While contract certainty in any business may never reach the 100percent level, the London market has plenty of room to raise thebar.

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Marcus Rivaldi, London-based director for Standard & Poor's,admits that sometimes the London market operates by its own uniquerules and logic, particularly when it comes to the sometimesseemingly casual way risk is assumed.

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“You would think it would be one of the most obvious things todo,” he said. “There is no way to explain it and it is notdefendable. But that is the way it has always been.”

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But lately some very important people, including one of theU.K.'s top insurance regulators, have been demanding notexplanations as much as action.

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Last December, John Tiner, Financial Services Authoritydirector, ordered market players to make demonstrable progress toeliminate time gaps between the time when risk is assumed and allthe details of obligations of the parties have been spelled out andsigned.

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Lloyd's Chief Executive Officer Nick Prettejohn raised thepossibility of sanctions such as capital loadings or restrictionson activity if the targets are not met.

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“Coming from a background in private equity, I have always foundthe willingness of our industry to assume significant exposure inthe absence of a signed contract pretty extraordinary,” he told anindustry gathering recently.

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At the heart of the London contract is the slip, which isessentially a preliminary contract. That 300-year-old document hasthree parts–broker details, information regarding the risk and theunderwriters' panel.

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Chris Rawson, Lloyd's chief information officer, said theeventual blurring of the distinction between the slip and thepolicy is the project's ultimate goal.

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“The cost-benefit case is rarely convincing on its own,” Mr.Rawson said, asserting that transparency and regulatory pressurewill have to serve as the main impetus behind reform.

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While the contract certainty aspect of the London MarketPrinciples is one of the less technically driven aspects, there arenonetheless systems in development to meet the FSA goals.

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Phil Brown, technical expert for ACORD, the internationalinsurance standards organization, said that while there is astandard format for placing insurance and reinsurance business inthe London market, there is no agreed international equivalent.

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An ACORD working group is in the process of producing aninternationally agreed standard that defines the headings for adocument that could be used for placing any class of businessanywhere in the world.

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The current LMP slip has 15 common risk detail headings that aregeneric across all business types. “The ACORD Working Group hastaken these headings, identified further headings by differentlines of business, and is using these to define a Global PlacingDocument standard,” Mr. Brown said.

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Nothing underscored more effectively the perils of uncertaincontracts than the litigation centering on the events of Sept. 11as to whether they were one or two events in insurance terms.

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But this was not an isolated instance. “The market spends ?500million or more paying principally outside legal advisors each yearas part of the claims process,” Mr. Prettejohn said. “This is anunacceptably high number, and most would agree the achievement ofcontract certainty is one solution to reducing it.”

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The contract certainty project began five years ago. “The LMPslip was an awful long time in gestation and the subject of intensedebate,” Mr. Prettejohn said. “Never in the field of human commercehave so many words been generated by so few headings.”

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Opinions differ as to how much the contract certainty hasresonated in the land where its signature pitfall is located.

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Robert Bredahl, who heads up the U.S. operations of theLondon-based Benfield Ltd., has made as one of his organization'sgoals “contract at inception”–an effort with much the same goals asthat of the LMP project.

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“The problem is that the underwriting process of the brokers,the reinsurance and insurance companies have been set up to dealwith the historic convention, and that is after the deal is donethe reinsurance companies are on the hook,” Mr. Bredahl said.

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Mike Koziol, assistant general counsel for the Property CasualtyInsurers Association of America, said the World Trade Center casehas not led to any major effort to change the way of doing businessin this country.

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U.S. statutory accounting rules allow nine months for areinsurer and cedent to sign on to full policy wording. “Somereinsurers get the full policy wording at the outset of coverage,but it is still common not to.”

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Mr. Prettejohn sees the issue extending beyond London to theentire global insurance community. But within London he realizesthat some eggs might have to be cracked to make this omelet.

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“This is too important a challenge for us to be squeamish aboutexercising our ultimate authority if that proves necessary toprotect the brand and high quality of our regulatory compliance,”he said.

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“Coming from a background in private equity, I have always foundthe willingness of our industry to assume significant exposure inthe absence of a signed contract pretty extraordinary.”

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Lloyd's CEO Nick Prettejohn

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Flag: Heading For A Standard

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According to a Lloyd's spokesperson, every LMP global slipdocument has at least 30 items in a heading, delineating thingslike choice of law and jurisdiction.

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The current LMP slip has 15 common risk detail headings that aregeneric across all business types.

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There can be more than 30 components, depending on the type ofrisk.

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