In the last 18 months, the market has seen several downgrades and reserving difficulties for some carriers, as well as a slow down in the trend of reserve releases for prior-year losses which previously buoyed reinsurers’ financials, increasing pressure on their bottom lines.
This focus on reserves highlights the importance of a claims team’s input and how losses are dealt with, which is also underlined by the softening market as reported following 1/1 renewals. Third party capital has risen and increased capital in the combined traditional reinsurance and capital markets is putting pressure on rates. At the same time we have seen the introduction of sidecar broker deals at Aon and Willis promising yet more capacity but causing concern in some quarters. Major hurricane activity was not seen in 2013, although Europe, the US and Asia all endured major storms. Pressure of course is not only on rates but also on wordings, and how wordings perform will be paramount.
We have already seen some ILS documentation tested and there will be focus on traditional wordings to protect reserves. Relationships and the presence of capital will of course continue to be key in 2014 but so will the claims experience, not least how new capital products perform.
Against this backdrop more noteworthy reinsurance cases were determined in 2013 than in previous years. The cases do not centre on any particular overarching issue affecting the market, but instead concern fundamental reinsurance principles such as aggregation, claim presentation, the role and remuneration of brokers and the reinsured’s obligations to the reinsurer.
9/11 aggregation litigation
The market has kept a close eye on the first “9/11” aggregation litigation to come before the English Courts, Aioi Nissay Dowa v Heraldglen & Ors. The case concerned whether the attack on the World Trade Centre constituted one or two events under “arising out of one event” aviation hull wording. The Court approved an arbitral tribunal’s decision that there were two events, which led to a number of reinsureds reviewing their historic presentations. Reinsurers had to be aware, however, that the case did not set a precedent under English law that the attacks were two events, as the Court did not consider whether the tribunal’s decision was correct, only whether it had been reached correctly.
We had to wait for a decision of the Supreme Court to find out whether reinsureds can validly choose to present losses in non-chronological order to maximise recovery. In Teal Assurance Company Limited v W R Berkley Insurance Ltd, the Court found that a reinsurance policy is exhausted in the order that claims are ascertained by judgment, arbitration award or settlement, not payment. This means that reinsureds can not pay claims and then recover in a chosen order, although a shrewd reinsured may manipulate the order in which claims are ascertained.
In another key decision, Equitas v Walsham Brothers, the Court considered for the first time whether a reinsurer’s claim against its broker for unpaid premium was time barred after the broker held on to the money for over six years. This turned on whether the broker’s duty to pay its principal was “continuing” or final. The case was decided on its facts, and the Court was clearly swayed by the commercial ugliness of allowing the broker to profit from its own inaction in finding that the broker’s duty was continuing. The limitation clock was therefore reset for every moment the broker’s non-payment continued. The decision gives some ammunition to reinsurers who have discovered unremitted reinstatement premium monies on historic accounts.
Claims control and follow the settlements
Contractual provisions going to the heart of the relationship between reinsurers and reinsureds were also subject to scrutiny in 2013, in particular claims control clauses in Beazley v Al Ahleia Insurance Company and follow the settlement clauses in Tokio Marine v Novae Corporation.
In Beazley the Court continued the trend of construing conditions precedent narrowly. The clause contained a reinsured’s obligation to notify losses potentially giving rise to a claim under the policy and a separate obligation to seek reinsurers’ approval to settlement. The judge found that the wording of the duty to notify limited the reinsured’s obligation to seek approval in respect of only potential claims and not, for example, settlement of the reinsured’s retention. This provided a salutary reminder that reinsurers must unambiguously set out the scope of claims control clauses in wordings.
The Tokio Marine case related to recovery of Thai flood losses under the retrocession of a non-proportional reinsurance. The Court held that a follow the settlements clause bound retrocessionaires to the original settlement “at the coalface” between the insurer and insured. This duty to follow the original settlements was supported by the “materially identical” coverage terms in the retrocession and reinsurance contracts, which allowed the Court to conclude they were written back to back. In addition to showing the claim was settled honestly at the direct level, the retrocedant only had to prove that the claim arguably fell within the retrocession cover, thereby confirming that the “arguability” standard of proof applicable to reinsureds applies equally to retrocedants. Although the 2013 cases do not follow any particular theme, there is little doubt that there will be repercussions across the market, occupying reinsurers and reinsureds alike throughout the remainder of 2014.