FOCUS: Insurers Turn to Databases to Clarify Contracts

By Kaveri Niththyananthan of DOW JONES NEWSWIRES

13 July 2006

Dow Jones International News

English

(c) 2006 Dow Jones & Company, Inc.

LONDON (Dow Jones)--An online database of wording for insurance policies has been launched to try and help the industry deal with the longstanding issue of uncertainty in contracts.

It's the latest in a series of efforts to solve a problem that rivals such as Bermuda have overcome but that still plague the London market.

Thursday's launch is from Xchanging, a business processing company, which will have an online database of 13,000 wordings, clauses, policy forms and schedules.

Xchanging also provides access to approximately 1,000 wordings provided by the Lloyd's Market Association (LMA), whose own wordings repository will be available for market use from August. The International Underwriting Association (IUA) has submitted roughly 200 wordings, to be included in Xchanging's library.

The London market has drawn criticism over its contracts since at least 1791, when a judge called a form then in use "absurd and incoherent" because it contained a mixture medieval English and translations from Swedish, which he said had "no plain or ordinary meaning in English."

He said, "I decline to give the policy a meaning which makes commercial nonsense..."

That form only fell out of use in the late 1980s, when the industry moved to its current form.

Peter Taylor, partner at the Lovells law firm, said, "Bermuda poses a big threat to the London insurance market, not only due to tax reasons, but because the market has developed standard wordings for certain types of insurance contracts, which are widely accepted by market underwriters."

Since 2005, as London has worked toward greater contract certainty, Xchanging has seen the number of its wordings triple. Its customer base includes 80% of Lloyd's Managing Agencies, 45% of IUA companies and over two-thirds of the London market brokers.

"Anything that provides greater access to wordings and a final result of full knowledge is something we encourage to our members," said John MacKenzie, policy adviser for market regulation at the Association of British Insurers, which mainly represents the retail insurance market.

"We see the Web as an ideal access route to understand the exchanging of wordings, track historical versions as well as providing reference points," he added.

Taylor of Lovells said the standardization of contract language avoids the negotiating dance around exact wording and instead allows discussions to be focused on premium rates.

He said the London market has always adopted a "kebab" style of drafting, where clauses designed to address different situations are strung together to form a whole. However, the terms expressed as "by event," "per accident" or "per occurrence", for example, mean very different things under the law than what may have been perceived at the time of agreement.

Martin Elton, managing director of production for insurance at Xchanging, said its online database should grow by 1,000 words a year and the company hopes to see a return on its investment within five years.

The Web-based database will be updated every day, whereas the CDs that have been in use up to now got only monthly updates, he said, noting that the Web version will hold on to historical versions of wordings, "something which can prove useful in legal situations."

Model wordings trim both legal costs and the time it takes to produce policies, but Xchanging doesn't guarantee the quality of wordings submitted.

Taylor said Lovells is exploring how it can take advantage of the opportunity that arises from the lack of a guarantee in the quality of the wordings. The firm is in talks with electronic trading service RI3K to see whether they can join forces to develop quality checks for wordings for RI3K's Data Management Center.

Alex Letts, chief executive of RI3K, said that it isn't enough simply to tick boxes to fulfill the regulatory demands of the Financial Services Authority. That's because contracts can still fall apart when they reach court.

Letts said he hopes the talks with Lovells will bring the market "closer to a meaningful solution whilst remaining competitive."