Late Documentation Is No Joke:Brokers

By Lisa S. Howard

Second of a Series

International Editor

London

Risk managers often joke that they dont get to see theirpolicies until the policies expiresuch are the inefficiencies ofthe insurance industry. Indeed, practices such as latedocumentation, late premium payments, and late claims processingand payments are endemic in the insurance industry.

Part of the problem is that bad practices are tolerated byunderwriters and brokers as well as insurance and reinsurancebuyers, according to brokers who were interviewed for this series.(See NU, May 5, for the first part of the series.)

“Unfortunately, its become an industry accepted practice thatdocumentation is quite often done after the inception date of anagreement,” said Peter Scanlan, CEO of Carvill North America inStamford, Conn., which is a specialty reinsurance broker.

Although reinsurers are required by regulation to sign wordingswithin nine months of the contract, even nine months is too long,he said.

“Can you think of any other business where youre tradingmillions and millions of dollars, and at the day your deal inceptsyou still dont have documentation done? Thats kind of the way ourbusiness has operated for years,” he said. “Its a very dangerouspractice.”

Mr. Scanlan said the wordings should be completed within threemonths at the most “and there should be a slip or a cover-note thatclearly delineates the main issues of the arrangement, which shouldbe completed before the inception date of the contract,” hesaid.

The industrys bad practices and inefficiencies are perpetuatedbecause theres no consequence for bad behavior, said Mr. Scanlan.“A message needs to be sent that people who behave improperly willnot see business in the future.”

Insurance and reinsurance buyers have to be prepared not totrade with people who dont do the work properly, he said. “If theycant meet timeframes, you dont deal with these people.”

Brokers are often selected on the basis of reciprocal tradingrelationships rather than on the quality of their service andexpertise, he said. “Its easier to turn a blind eye to some of thenegative aspects as long as the production mill is still goingstrong.”

Its common for the industry to operate within the framework thatif “you scratch my back, Ill scratch yours,” he said. “So wetolerate certain things.”

“However, when your business becomes jeopardized by badpractices, you can no longer continue to work on that basis,” Mr.Scanlan said. “Old habits die hard. Until most people really becomeforced in some way, where either theres a reward or a whip, youdont get people to change,” he said.

Mr. Scanlan said its important that brokers are diligent abouttheir internal practices to assure that wordings are issued ontime. “However, on a syndicated placement, if somebody is late onthe chain, then it can hold up the whole system,” he emphasized.“Unfortunately, your timeframe is reduced to the weakest link.”

The World Trade Center dispute highlights the importance of thedocumentation issue and should make resolving the problem apriority, said Nigel Roberts, who chairs a subgroup of the LondonMarket Brokers Committee, which focuses on market reform. He ismanaging director of Aon Ltd.s Specialty Group in London.

The specific lesson of the World Trade Center dispute is thequestion of whether its one event or twoa $7 billion loss or a $3.5billion loss. Here is a situation, Mr. Roberts said, where brokers,underwriters and clients are fighting over “what the policy wouldhave said if a policy had been issued.”

If the reforms proposed under the London Market Principlesinitiative had been in place during Sept. 11, he said he doubtedthere would now be a dispute.

“The new LMP slip format provides a much greater degree ofcontract clarity without necessarily establishing contractcertainty,” he said. “So thats a piece of work that needs to becontinued. The previous London market slips had scant detail onthem. It was pretty esoteric stuff, so only those who are reallyinitiated could understand what was covered,” he said.

“We want to get contractual certainty at inception so thatpolicies can be issued and given to clients at the same time asinvoices, so they know right from the start what it is that theyhave bought,” he said.

“It takes on average 235 days to produce policies in thismarketplace,” he said. “During that 235-day period, fundamentallythe customer doesnt know what theyve bought. That is absolutelyludicrous,” he said.

The problem is that the LMP reforms, which began in the summerof 1999, are moving ahead slowly, he said. “It takes a long time tomove the mountain because the London market has been doing businessthe same way for over 300 years.”

Mr. Roberts said the problem is that there is no mandate for thebroking community, the Lloyds community and the London companymarket community to quickly make changes in this area.

He emphasized that action needs to be taken because Londonmarkets reputation is at stake. (Indeed, insurance and reinsurancebuyers often point to London as being one of the worst markets withregards to documentation.)

“What do you think the client feels?” Mr. Roberts questioned.“Bloody hell. I paid all this money” for coverage, he said, quotinga typical client who would find it unacceptable to pay and then betold by brokers and underwriters, “Well, okay, lets pretend theresa policy.”

Mr. Roberts hoped that the U.K. regulator, the FinancialServices Authority, will take a good look at the documentationissue when it takes over the regulation of conduct of generalinsurance in 2005.

He acknowledged that the London subscription market and theoften very specialized risks written in the London market add topolicy complexity. “However, a lot more could be done to speed upthe processes.”

For example, with regard to speedy payment of premiums, Mr.Roberts emphasized that underwriters have power through the use ofcancellation clauses and have to be brave enough to use them.

Currently, he said, brokers will go to the underwriter and say,“Yes, I know theres a cancellation clause, but you dont want toinvoke it, do you?” Underwriters regularly give in in order to keepthe peace, he said. “They may get cross, but that does absolutelyno one any favors.”

The London market terms of trade process says the money must bepaid to the underwriters within 90 days, he said. “However,underwriters have to be brave enough to use the cancellation clauseor nothing will change.”

Reproduced from National Underwriter Edition, May 12, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.