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.