9/11 and its aftermath was a pivotal time for Lloyd's, for London, and for the insurance industry.
First, the market responded in a superbly resilient way, underwriting risk at a time when much of the industry was unable or unwilling to do so. That response is at the heart of the restoration of Lloyd's reputation worldwide.
It showed both the true risk taking nature of the market and the extent of the underlying management improvement across businesses in the market.
Second, the Silverstein case was an uncomfortable experience for the industry. It exposed a business process, and custom and practice, that left all concerned with a belief that we can and should not allow the industry to continue in the way that it has. Silverstein was eye catching because of the tragic context and the sheer scale of the numbers allowed. I say eye catching, but I was surprised at how little attention our industry's - and this is an industry, not just a London issue - apparent state of disorganisation got from the outside world.
But we know that Silverstein was not an isolated instance. I'm sure this audience knows of many smaller examples. The market spends £500m or more paying - principally - outside legal advisors each year as part of the claims process. That is an unacceptably high number, most would agree, and the achievement of contract certainty is the solution to reducing it.
A couple of points need to be made before going any further, however.
Firstly, "contract certainty" is a misnomer. You don't need to be an inhabitant of the Inns of Court to know that a contract is a battlefield where victories are won and lost, and where much of the booty still finds its way into the pockets of the legal profession. Nonetheless, a contract is at least a respectable and credible start towards certainty.
Coming from a background in private equity, I have always found the willingness of our industry to assume significant exposure in the absence of a signed contract pretty extraordinary. We have to judge ourselves by the standards of other businesses, not just our own, because in the end we compete with them for capital, and because regulators and rating agencies make judgements across sector boundaries too.
Secondly I am reluctant to define contract certainty only as contract delivery, as some have argued, from a viewpoint which incidentally I regard with more than some sympathy. As an interim definition, the MRG has defined contract certainty as being "achieved by the complete and final agreement of all terms between the insured and insurers before inception".
I would stress, contract delivery is obviously an extremely important issue. Getting documentation of cover into the hands of the insured has been, for some time, a priority that policyholders themselves have raised with me, and it is a competitive issue for Lloyd's and London that must be addressed.
Consideration of the delivery challenge must include discussion of what constitutes adequate documentation: slip, cover note, policy? Who issues it? When should it be produced? The last question is easy - we should aim to have the document at or before inception. Anything less might be acceptable and pragmatic as a staging post - say 30 days as we have recently suggested, but it does not constitute an acceptable vision.
But the first 2 questions are more difficult, as I'm sure you know - and there is, at least potentially, more than one right answer to them.
Getting bogged down in debating the answer to those 2 questions should not be a substitute for satisfying the interim definition that I described a moment ago. After all, in order to send a meaningful document you need to have agreed, meaningful and high quality content. The lights must be on and there must be someone at home, or some other analogy I'm not quick enough to devise at a breakfast meeting.
That is why we have established our interim definition, that focuses on securing agreement. Agreement is the prerequisite to delivery. And delivery is, yes, where we need to get to.
So stepping back, why is contract certainty important?
My basic point here is that contract certainty is a commercial necessity rather than a regulatory concept. The commercial reasons are overwhelming.
Contract certainty is essential in order to minimise risk. This risk hits underwriters and brokers: underwriters because they have uncertainty around their exposure, brokers because they have E&O risk when wordings are unclear or non- existent.
Uncertainty over exposure for underwriters leads not only to reserving risk but also to an inability properly to understand business performance and therefore pricing. Inability to calculate exposure properly leads to capital misallocation.
Lack of contract certainty leads to protracted negotiations, legal disputes and inevitably a legal plutocracy. All of this leads to higher costs and slower movement of cash.
Lack of contract certainty means that the policyholders do not have clarity of coverage, or documentation of it, when they purchase coverage. Always, but increasingly intolerable in today's corporate governance environment.
I don't need to go on. The commercial case should not need any regulatory upholstery.
But clearly the regulators are interested. Why?
Again, looked at from their perspective, the commercial reasons for it being a critical issue are pregnant with regulatory issues.
Wherever there is risk, the regulatory antennae are raised and unquantified risk - in this case I would designate it as operational risk that results from substandard process - they will be particularly interested.
So, when I discussed a moment ago that if there is a failure to achieve contract certainty, underwriting businesses cannot fully assess their exposure, or brokers their E&O risk, then the rationale for FSA interest is obvious. Further, when you look at the policyholder service and protection issues then there is equal cause for their interest, although I will add a small but significant rider to that perspective in a moment.
So there are overwhelming commercial reasons for us to address the issue, and the regulatory reasons only add to the urgency.
We started down the road towards contract certainty 5 years ago or more, with the LMP programme. The LMP slip was an awful long time in gestation, the subject of intense debate. Never in the field of human commerce have so many words been generated by so few headings. Eventually, we emerged with a workable consensus that in Lloyd's we were able to mandate. And we can be relatively pleased with the level of compliance.
But we should remember 2 things.
First, the level of compliance we focus on is a so called "balanced scorecard" approach. At one level this is sensible and pragmatic.
However, we should remember that if you compare and contrast the balanced scorecard achievement (93% at its best) with the percentage of slips that are fully LMP compliant (22% at its best), you get a less flattering picture.
The long term demise of much of British manufacturing can be attributed at least in part to a failure to "get it right first time". I am sure none of us would wish to see long lines of melancholy ex-employees of the London Market trooping out of EC3 to contemplate the wreckage of their lives as the result of our failure to address this issue fully and vigorously.
Second, where we are on LMP has taken - as I have said - 5 years plus. The process has felt, to some of us, glacial. Commercial realities should, to pursue the temperature theme, provide us with the "burning platform" that we need to ignite rapid action. But the FSA's timely and welcome intervention has jammed burning coals under our feet that are sufficiently uncomfortable for even the most insensitive or recalcitrant to take notice.
The FSA have made it absolutely clear that they mean business on this issue. If we don't make substantial progress by the end of 2006, then they will take action. What that action might be will clearly depend on a number of factors, but the range of possibilities would certainly include capital loadings or restrictions on the writing or broking of business.
By the end of 2006. Anyone who derives a shred of comfort from this deadline on the grounds that it is not in the next 3 months, should emulate Robertson's and abandon the shred.
What "end of 2006" means is that we really need to have made sufficient progress by this time next year, so that we can view the second half of 2006 as a period in which progress can be delivered confidently. So there is absolutely no time to lose.
I have already discussed the LMP slip. I remember when Peter Levene joined Lloyd's and he had heard of lot of enthusiastic, apparently learned discussion of LMP, he asked to see an LMP slip. He was slightly perplexed to find that it was a set of headings. Nothing magic, intricate or sophisticated. But entailing a significant change in behaviour, and a simple step towards contract certainty because it is about documenting upfront the key data about the substance of a transaction.
All about behaviour. And if you look at business process change in general, it is a challenge to behaviour and, as the survey says, culture. People have to do things differently. Brokers, underwriters, policyholders.
And here I should make my small but significant point about policyholders that I referred to earlier. To achieve contract certainty, everyone needs to change. All - including brokers, underwriters and policyholders - should resist the temptation to compress the period of negotiation in the hope of getting better terms and conditions, or temptation to tolerate ambiguity because it may prove advantageous at the point of a claim. Those behaviours are obstacles to the achievement of contract certainty. And that is why we are also working with AIRMIC to respond to the FSA's contract certainty challenge.
The subscription market is, I believe, a significant asset for London. The ability to share and diversify risk, the ability to share information, the ability to share expertise, all represent sources of potential competitive advantage. But that advantage can only be realised if trading partners collaborate. As a market we are not strangers to collaboration, and therefore no one should view changes to our process as being a zero - sum game. Everyone should be able to benefit, and, as the survey indicates, everyone has a part to play: this not solely a broker or an underwriter issue, it is a market issue.
A change in market behaviour requires market leadership. This issue of contract certainty has to be high on the management agenda. Again, it is good to see from the survey that people are taking it seriously. Getting senior management and board level attention is critical: this is the lesson that we have learnt from the work on the Lloyd's Market's Claims Strategy where historically claims management has suffered from having too low a profile at Board level within individual businesses.
As you know, we recently issued the contract certainty plan from the MRG to the market. It was a lengthy and in places detailed document. Some have felt it was a bit of the proverbial sledgehammer to crack a nut, but at its heart is the notion of ownership. If you cut away the undergrowth, the single most important factor that will make a difference is ownership - Board level responsibility for the issue and dedicated resource to tackle it in each individual business.
Without that individual business level ownership, no amount of market level rhetoric will bring about change. And in the spirit of the subscription market, it is implementation between trading partners that will deliver real results, therefore making the "proof of concept" programmes in particular lines of business all important.
Those programmes aim to agree wordings during placing, incorporate bureau checking into the placing process (rather than leaving quality audit until after inception) and to ensure the client receives evidence of coverage within a prompt timescale. I would urge all business who are not committed to those programmes to get involved. The lessons from them will drive much of the subsequent work and investment.
I was interested and encouraged to see that the survey placed such high importance on the development of the Market Wordings Database. I cannot help feeling that the database holds the key to much progress - provided the database is populated with the quality entries, not infinite variations some of them inadequate.
Responsibility and ownership are critical then. And measurement is equally important. One of my favourite business clichés is "what gets measured gets done".
We have now been measuring LMP slip compliance for over a year, during which time there has been a substantial improvement in performance.
Within the measurement of LP slip compliance, there is - as I'm sure many of you are aware - a score for "contract certainty" which measures 26 items relevant to contract certainty. This score has - unsurprisingly - tracked the overall LMP score closely, standing at 92% - 3% short of the June target, and 7% short of the 99% target for March 2006.
The prime drivers for improvement will, based on current experience, be in the areas of "wordings" (having all clauses correctly reference or attached in full to the slip) and "Law Jurisdiction and Arbitration (stating the law that will be applied to determine the policy and the Court that will hear any policy dispute).
"What gets measured gets done". Continuing measurement, and feedback of the results to the market, is at the core of the drive towards improvement.
The interim definition of contract certainty that we have adopted - "complete and final agreement of all terms between the insured and insurers before inception" - needs to be fleshed out to be measurable.
We have therefore identified 9 attributes to give practical meaning to the definition, and provide a more granular basis for measurement:
- Wording
- Law Jurisdiction and Arbitration
- Commercial terms
- Risk Disclosures
- A single agreed version
- Compliance
- Sound Legal basis
- Duties Clearly Allocated
- Other (always present!)
There are then around 50 characteristics of those attributes and guidance on how to address them and measure them. None of this is the proverbial "rocket science". But it involves careful and patient work. Another old cliché - "retail is detail" - comes to mind.
You could certainly apply that maxim to the achievement of contract certainty. In Lloyd's we are working to codify the detailed checking that XIS do to ensure that market policies are compliant with regulatory and fiscal requirements, so that everyone knows what those checks are and can work to engineer that quality much earlier into the process.
Such detail may be somewhat excruciating to contemplate, but it is vital for the integrity of Lloyd's licences and brand worldwide. And I would add, if any such checking is judged not to be vital, it should not be done.
Everything I have discussed so far is independent of technology. It is all about changing culture and behaviour: the survey respondents are absolutely correct to identify this as the overriding challenge.
Technology cannot supply the answer if people will not change; if people will change, then technology can act as a powerful multiplier of the impact of change. We would therefore be quite wrong to look to investment in technology for salvation; but equally, we would be quite wrong not to invest.
Technology can provide a structured, secure record of the data surrounding a transaction. So whether it is Kinnect, R13k or Electronic Claims Repositories, technology has an important supporting role to play in the contract certainty programme.
It can facilitate and systematise disciplines like checking and LMP slip compliance by building them into the process.
It can facilitate the exchange of data between parties to speed up the achievement of higher quality agreement.
And importantly it can help to measure process improvement, thereby enabling further improvement to be made.
The market should embrace technology, and it is doing so. Today, for instance, Kinnect will announce 3 new customers (QBE, Cathedral and Chaucer), bringing its total customers to 18, with the 15 managing agents representing around 60% of Lloyd's capacity. It will also announce volume figures for the first time: 500 risks in North American Property, representing 1300 signed lines and $800 million in premiums.
This is just one example of how businesses across the Market are indeed embracing technology. All such examples should be applauded; they provide a good and utterly necessary basis for progress. But they cannot be mistaken for a panacea; all participants in technology initiatives must continue to be realistic and to realise that behaviour is still the key.
We have no choice in the drive to contract certainty; we simply have to make it happen. The commercial and regulatory rationale cannot be denied. As such, I would much prefer that as far as Lloyd's is concerned, we do not have to exercise any mandate or sanction to enforce compliance. A voluntary market solution is distinctly preferable, and it is certainly to be preferred to FSA enforcement.
However, if progress at any time over the next 12 months falls short of expectations, then some form of sanction may be required. Perhaps the equivalent of points on a driving licence, but in this case a penalty for going too slow, is the answer. We need to create an environment in which people are incentivised to change measurably over a defined period. This is too important a challenge for us to be squeamish about exercising our ultimate authority if that proves necessary to protect the brand and the high quality of our regulatory compliance.
My final point is that the achievement of contract certainty needs to be seen in its broader context. As I said at the outset, this is not just a London issue, it is an industry issue, which is why we are working with our colleagues from outside the London Subscription Market in responding to the FSA, and with AIRMIC too.
But for London, that broader context is all about survival. The London Market is, as I have said elsewhere, the most significant single concentration of insurance talent in the world. We have expertise that the world genuinely needs. But the world does not need our cost base or our complexity. And - yes - both we and the universe of our policyholders needs us to deliver proof of the cover that that our expertise has created. The steps we are taking so far on contract certainty are critical if we are to satisfy that need, but they are not - huge change that they necessitate - sufficient. We need to go the whole way, which is why the definition of contract certainty we have adopted so far is a temporary staging post, not the ultimate destination.
We have no charmed existence in London. For business to continue to come here, we have continually to earn the right to see it. Anything that adds to the cost or difficulty of accessing London must be removed. Any pretext that anyone may have for preferring other markets to London, must be eliminated. If we don't want to write the business here, that's one thing. But if we do, and we are selected against, then that is quite another. To preserve what we all love about this market, we have to jettison age old behaviours and sacrifice some vested interests.
Notwithstanding our other advantages, it is only then that we will have earned a sustainable role for the future. We, all of us, in this room, have an absolute community of interest in making that role secure, and taking the action required to do so. To echo, on the first day of the new Shadow Cabinet, a former Tory leader, there is no alternative.
