UK: The Market Reform Group publishes ‘Contract Certainty Code of Practice’

Last Updated: 24 October 2005
Article by Nick Paul and Maxine Cupitt

FSA regulation of "contract certainty" is a critical issue for insurers and authorised insurance intermediaries. Market processes are being restructured whilst individual firms are conducting internal projects to meet FSA's standards, and awaiting FSA's decision on whether to impose additional regulation.

See below for the full article containing:

  • news on latest developments
  • the "contract certainty" timetable
  • an explanation of FSA regulation and the background to the Contract Certainty initiative.

Full Article

FSA moves towards decision time on Contract Certainty - update on FSA Regulation Timetable and recent developments

December '06: Final date set by FSA for market compliance.

December '05: Formal 'stocktake' by FSA to determine whether sufficient progress has been made to meet the December 2006 challenge and/or whether to introduce further specific regulation. FSA has a wide range of options including additional capital weightings, restrictions on firms and further specific contract certainty rules.

November '05: Key meeting at which the industry will report progress achieved to FSA ahead of the December stocktake.

October '05: London Market Reform Group publishes its Contract Certainty Code of Practice.

September '05: Dane Douetil chairman of the Lloyds' Market Association announces that the inability of insurers to provide accurate loss estimates following Hurricane Katrina is the clearest evidence that contract certainty must happen. Chartered Insurers Institute launches contract certainty certificate which is welcomed by FSA.

August '05: LMBC produce guide to assist brokers to develop their own detailed implementation plans and Contract Certainty Guidance note highlighting FSA threat of rule-based measures unless at least 85% of placements will achieve contract certainty by 31 December 2006. Lloyd's extends mandate of LMP guidelines to preparation of lineslips. "LMP lineslip – June 2005" proposes a standard format and market standard from 1st October.

July '05: Third FSA meeting on contract certainty, Progress Reports from Nick Prettejohn and Duncan Boyle for the Subscription Market and Non-slip Market respectively. FSA highlighted the vital importance of market engagement and cultural change. FSA to:

  • Assess the progress of individual firms over next six months
  • Ensure unmitigated risks (operational/legal) are considered within Individual Capital
  • Market Reform Group addressing volume targets for achievement this year. FSA to assess monitoring of complex aspects of implementation and infrastructure providers.

Contract certainty – what's it all about?

FSA became responsible for the entire insurance industry this year. Its main statutory objectives are "market confidence" and "the protection of consumers". It is concerned about inadequate contracts and documentation in the industry because it poses risks to those objectives. Current practices within firms and at a market level pose operational and legal risks for insurers and intermediaries and unacceptable uncertainty for their clients and insureds. FSA authorised firms are already subject to a range of requirements which may be breached if contractual documentation is inadequate. These include high level standards, such as PRIN and SYSC, more detailed business standards such as PRU* and specific requirements in ICOB and CASS. It is also a key issue in the context of FSA's personal regulation of individual senior managers (approved persons) under APER.

(*e.g. PRU 7.1.30 - A firm should pay close attention to the wording of its policy documentation to ensure that these wordings do not expose it to more, or higher, claims than it is expecting. In so doing, the firm should consider:

  1. whether it has adequate in-house legal resources;
  2. the need for periodic independent legal review of policy documentation;
  3. the use of standardised documentation and referral procedures for variation of terms;
  4. reviewing the documentation used by other insurance companies;
  5. revising documentation for new policies in the light of past experience; and
  6. the operation of law in the jurisdiction of the policyholder)

FSA has a range of "tools" available to combat poor documentation ranging from enforcement action for breaches of existing requirements through to the introduction of new rules or requirements. These includes disciplinary action against senior managers leading to fines, particularly if internal systems are inadequate. Recently FSA has raised the prospect of additional capital requirements (to reflect operational and legal risk) and ultimately it has the power to vary a firm's permissions to restrict or apply conditions to underwriting or mediation business. In short, FSA "holds all the cards" in the current debate about contract certainty.

Contract certainty

FSA is alarmed about the standards of documentation in the insurance industry, particularly when compared to other markets which FSA regulates. It has attacked a "deal now, detail later" culture which poses a clear and identifiable risk to FSA's objectives. In short, FSA's concern is that firms and market participants tolerate substantial operational risk and poor protection for their clients and seem to find it easier to pay the cost of "clearing up the mess" after the event, rather than investing in systems and training to mitigate the risk up front.

"Contract certainty" under the FSA Handbook extends across a range of agreements and processes. This includes contracts of insurance and policies but extends to a wide range of commercial agreements, particularly those which govern the role of the different participants in the chain, such as binding authorities, agency agreements for the collection of premium, outsourcing, claims handling and so on. It also extends to record keeping and systems necessary to maintain related evidence such as material information disclosed to underwriters.

In the London Market, traditional market mechanics (primarily relating to subscription risks) pose substantial risks. FSA has given notice that these risks must be eliminated. Alarmingly from FSA's perspective, the precise terms of an insurance contract can be uncertain at the time of the "placing" and can remain so after "inception" and for a considerable time thereafter. Indeed, some insureds (and insurers) find that when a claim is made, there is still no policy in existence and they have to instruct lawyers to gather evidence and to litigate in order to determine, forensically, the extent of coverage or other terms. The consequences of poor contract certainty were shown by the Silverstein case last year, which followed the World Trade Center terrorist attacks. The policies had not been finalised and insurers held conflicting records of the terms. As a consequence, the parties had to rely on the courts to decide retrospectively what the terms of the contract were intended to be.

Industry Initiatives

A steering group is reporting to FSA on contract certainty. There are two streams beneath the steering group. The MRG is responsible for the slip/subscription/London Market (which includes the International Underwriting Association, the Lloyd's Market Association and London Market Insurance Brokers' Committee).

(MRG announced in July that it was re-establishing its executive committee, the MRGE (whose task it is to convert reform strategy into deliverable projects that have market-wide buy-in) with a new board, the Market Reform Implementation board (MRIB) will be responsible for implementation. MRIB has initially taken on the implementation of the account and settlement (A&S) and claims reform. MRG has also established a Performance Monitoring Group.)

The second stream that reports to the FSA steering group, deals with the non-subscription side of the industry and is headed by Duncan Boyle. This stream has proposed a code of practice to FSA. It has been surveying the market to establish the extent of contract certainty issues in non-subscription business.

Developments in the London Market

There are particular challenges in the London market because of the way business has traditionally been conducted. In essence, slip signing and policy production have taken place 'after the event" – as illustrated by the following timeline/sequence:

Placement -> Inception -> finalisation of slip/queries resolved ->closing/slip signed -> policy produced -> policy reviewed -> finalisation of policy/issues resolved -> policy signed -> policy sent to broker - broker sends policy to client.

This sequence often means policies are not finally produced until well into –sometimes nearing the end - of the period of coverage or, in some cases they have not been produced at all.

MRG – Contract Certainty Code of Practice

The MRG members have now produced a Contract Certainty Code of Practice. This extends the original definition of "contract certainty" – "contract certainty is achieved by the complete and final agreement of all terms (including signed down lines) between insured and insurers before inception" – by adding "In addition:

  1. The full wording must be agreed before any insurer formally commits to the contract
  2. An appropriate evidence of cover is to be issued within 30 days of inception"

Targets have been set for the % of contracts meeting this definition:

  • 30% (of monthly volume) by end O5
  • 60% by end June 06
  • 85% by end 06

Aggregate market progress will be reported to FSA; each firm remains responsible to FSA for its own performance.

The Code of Practice has 8 Principles each with accompanying guidance and definitions:

  1. Brokers will provide submissions that satisfy the contract certainty definition and checklist to obtain firm quotes and place firm orders.
  2. Each insurer will be satisfied that the submission meets the contract certainty definition and checklist before formally committing to the contract, ensuring that any conditions or subjectivities are clearly expressed.
  3. Brokers will notify all terms to their client and obtain their client's agreement before inception.
  4. Brokers will calculate signed lines by inception and notify them to each insurer no later than 30 days after inception date, or by inception date on request.
  5. Brokers and insurers will not take part in post-inception over-placing.
  6. Brokers and insurers will ensure that post-inception amendments are documented and agreed as endorsements.
  7. Brokers and insurers will each collect and maintain data on their contract certainty performance at individual contract level.
  8. Brokers and insurers will ensure that appropriate evidence of cover, including security, is issued within 30 days of inception.

The new structure builds on previous work in the London Market including:

  • The LMP slip and improving compliance with LMP slip requirements;
  • De-linking i.e. the separation of payments and invoicing from slips/policy production (part of accounting and settlements (A&S)); and
  • Other developments in market systems/infrastructure, including those involving Xchanging and Kinnect.

This new timetable has significant consequences for firms because it pushes policy drafting/conclusion from the leisurely world of back office "admin" into a more commercially sensitive/time critical arena. This will require significant investment to deliver the skills necessary to move policy wording out of the darker areas of the back office.

Policy wordings

MRG have listed 9 attributes in their MRG Contract Certainty Measurement:

  1. Wording (e.g. consistent, coherent and complete);
  2. Law, jurisdiction and arbitration (e.g. choice of law and jurisdiction defined);
  3. Commercial terms (e.g. premium and brokerage defined);
  4. Risk disclosures (e.g. clear reference to supporting information);
  5. A single agreed version (e.g. available to all, definitive, timely);
  6. Compliance (e.g. meets relevant regulatory requirements);
  7. Sound legal basis (e.g. several liability clearly established);
  8. Comprehensible (e.g. plain English); and
  9. Duties clearly allocated (e.g. basis of agreement to contract changes).

FSA has also emphasised the potential legal risks in policy drafting and the need for expert legal advice and regular reviews of policy wordings against market sector practise. The widespread use of "standard wordings" brings potential benefits but also risks which need to be addressed. Standard wordings are particularly important as the basis for subscription business and reduce costs and potentially untested "bespoke" drafting. The dangers, however, are demonstrated by cases such as Dornoch Ltd and Others v Royal and Sun Alliance Insurance Plc, where a number of standard clauses had been used which made no sense in combination; in that case the Court of Appeal refused to re-write standard clauses to give them a purposive or business common sense construction.

Another danger is the uncertain provenance and quality of some standard market wordings; the origins of some may be lost, a "standard" is not necessarily an indication of good drafting and to what extent is there reliable guidance on how the particular wording can be used? Finally, whilst FSA may see the benefits of industry standards, the European Commission remains concerned about the potential effect on competition. The use of standard wordings is subject to specific competition law rules (in the EU insurance block exemption) and the latest EU investigation into commercial insurance may lead to these requirements being tightened further.

Beyond policy wordings, there are a wide variety of commercial arrangements which have traditionally been very poorly documented or not documented at all. One example, which led FSA to adopt specific rules, was the agreements between insurers and intermediaries concerning the basis on which premiums and claims monies are held. It transpired that there was widespread uncertainty. The industry has recently been criticised by FSA for failing to have the necessary documentation in place by the summer deadline (when certain client money transitional rules expired). Another example of poor documentation is the lack of written agreements apportioning responsibility (e.g. for product or sales process design or fulfilment of other regulatory or commercial obligations) between the different participants in the insurance "chain".


Contract certainty has to be addressed at two levels:

  • market reform and market initiatives
  • action within individual firms. All firms should by now have a well established contract certainty project or initiative. FSA is reviewing progress by individual firms ahead of its stock take in December '05.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 24/10/2005.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions