The traditional practice of insurance brokers and underwriters agreeing insurance term sheets often meant that the price was agreed far in advance of the finalisation of detailed documentation (‘contract certain’) of just what was being covered.

In December 2004, the Financial Services Authority (FSA) challenged the industry to improve the lengthy process of finalising insurance contracts or face enforcement action.

In 2005, the London Market trade associations agreed an industry code of practice and targets for achieving full documented contracts within 30 days of inception of each insurance policy (‘Contract Certainty’). In January 2007, the trade associations reported their findings and the FSA published the report on 24 January.

While the FSA publicly praised the London Market and UK commercial insurers for meeting their Contract Certainty challenge, the glow from the headlines is a distraction from fundamental business process failures which threaten the sustainability of Contract Certainty and the very survival of firms in an increasingly competitive industry.

Brokers and underwriters can ill afford high operating costs, as they already face declining trading margins owing to the softening market, the absence of contingent commissions, and intensifying competition.

The London Market, where insurers subscribe to risks covered by lead underwriters, is currently achieving 90% contract certainty, with the non-subscription market [other UK commercial insurers] attaining 88% certainty. However, these results have largely been achieved by adding additional layers of business process, rather than addressing the long-term process inefficiencies prevalent in the market.

For instance, several leading firms in the London Market have added a paper-based checklist to an already sometimes ad hoc and manual process of matching the terms and conditions on insurance slips to detailed policy wording offered by insurance underwriters.

Through this additional layer of process, some firms have achieved high contract certainty scores in the short-term but they have embedded yet higher costs into an already strained trading margin. In the medium term, this will worsen existing process inefficiencies that the Contract Certainty Code of Practice was created to cure.

Process efficiency is key to deriving greater profitability from existing client portfolios. In the absence of contingent commissions, many brokers are aiming to address their client profitability challenges through service-based segmentation. Unless this is accompanied by significant process improvement, the clients of broking firms may find themselves paying more for less.

Atos Consulting identifies the following areas as key to closing the gap on 100% contract certainty and improving operating results:


Accurate figures are urgently needed to survey current processes and compliance infrastructure. Measurement is critical to uncovering broken processes and in focusing efforts, particularly in the handovers between brokers and underwriters or where risks are shared with participants outside of the London Market.

For instance, firms which enter the same client data in multiple departments for specific tasks in the chain of insurance policy production could benefit from a Lean Six Sigma review of repetitive data entry and a focus on integrating processes between insurers and brokers.

Improved information systems

The absence of good data which can be used to track recording errors in brokers’ back offices, differences between insurer direct and broker-issued evidence of cover timeliness and insurer documentation issues is limiting progress in the non-subscription market. Late placements arising from lack of information, long production chains and the buying strategy of clients or intermediaries will continue to prevent full compliance.

Activity-based costing could help to identify back office processes which are consuming the greatest amount of time or where process failures are leading to delays. In addition to reducing operating costs arising from process failures, better MI systems can also promote cross-selling, especially where clients are buying multiple insurance products.

Legacy policies

The London Market faces a substantial backlog of older policies which, though in force, have never had a completed contract.

To achieve ambitious 2007 targets of reducing legacy policies in aggregate to 40% by year-end 2007 relative to a baseline in mid 2006, brokers and underwriters need to undertake gap analyses and structure implementation workstreams for their own backlogs reflecting the Legacy Code of Practice prioritisation.

In the absence of ‘live market’ competitive pressures, a joined-up approach among brokers and underwriters in measuring and prioritising the backlog could reduce duplication of effort. Firms which fail to address their legacy policies will face increased scrutiny and possible fines from the FSA.

David Smith is Principal Consultant at Atos Consulting