FSA sees insurers meeting targets on contracts

LONDON (Reuters) - Britain's financial watchdog said on Tuesday it expects the general insurance industry to have succeeded in solving issues around contract certainty by its year-end deadline, but said it was too soon to call a victory.

In December 2004, the Financial Services Authority (FSA) gave the market two years to ensure that insurance contract terms are agreed at the time that policies commence -- effectively ending a practice of "deal now, detail later".

The practice had produced significant litigation and, in some cases, unexpected losses for insurance companies.

For example, a number of London market insurers became involved in a multi-billion dollar legal battle over insurance for the World Trade Center in New York.

But in March this year, the FSA shelved plans to implement legislation, saying the industry was addressing the issue.

"We've said that, by the end of this year, 85 percent of contracts should be in place by the time the coverage begins," Thomas Huertas, director of wholesale firms at the Financial Services Authority, said.

"We laid down this challenge to the market place and the market has responded very effectively, putting in place changes to the way they do business. There is every indication that the market will meet this challenge."

Lloyd's of London Chief Executive Richard Ward said last month the insurance market was on track to meet its target, saying more than 80 percent of contracts were already achieving certainty.

But Huertas said the FSA would not come to any conclusions before the year-end deadline and until it had seen final data.

"We would not regard the challenge as having been met if it was 85 percent of contracts by number but a significantly lower proportion in terms of value of premium or value of coverage," Huertas said at the Reuters Investment Banking Summit in London.

"We are very confident the industry will reach this target, but it would be premature to declare a victory until we've seen the data for what the market has done."

Another concern for the general insurance industry has been broker fees, with some industry officials asking the FSA to help break an impasse over the disclosure of broker remuneration.

Huertas said the FSA would review that issue next year, but said any rules forcing insurance brokers to be more transparent in reporting commissions would have to pass cost-benefit tests.

"Those who would impose a rule with regard to mandatory commission disclosure would have to present a very convincing case as to how the benefits to society as a whole are going to exceed the costs that such a rule might create," he said.

"They would have to give due regard to how such a rule might be developed and whether a rule about commission is not simply going to lead to a change of market practice -- where other forms of compensation are in fact paid to brokers."

Under current rules, insurance brokers are not required to disclose how much they receive for arranging cover for risks unless specifically asked to do so by their clients.

Broker fees have been a subject of controversy since a 2004 probe in the United States by New York Attorney General Eliot Spitzer, which showed some brokers had rigged bids.