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

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

“You would think it would be one of the most obvious things to do,” he said. “There is no way to explain it and it is not defendable. But that is the way it has always been.”

But lately some very important people, including one of the U.K.'s top insurance regulators, have been demanding not explanations as much as action.

Last December, John Tiner, Financial Services Authority director, ordered market players to make demonstrable progress to eliminate time gaps between the time when risk is assumed and all the details of obligations of the parties have been spelled out and signed.

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

“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,” he told an industry gathering recently.

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

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

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

While the contract certainty aspect of the London Market Principles is one of the less technically driven aspects, there are nonetheless systems in development to meet the FSA goals.

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

An ACORD working group is in the process of producing an internationally agreed standard that defines the headings for a document that could be used for placing any class of business anywhere in the world.

The current LMP slip has 15 common risk detail headings that are generic across all business types. “The ACORD Working Group has taken these headings, identified further headings by different lines of business, and is using these to define a Global Placing Document standard,” Mr. Brown said.

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

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

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

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

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

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

Mike Koziol, assistant general counsel for the Property Casualty Insurers Association of America, said the World Trade Center case has not led to any major effort to change the way of doing business in this country.

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

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

“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 high quality of our regulatory compliance,” he said.

“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.”

Lloyd's CEO Nick Prettejohn

Flag: Heading For A Standard

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

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

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

Special Reports /

London Contracts: Signed, Sealed, Delivered At Inception

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