 2005 Phases 4.5/5.5 CLASS at Lloyds data through GUI/Seamless link Implementation 20 partnerships operational (from 6 in May, 11 in August) Relatively low volumes (257 first advices) -testing out electronic infrastructure and developing procedures Live issues Cross market procedures and practices draft issued

Market Reform Forum 29 September Market Reform Training LMP Training Group (LMPTG) established Cross market group - CII and other providers Ensure sufficient, relevant and accredited training Progress to date Contract certainty training plan being developed -Senior management, compliance, technical levels -These are the courses, you should have been on e.g. Placing broker – how to complete an LMP slip Claims and A&S plans to follow Review / Accreditation of current training providers – LMP stamp