Reinsurers Dismiss Recoverability Issue

New York

The idea that reinsurers are generally less willing to payclaims in a hard market is one that industry representativesrefused to subscribe to at a recent conference.

Instead, the complexity of claims and subtle changes inrelationships may be contributing to changes in the timing ofpayments, said two reinsurance executives.

“There's almost a presumption that when the going gets tough,the tough get stupid,” said Rick Murray, chief claims strategistfor Swiss Re, noting that a reinsurer would risk jeopardizing itsfuture if it were somehow disinclined to pay valid claims.

I dont think the industry is stupid, he said.

David Furby, president of ACE Reinsurance, agreed.Fundamentally, the tenet of the insurance and reinsurance businessis to pay claims. That's what we sell, Mr. Furby said.

We sell a promise to pay. Failure to do so can severely damageyour reputation, can lead to disputes, can lead to allegations ofbad faith, he said.

The two men were responding to a question posed by Karole DillBarkley, a director for Standard & Poors in New York, duringthe rating agencys annual insurance conference last month. Is thewillingness of reinsurers to pay claims changing? Ms. Dill Barkleyasked, after providing a rundown of some statistics that she saidare causing S&P analysts concern. Among the market statisticsgathered by S&P and presented by Ms. Dill Barkley werethese:

Since 1997, recoverables have grown by 73 percent, welloutpacing the growth of premium and the 8 percent decline insurplus.

Reinsurance recoverables to U.S. insurers totaled $171.4 billionat year-end 2002.

Unsecured recoverables exceeded $100 billion at year-end2002.

She also said that insurers are becoming more wary of reinsurersecurity, even in instances where regulators give them full creditfor reinsurance. She noted that the use of collateral has increasedand is approaching one-fifth of authorized recoverables.

The question is whether one-fifth of recoverables is enoughandwhether the right one-fifth[is] collateralized, Ms. Dill Barkleysaid.

The two reinsurer executives took the information in stride,calmly presenting their own numbers and views to explain why $100billion in unsecured recoverables may be a non-issue. After all,they suggested there isnt any evidence that reinsurers areunwilling to pay claims–hard market or not.

First Mr. Murray noted that an underlying assumption of Ms. DillBarkleys question is that a recoverable is an obviously validentitlement that isnt subject to potential misunderstandings orother complications.

As far as valid claims, our position is clear and unequivocal.There is absolutely no change in our position regarding payment, hesaid. In 2002, Swiss Re paid 20 billion Swiss francs (or $15billion) in non-life claims.

He said Swiss Re is currently involved in disputes on, at lastcount, 91 claims out of 34,000, noting that the ratio is less thanone-tenth of 1 percent.

In between those figures, there's probably half-of-one percentof matters where it is not clear to anybody at the outset whetherthe claims have validity, he said.

While admitting he didnt have data from other periods for thepurposes of comparison, he said, I don't believe there is anythingyou can call a change in behavior. On the other hand, the potentialfor real disputes over legitimacy is growing, he added.

Reinsurers certainly see contentious claims being submitted.That's a by-product of the marketplace, said Mr. Furby. There areclaims out there that have come out of new products [in] themarketplace, he said, noting that the language of contracts must belooked at. In the context of any contractual agreement, onoccasion, you get disputes between parties, he continued.

Mr. Murray noted that some particular, high visibility disputeshave been classified, sometimes inappropriately, as reinsurancedisputes, such as the World Trade Center dispute. So it tends toget blown out of proportion, he said.

Laline Carvalho, an S&P director, took a different view. Ourposition is that willingness is an issue [and] it is going tobecome a bigger issue for a number of reasons, she said.

First, she said a number of reinsurers have had their financialpositions weakened by large amounts of losses. A recoverable issubject to credit default of the reinsurer, and there are a numberof reinsurers that have failed in the last few years, she said.Others, in weakened financial positions, have had negative outlookstagged on their ratings by S&P.

Further, she said, there's been a move towardtransaction-oriented relationships between cedents and thereinsurers. The old idea that you have a 20-year relationship inwhich you make money a few years and lose money a few years is notnecessarily there anymore, she added.

In addition, she noted that the litigious environment in theUnited States is starting to generate more and more unpredictableresults. It is fair to conclude that reinsurers will look closer atwhat was in the language of the contract and what was reallyintended to be paid, she said.

She also noted that there are greater potential issues goingforward in areas like asbestos, where huge ceding companyliabilities are sitting on their balance sheets asincurred-but-not-reported claims. When the IBNR turns into actualclaims in future years, that's when you might see more potentialdisagreements, she said.

For cedents, when a recoverable becomes the subject ofarbitration, the cedent might see a delayed payment, she said,raising another concern. Delayed payments can cause a cash flowcrunch for companies with high levels of recoverables, she said,noting this was one factor leading to the demise of Mutual RiskManagement.

Beyond the ability and willingness of reinsurers to pay, thereis a third category that gets lost in the debate aboutrecoverables, Mr. Murray said. That is the increasing complexity ofclaims in which its not at all simple to figure out what the rightand fair answer is, he affirmed.

It would be impossible to say that [such complex] claims aregoing to get matured, processed and paid in 30 days, he said.

Commenting on Ms. Carvalhos remarks about changes inrelationships between insurers and reinsurers, Mr. Murray notedthat some unique drivers of this change exist in continentalEurope. In Europe, he said, large direct writers and large-scalereinsurers, historically, had shareholders in common. There wasreal family And in the family, you would tend to say, Whats mine isyours, he said.

Now, the entire governance and ownership structures incontinental European companies are undergoing change at a dramaticrate, he said. There is a conversion from family, and itsunderstandable dynamics, to commerce, and its understandabledynamics in some cases.

Taking issue with one of Ms. Carvalhos commentsthat some cedentsrealize they may not be able to rely on payments from reinsurerswhen times are bad–Mr. Murray asserted, The factors that aredriving change today are quite independent of the underwritingcycle. Instead, the factors are ownership changes, the dynamics oftimely settlement and the litigation environment, he said.

Whats really driving the insurance market, at least in theUnited States and increasingly in Europe, is the claimantcommunity, Mr. Murray said.

The claimant community is rapidly becoming more expertised, hesaid, explaining that well-funded claimants are leaning on insuredsto structure settlements and resolve complex litigations in waysthat optimize insurance claims. There is a new alignment betweeninsureds and claimants, in which direct and reinsurance communitiesas a whole become the deep pocket, he said.

We have yet to begin figuring out how to build bridges betweenthe direct and reinsurance components against claimant-insuredalliances, he said.

During the session, the panel was asked whether the forays ofprimary markets into areas such as taking credit risk on varioussurety bonds, where they may not have had the sophistication tounderstand the risks involved, has led to a greater level ofreinsurance disputes.

Mr. Furby said the answer depends on the reinsurance structures,noting that where contracts are of a sharing nature, reinsurers dohave an implied obligation to follow the fortunes of thecedents.

In an excess-of-loss contract, he said, the terms of thecontract are negotiated. So when youre talking about risk that wastaken on by the ceding company that was never intended to becovered, or was never disclosed as a potential risk, then thereinsurer isnt simply in the position where [it is] obliged tofollow the fortunes.

Reproduced from National Underwriter Edition, July 7, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.