1. 1 Market Reform Forum 25 August 2005 Andy Brookes Mike Smith Market Reform Programme Office

2. 2 Objective: up to speed in twenty minutes…… Contract Certainty Public letter on CC CC guidance to be published end-September Progress on LMP slip, checking, Kinnect Back office electronic infrastructure Accounting and Settlement Electronic Claims Files – todays special topic

3. 3 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

4. 4 The aims of market reform 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. Service to the client Process Efficiency Efficient capturing, storing and reuse of data, reduced error rates, and quicker premium payment processes. Lower costs. To adopt processes that speed up the agreement of the contracts, the issuance of documentation and the subsequent agreement of claims. Londons competitive position Includes defending market share in traditional markets and promoting growth in new markets Global standards To facilitate adherence to (or creation of) accepted internationally standards for accounting, message/business flows, and technology.

5. 5 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

6. 6 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

7. 7 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

8. 8 Contract certainty: FSA challenge Tiners speech: end to deal now, detail later End 2006 deadline Lit the already smouldering platform Answering the FSA requires: -clear plan pulling together components -measurable progress against that plan -your participation

9. 9 Contract certainty: Market Game Plan 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 MRG endorsed the following, for implementation by end 2006:

10. 10 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

11. 11 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

12. 12 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 commits to the contract

13. 13 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

14. 14 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 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

15. 15 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

16. 16 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 ie not targeted – brokers call Signed lines; stamp conditions; underwriter subjectivities; challenges to CC

17. 17 LMP Slips – wider and deeper CC score for open market: June 94%, just below 95% target -Rising, but slowly - 92% in March, 93% in April….. -97% target for December CC score for binder LMP Slips: 95% June -Down from 97% in May Continue to check 25% of Lloyds slips in 2005. First IUA slips processed - companies getting first reports LMP Slip 2005 -published in April Extending to lineslips -LMP standard for lineslips published in June -1 October mandate for Lloyds market

18. 18 LMP Slip Quality

19. 19 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 Q2 2004- Q1 2005 -Q2 report end this month -Better stats in Q4 2005 QA tool for both binders and open market

20. 20 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

21. 21 QA Tool – Currently Available Bahamas Binding Authority Contract Checks New, Amende d or Deleted Level 5 - Foreign Legislation Checks Level 5 Ref. Categor y Description of Check - Level 5OwnerUltimate Responsibilit y NewBahamas BA Contract 5.001AEnsure that the contract contains provision for certificates to include a service of suit clause nominating a person resident in the Bahamas. Please check the Bahamas page of lloyds.com for the recommended service of suit nominee. WWMUnderwriter NewBahamas BA Contract 5.002Not checked by XIS Ensure that the contract contains provision for certificates to include a law and jurisdiction clause allowing the insured to enforce his rights against insurers under Bahamian law and in any competent court in Bahamas. WWMUnderwriter New, Amend ed or Deleted MarketLevel 4 - Class of business Level 4 Ref. Dir ect R/ICat.Description of check - level 4OwnerUltimate Responsib ility NewNon- Marine Personal Accident 4.001YYACheck that where the policy exceeds 4 years 364 days that underwriters have agreed the use of a cancellation clause and that this is contained in the policy. FPDUnderwriter Non-Marine Personal Accident Open Market Checks

22. 22 XIS policy rejections b – excludes Jan-04 The volume of binders is about 15% of the open market contracts

23. 23 Policy production: Quality XIS rejection data - XIS reasons b – excludes Jan-04 The volume of binders is about 15% of the open market contracts

24. 24 XIS binder rejection data - QA checks BA QA Tool referencePercentage of QA checks failed General 1.00221% Contract 2.0224% Endorsement 2.0094% General 1.0193% General 1.0073% General 1.0173% Contract 2.0053% Contract 2.0213% Endorsement 2.0082% Contract 2.0302%

25. 25 BA QA Tool check General 1.002 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.

26. 26 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

27. 27 Legacy policy data Stage I signing Stage II signing Year accountNumber of legacy policies as atPer cent increase / decease Autumn 2004Spring 2005 1993 - 199994,60098,3314% 200019,63720,0462% 200120,72020,6310% 200224,05222,890-5% 200328,10524,516-13% 200425,70229,37914% Total212,816215,7731%

28. 28 Legacy policy data by priority Stage I signing Stage II signing Year of account Priority 1Priority 2Priority 3Total 199312,1729,75611,929 199422,1677,7029,871 199533,15811,17814,339 199682,60510,08012,693 1997122,93611,79214,740 1998113,20813,04716,266 1999294,05514,38918,473 2000733,95216,02120,046 20011094,48016,04220,631 20021925,67617,02222,890 20035165,73418,26624,516 200411,63917,74029,379 Total12,59557,883145,295215,773

29. 29 Legacy priorities Priority 1 From 2005 and current long tail and short tail (current work in progress) Priority 2 2004 expired short tail and pre 2005 long tail (priority legacy items) Priority 3 2003 and previous short tail (other legacy items).

30. 30 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

31. 31 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

32. 32 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?

33. 33 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

34. 34 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

35. 35 Electronic Claims File 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

36. 36 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

37. 37 Market Reform Forum 25 August 2005 Andy Brookes Mike Smith Market Reform Programme Office