FSA Insurance Head Reasserts Commitment to Contract Certainty

David Strachan, The U.K.’s Financial Services Authority’s Insurance Sector Leader, in a speech to the Insurance Institute of London, reiterated the FSA’s commitment “to finding an end to the practice that has come to be known as ‘deal now, detail later’ in the insurance market.” The regulator wants the terms of an insurance contract to be established when coverage is agreed, not at a later date.

He acknowledged that “from our recent discussions with senior market participants” that for the most part they are also interested in implementing the needed changes. Strachan recognized, however, that “achieving this end is not as simple as changing the odd process here and there or making lots of noise in speeches and articles.”

The London market has a little less than a year to adopt the changes the FSA wants. They must be in place by the end of 2006. “If all goes to plan, in January 2007, policyholders will know exactly what protection they have bought; brokers will reduce the legal, fiduciary and operational risks which they are running; and underwriters will have a clearer view of their underwriting exposure, for both full and ‘subscribed to’ risks,” Strachan continued. “There will be greater certainty at inception of the contract with full policy documentation provided promptly thereafter: the deal now with detail now. Reaching this golden moment can only bring benefits to all in the insurance chain. And it is for this reason that our focus has been on buyers, brokers and insurers, operating in both the subscription market and the non subscription market.”

After reviewing the current state of the market, and setting out the areas where the FSA sees the need for changes, Strachan acknowledged that while “we remain reluctant to introduce new requirements. New regulations are not our preferred outcome. A market solution is. However, if the market does not meet our challenge, we will introduce new requirements.”

So far most of Strachan’s remarks could be considered ” the carrot;” then came the stick, as he stated: “As part of our contingency planning for what we hope is the remote possibility that the market will fail to meet our challenge, we are working up our high level options which would apply to insurers and brokers. Although it is too early for us to make a decision now, and our ideal position is not to introduce new rules, we are having to think very carefully about how any rules and requirements would work and our legal and policy colleagues at the FSA are considering how best to achieve this.”

He softened the threat a bit by indicating that “any new requirements would be designed to support the market’s solution – recognizing those firms which are making real progress and incentivizing those which are not. Naturally, any new requirements would be subject to further detailed cost benefit analysis.”

However, the FSA certainly has a back-up plan if the market fails to act. In what he called a “brief overview of our early thoughts – not so much to act as a stick but rather a carrot to encourage continued progress in the important months ahead, he outlined the FSA’s “regulatory options.” He said they were designed to “reinforce Market Codes rather than replace the work done by the market – and, in line with the market approach, would be designed to target all parties in the chain.”

Those options include:
— restrictions on commission drawdowns for brokers;
— additional capital charges for brokers;
— operational and other risk charges under our ICAS regime for insurers; and
— amendments to ICOB and SYSC to refer to contract certainty.

In a not so veiled threat he warned: “We are also looking at raising the awareness of the importance of this issue on the part of insureds, where they are UK-listed companies and therefore subject to our regime.” He added: “Of course, we have the ability to make targeted use of our existing regulatory tools for firms which continue to lag behind on progress.” No one would want to be on such a “blacklist.”

In conclusion Strachan noted: “We still see much ‘finger-pointing’ between insurers, brokers and clients as to who prevents contract certainty from happening – we expect all parties to work together to meet our challenge – to use the words of the market: ‘this is a tripartite responsibility’. Bearing in mind that a lack of cultural change was a key reason for previous initiatives failing – we continue to see this as a key risk and hope that it won’t materialize. But only you can prevent that from happening. Only you can deliver the solution to contract certainty. Only you can ensure that the UK market is one which remains competitive and is attractive to its customers, wherever they are, because they get the detail with the deal, not later.”

The full text of Strachan’s speech as well as other pertinent regulatory information can be obtained on the FSA’s Website at: http://www.fsa.gov.uk.