Contract Certainty

FSA recently announced that the UK insurance industry has met the challenge laid down to achieve a solution to "contract certainty".

According to the industry working groups, contract certainty is achieved by the complete and final agreement of all terms (including signed lines) between the insured and insurers before inception, and in addition:

• the full wording must be agreed before any insurer formally commits the contract; and
• an appropriate evidence of cover is to be issued within 30 days of inception.

In Dec 2004, John Tiner (FSA's chief executive) challenged the insurance industry to end the "deal now, detail later" practice in UK, giving it 2 years to find an industry solution or face regulatory intervention. Lack of contract certainty creates risks for policyholders, insurers and brokers:

• Policyholders do not know exactly what protection they have bought.
• Insurers have an incomplete knowledge of the risk they have underwritten.
• For brokers there are large and unquantifiable legal risks.
• Delays create treacle in the back office and ever longer, more arduous reconciliations.

FSA has monitored the progress by working with the industry groups and the industry reported that most of the insurance contracts are now achieving contract certainty.

Contracts of financial product are becoming less comprehensible today due to the use of technical jardons and legal words. On the other hand, use of plain language and simplified version may reduce accuracy and certainty. It is a big challenge to produce a user-friendly but informative contract.