Singapore looks to remove contract uncertainty

The Monetary Authority of Singapore, which has been pushing for contract certainty for several years, is encouraging reinsurance brokers, reinsurers and insurers to work together to form a market-led solution, in order to avoid mandatory regulation. A similar edict was given by chairman of the Financial Services Authority to the London reinsurance market in December 2004.

The idea behind the implementation of contract certainty is to clear up the sometimes messy period between when a contract is being negotiated and when it formally begins, and also any changes to contracts mid-term. The initiative aims to ensure all terms and conditions, documentation and signatures are in place before they enter the contract and that all contract documentation is sent to all parties within 30 calendar days of the cedant's risk inception or the cedant's order to bind - whichever is later.

Global market
Clearly reinsurance is a global market with a large proportion of Singapore's insurance contracts coming from overseas, and while cedants in Singapore will be required by the MAS to sign documentation, it will be at the discretion of brokers and reinsurers whether this is necessary outside the country.

Nick Garrity, recently appointed strategic customer and broker relationship director, specialty lines for Asia and the Middle East, at RSA, and formerly chief executive of Lockton Singapore, is the chairman of the Contract Certainty Working Group. The CCWG was formed in April 2011, and has over 100 brokers, reinsurers and purchasers on board. The group last met in January, and discussed how to best meet the proposed implementation date of July, and in February, the CCWG issued its latest guidelines.

"We want a market-led solution and we will need everybody from front-end compliance operators to board level to be involved" Garrity

Bringing together
According to Garrity, working cross-industry had always been a challenge in Singapore as its reinsurance industry is an approximate mix of 60% treaty, 30% facultative and 10% direct. However, the contract certainty initiative has brought together a host of industry bodies around the table including the General Insurance Association (of Singapore), the Singapore Reinsurers' Association, Lloyd's Asia, the Reinsurance Brokers Association of Singapore and the Insurance Law Association of Singapore.

The CCWG wants companies to start implementing the guidelines into their own internal systems and controls in April, with the first reporting date in June. The recommendation is for the market to achieve its minimum target of contract certainty as a whole by the end of 2014. Garrity says: "We want a market-led solution and we will need everybody from front-end compliance operators to board level to be involved." This will arguably need a change in culture at some organisations, but the rewards could have an impact on the bottom line.

Historic approaches
Paul Clark, Asia Pacific insurance leader, Ernst & Young, says: "One of the challenges the insurance industry has faced in recent years is how to update historic approaches to insurance contracts, in particular, the commonplace use of terms that are 'to be agreed' post-inception. This requires all parties to the contract to be better prepared with the infrastructure and data necessary to conclude the contract available at the necessary time. This will require change."

He continues: "Other markets, most notably the London Market, have implemented guidelines requiring all parties to have a complete and final view of the contract at the date of inception. This means better pricing, more certainty and clarity on coverage and exclusions, and ensuring no misunderstandings from having to revisit what was intended at the time, particularly when the outcome may cost insurers and insured substantial amounts of money."

"One of the challenges the insurance industry has faced in recent years is how to update historic approaches to insurance contracts" Clark

Market leader
In addition to the wishes of the MAS, one of the key attractions for the Singapore market to get this right to become a leader in the Asian insurance sector. Clark adds: "In the context of Asia and Singapore as a leading financial hub, we see the recent Contract Certainty Working Group as a positive initiative that will enhance how our market operates. As natural disasters increase in our region and more people and companies place insurance, transparency and certainty of outcomes are key foundations for a flourishing industry. Contract certainty is an important element of this."

Garrity comments: "This will give confidence in the quality of the whole reinsurance market in Singapore."

However, despite almost three years of effort, there is still much work to be done and there is no room for complacency. Individual market participants will have to make the effort to comply and update their systems, and ensure the industry is working together as one.

As Ben Du Maniar, director of the insurance department at the Monetary Authority of Singapore, said at the January meeting of the CCWG: "More hard work awaits us. The devil is in the details and, more importantly, implementation. MAS will continue to work with the working group and the industry during the implementation process to see it through."

BOX - Some contract certainty principles
- When entering into the contract, the reinsurer and broker (where applicable) must ensure that all terms are clear and unambiguous by the time the offer is made to enter into the contract or the offer is accepted. All evidence of offer and acceptance including file notes of conversations and meetings, written and electronic communications, must be maintained by the reinsurer and broker

- After entering into the contract, contract documentation must be provided to all parties (including all signatures) within 30 days of the cedant's risk inception or the cedant's order to bind, whichever is later

- Contract changes need to be certain and documented properly.

When there is more than one reinsurer

- When entering into the contract, the contract must include an agreed basis on which each reinsurer's final participation will be determined.

- Where the contract has not met the principles, the reinsurer and broker have a responsibility to resolve expectations to any of the above principles as soon as practicable and without undue delay.

Source: Contract Certainty Principles and Guidance Notes issued in February 2013 for all reinsurance contracts entered into a MAS-regulated (re)insurer or intermediary

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