Direct insurers and their clients can benefit from contract certainty, but there are many in the region that ‘simply don’t believe in its benefits’

The Singapore Contract Certainty Working Group’s (CCWG) stated goal of 85% of all reinsurance contracts handled in Singapore being contract certain by the end of 2014 is almost certainly unattainable, according to partner at DAC Beachcroft Steven Dewhurst (pictured).

Speaking exclusively to StrategicRISK following the publication of the CCWG’s April 2104 market briefing, Dewhurst said the December deadline would be extremely difficult to meet due to a “core of market participants who are either indifferent to the issue of contract certainty, or who simply don’t believe in its benefits”.

“The core group consists of national and international direct insurers, so there’s a broad cross-section of direct insurers who aren’t really signing up to this,” he said.

“It’s getting those market players to sign up to reporting and then to compliance that is the key to this initiative being a success.”

Indeed, the briefing itself sounds a note of caution: “Unfortunately, some companies are not yet sufficiently engaged to effectively implement contract certainty processes and reporting in time for the December 2014 milestone.”

Singapore-based Dewhurst, who provides regulatory and claims advice to (re)insurers, intermediaries and policyholders across Asia-Pacific, said that some direct insurers in the region didn’t understand why contract certainty was important to them, despite the fact that many of them only retained small amounts of risk and ceded the rest to the reinsurance market.

“There is a mindset that exists in Asia along the lines of, ‘Well, if we as a direct insurers have laid off 97% of our risk, why is contract certainty our problem, because really this is about reinsurance contract certainty?’,” he said.

“But what they miss there is that they’ve only transferred that risk if they can ensure that the reinsurance is in place and will respond. If the reinsurance doesn’t work properly because at the time of placement there wasn’t full compliance with the types of things that the contract certainty checklist (see box below) is driving at, then their recovery is at risk.

“But this message doesn’t seem to be getting across. It’s the failure to appreciate that direct insurers have that risk and therefore can benefit directly from the contract certainty initiative that is the missing element at the moment.”

Implementation and impact

The CCWG was formed in April 2011 for the purpose of providing for and guiding the implementation of contract certainty in Singapore’s reinsurance market. It comprises volunteer members from the General Insurance Association of Singapore, the Singapore Reinsurers’ Association, Lloyd’s Asia and the Reinsurance Brokers’ Association (Singapore).

CCWG chair Nick Garrity said that the Singapore’s contract-certainty initiative was not only impacting on the region’s reinsurance buyers and brokers, but also its direct insurance buyers.

“Direct insurance buyers in Asia with large and complex programmes are also very likely to have risk financing solutions which involve the reinsurance market in Singapore, so they also benefit from this initiative,” he said.

Garrity, who is RSA’s strategic customer and broker relationship director for global specialty lines in Asia and the Middle East, said that the CCWG was confident that by December 2014, 85% of all reinsurance contracts that were purchased, intermediated or reinsured by entities regulated by the Monetary Authority of Singapore (MAS) would be contract certain, according to the definition and principles agreed by the market.

The April market briefing reports that the contract certainty figure for all reinsureds was 68.5% for January 2014 contracts, which was the market’s peak volume month. However, Singapore reinsureds reported significantly higher levels of contract certainty, 88.5% for treaty and 76.8% for facultative, which is important given their obligations under the Risk Management Practices for Insurance Business (March 2013) issued by the MAS.

‘Low-hanging fruit’

DAC Beachcroft’s Dewhurst said that the working group had been able to “pluck the low-hanging fruit on contract certainty” but if Singapore was to become a global reinsurance hub, “the MAS needed to show to the wider world that the market here knows what it’s doing”.

“In order to play in the big league, Singapore needs to be able to show the global (re)insurance community that Singapore can do all the things that they can; one of these things is placing reliable, contract-certain reinsurance programmes in the market,” he said.

“Frankly, if the market can’t deliver the message that coming to Singapore ensures the reliable placement of reinsurance programmes, there will be a degree of embarrassment that comes from that – and the MAS is not the type of organisation that will sit back and accept that.

“Therefore the CCWG realises that there is a danger that if the market does not sign up in total to this initiative, it will sleepwalk into the MAS taking what is effectively an industry-led project and making it a MAS-led project, which is a completely different ball game.”

Dewhurst explained that there was currently no explicit sanction for not taking part in the contract-certainty initiative, but that “once MAS gets hold of it and regulates it, there will be”.

He added that only full compliance would “create a level playing field”.

“The CCWG brings with it a compliance burden and it involves players having to ask for things more quickly and for contract documentation that is better than might otherwise be the case,” he explained.

“Yet you’ve got a small minority who are not playing the game and the market is using that, placing business elsewhere to make their lives easier.

“The people playing that game are the intermediaries, but what they fail to appreciate is that contract certainty helps them because it reduces their exposure to malpractice claims.”

CCWG’s April 2104 market briefing contains a checklist to guide senior management in evaluating their company’s progress toward implementing reinsurance contract certainty. It lists the questions they should be able to answer regarding contract certainty implementation. They include:

  • Have we adopted the Principles & Guidance notes and Checklist developed by the industry, or have we developed our own comparable documents?
  • What is our targeted level of contract certainty?
  • What is the timeline for us to achieve this target?
  • How does our current level of performance compare to the market?
  • Have we undertaken any assurance activity to validate whether contract certainty is being implemented and measured appropriately and consistently?
  • Have we trained all relevant staff involved in reinsurance activity? Are we doing additional training for new joiners? If we’re not confident to do the training, have we sought external support?
  • If we have encountered obstacles during the implementation process that we have been unable to resolve, have we reached out for guidance to our Association or the Contract Certainty Working Group?
  • How are we collecting information on contract certainty performance? Is it a paper-based system? If so, do we have sufficient volume to justify modifying our applications to capture relevant contract certainty information?
  • What are the reasons for contract certainty failures? Are there training needs or are we having problems with particular counterparties or markets? What are the potential solutions?