Late Documentation Is No Joke: Brokers

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 their policies until the policies expiresuch are the inefficiencies of the insurance industry. Indeed, practices such as late documentation, late premium payments, and late claims processing and payments are endemic in the insurance industry.

Part of the problem is that bad practices are tolerated by underwriters and brokers as well as insurance and reinsurance buyers, 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 that documentation is quite often done after the inception date of an agreement,” said Peter Scanlan, CEO of Carvill North America in Stamford, Conn., which is a specialty reinsurance broker.

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

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

Mr. Scanlan said the wordings should be completed within three months at the most “and there should be a slip or a cover-note that clearly delineates the main issues of the arrangement, which should be completed before the inception date of the contract,” he said.

The industrys bad practices and inefficiencies are perpetuated because theres no consequence for bad behavior, said Mr. Scanlan. “A message needs to be sent that people who behave improperly will not see business in the future.”

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

Brokers are often selected on the basis of reciprocal trading relationships rather than on the quality of their service and expertise, he said. “Its easier to turn a blind eye to some of the negative aspects as long as the production mill is still going strong.”

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

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

Mr. Scanlan said its important that brokers are diligent about their internal practices to assure that wordings are issued on time. “However, on a syndicated placement, if somebody is late on the 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 the documentation issue and should make resolving the problem a priority, said Nigel Roberts, who chairs a subgroup of the London Market Brokers Committee, which focuses on market reform. He is managing director of Aon Ltd.s Specialty Group in London.

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

If the reforms proposed under the London Market Principles initiative had been in place during Sept. 11, he said he doubted there would now be a dispute.

“The new LMP slip format provides a much greater degree of contract clarity without necessarily establishing contract certainty,” he said. “So thats a piece of work that needs to be continued. The previous London market slips had scant detail on them. It was pretty esoteric stuff, so only those who are really initiated could understand what was covered,” he said.

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

“It takes on average 235 days to produce policies in this marketplace,” he said. “During that 235-day period, fundamentally the customer doesnt know what theyve bought. That is absolutely ludicrous,” he said.

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

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

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

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

Mr. Roberts hoped that the U.K. regulator, the Financial Services Authority, will take a good look at the documentation issue when it takes over the regulation of conduct of general insurance in 2005.

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

For example, with regard to speedy payment of premiums, Mr. Roberts emphasized that underwriters have power through the use of cancellation 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 to invoke it, do you?” Underwriters regularly give in in order to keep the peace, he said. “They may get cross, but that does absolutely no one any favors.”

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

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