This edition provides an update of recent developments of interest to the global reinsurance industry.

  • The US Case Note summarizes a recent decision from a federal district court in Arizona addressing the standard for overturning an arbitration award, under the Federal Arbitration Act, based on an evident material miscalculation.
  • The London Regulatory Update discusses recent changes to rates and other terms for reinsurance offered through Pool Re, the UK’s government-backed terrorist risk reinsurance scheme.
  • The EU Regulatory Update addresses two recent developments. The Update first reports on the publication of the Insurance Distribution Directive, which regulates registration, disclosures, and other aspects of insurance and reinsurance distribution in the EU. Next, the Update discusses a report indicating that the European Commission may not renew the insurance block exemption regulation, which relates to EU antitrust law, when the regulation expires in March 2017.

US Case Note

A recent federal district court decision, In re Arbitration Proceeding Between Scottsdale Insurance Company v. John Deere Insurance Company, has demonstrated the federal courts’ narrow application of the Federal Arbitration Act (FAA)’s standard for overturning an arbitration award on the basis of an evident material miscalculation, one of the grounds for overturning an award in FAA Section 11. No. 15-cv-00671, 2016 U.S. Dist. LEXIS 18986, 2016 WL 627759 (D. Ariz. Feb. 16, 2016). In John Deere, the court confirmed an arbitration award over the insurer’s objection that the awarded amount represented a miscalculation, holding that the FAA requires that a mathematical miscalculation be plainly evident from the face of the award to provide any basis for modification.

In this case, the insurer, Scottsdale, settled a class action brought against its insured and sought payment from its reinsurer, John Deere. Scottsdale billed John Deere $1,173.014.26 after calculating the percentage of loss that John Deere assumed through two reinsurance agreements between the parties. John Deere disputed the amount and the parties went to arbitration. The panel entered an order awarding $888,198.12 as John Deere’s share of the settlement amount was. Scottsdale moved in the District of Arizona for an order modifying or correcting the award. John Deere filed a cross-application for confirmation of the award.

The District of Arizona first held that the FAA governed the dispute, applying a strong presumption that the FAA, rather than state law, will apply. While the reinsurance agreements called for Arizona state law to govern the procedures applicable to the arbitration process itself, they did not “clearly and unambiguously provide that Arizona law is to govern the procedure for confirming the arbitration award.” 2016 U.S. Dist. LEXIS 18986, at *4. The court then construed Section 11(a) of the FAA, which permits modification or correction of an arbitration award “[w]here there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.” Id. at *6 (quoting 9 U.S.C. § 11(a)). The court reasoned that, “[u]nder § 11(a), the issue to be resolved by the court is not whether the arbitration panel reached what the court believes is the correct decision based on the underlying facts, but solely whether the panel’s alleged mathematical miscalculation is plainly evident from the face of the award.” Id. at 7. Because there was no error on the award’s face—the panel did not detail its calculation—the court rejected Scottsdale’s arguments that the panel had erred by adjusting the settlement amount and simply reducing John Deere’s share proportionally rather than applying the terms of the reinsurance agreements. Id. at *6-7. The court noted that any finding of computational error “would require improper speculation,” id. at *8, and confirmed the award. The court also awarded John Deere reasonable attorney’s fees and costs.

London Regulatory Update


On October 1, 2015, Pool Re, which is the UK’s government-backed terrorist risk reinsurance scheme, introduced a number of changes to its underwriting manual and terms of business in relation to rates and discounts. The changes are intended to bring Pool Re in line with the needs of the market as it continues to evolve in the face of the developing, but ever-present, threat posed by terrorism.

The CEO of Pool Re, Julian Enoizi, explained that “[t]he scheme must evolve in tandem with the shifting threat facing businesses across the UK. This is a continuous process which can only be achieved through extensive collaborative discussion with our members and stakeholders. [It] represents the culmination of the first stage of a process which will see Pool Re continue to look to enhance its offering and develop a scheme which not only fulfils its systemic function of underpinning the UK terrorism insurance market, but also provides a template by which insurance schemes around the world can better support and reinforce states against terrorism.”

Background to Pool Re

The Pool Re reinsurance scheme was established in 1993 in response to the IRA bombing campaign on the UK mainland that had resulted in reinsurance providers declining to include terrorism coverage in their insurance treaties, which threatened the operation of the market. The government stepped in, effectively as a reinsurer of last resort in respect of terrorism coverage.

Pool Re is a mutual reinsurer with members comprising most of the insurers and Lloyd’s syndicates that offer commercial property insurance in the UK. The government provides unlimited reinsurance cover to Pool Re for losses resulting from acts of terrorism, to the extent requested by Pool Re. This unlimited cover protects Pool Re if all of its financial resources are exhausted following claim payments. Pool Re pays the government a premium equivalent to 50% of its premium income for this reinsurance cover (an increase from 10% before January 2015). From January 2015, Pool Re was given the freedom to buy its reinsurance cover on the open market, which it has begun to do.


Pool Re sets the reinsurance premium rates which it offers to cedants. Those rates were originally calculated by reference to the values of the properties insured and their location. Initially there were several geographical bands, designed to reflect the perceived risk of terrorist attack (e.g. Central London, major commercial cities, rural areas).

The rates were last reviewed in July 2002. Pool Re considered that they should be revised to take account of modern modelling techniques and changes in risk.

With effect from October 1, 2015, Pool Re updated the rates as follows:

  • For property damage in Zone A (Central London), the rates increased by 10% (rates for Zones B, C and D remain unchanged).
  • For business interruption (BI), the rates reduced by almost 10%.

Pool Re also adjusted several of the zones for specific post codes, including:

  • Post codes beginning with N1C moved from Zone A to Zone B.
  • Post code TW6 moved from Zone C to Zone B.


Pool Re also introduced a number of discounts, as follows:

  • For Small and Medium Enterprises (SMEs) whose total property cover (excluding inflation protection and BI cover) is less than £2m, a 40% discount applies.
  • For owners/occupiers of “crowded places” who participate in the UK government’s National Counter Terrorism Security Office (NaCTSO) Crowded Places Programme and take approved security precautions, a 2.5% discount applies.
  • A discount of between 3 and 6% is given for large deductibles of £500,000 or more in respect of terrorism.
  • Pool Re will also consider discounts (assessed on a case by case basis) on locations where the policy limit exceeds £500 million, provided the exposed value per location exceeds the Policy Limit by 20%.


The introduction of modern modelling techniques, revision of rates and introduction of discounts are intended to make premiums more commensurate with the risks ceded to Pool Re and these changes have been welcomed by insurers. Most insurers pass on Pool Re’s premium to policyholders, and so policyholders are likely to benefit from these changes.

EU Regulatory Update

EU Insurance Distribution Directive Published in Official Journal

On February 2, 2016, the Insurance Distribution Directive was published in the Official Journal of the European Union. It regulates the activities of insurance and reinsurance distribution in the European Union (EU). EU Member States must implement the Directive into national law by February 23, 2018. It repeals a text dating back to 2002.

Comprising eight chapters and 46 Articles, the Directive regulates registration and professional requirements for re/insurance intermediaries, cross-border activity, organizational requirements, disclosures and conduct of business. It also introduces additional requirements for insurance-based investment products.

In particular, the Directive:

  • Sets out requirements for managing conflicts of interest, particularly regarding remuneration
  • Standardizes pre-contractual disclosures to customers
  • Focuses on market conduct risk through organizational, product oversight and governance requirements, by monitoring cross-selling and through stronger enforcement
  • Provides for secondary legislation to be adopted by the European Commission (EC)

Compared to the 2002 text, the main changes introduced by the Directive are as follows:

  • (Re)insurance undertakings and their employees are brought within scope, subject to adjustments to reflect requirements under Solvency II
  • Registration and professional qualifications are harmonized to a greater extent
  • For cross-border operators, the Directive introduces wider grounds for host States to intervene
  • Pre-contractual disclosures to customers are more detailed and lengthy, covering remuneration for the first time. Member States may maintain existing commission bans or introduce them
  • Product oversight and governance requirements are introduced
  • Enforcement is enhanced, with specified breaches and sanctions for Member States to apply in national law

The Directive is a compromise text reflecting financial crisis developments, but also maintains a patchwork of provisions characteristic of the re/insurance intermediary sector. The text contains complex and detailed definitions, for example in relation to intermediary and distributor; the professional requirements should improve the quality of distribution channels, but also increase the compliance burden for re/insurers. While seeking to clarify home and host State competence in cross-border operations – including a measure of “renationalization” of powers - it may only have sown the seeds of future misunderstandings.

The text does, however, also improve disclosures and conduct of business in order to root out mischief in the market, for example to reduce mis-selling caused by commission bias and sale of products of little obvious use; at the same time, remuneration rules remain flexible (even if this will cause an additional compliance burden in cross-border operations). The provisions on breaches and sanctions are detailed and dissuasive. Finally, the sector will have to await the various delegated acts contemplated by the Directive, in order to have a full picture of the new framework.

European Commission May Abandon Insurance Block Exemption Regulation as of March 2017

Insurers have long had the benefit of a special “block exemption” in relation to EU antitrust law. In 2010, the European Commission (EC) renewed the insurance block exemption regulation (IBER) but narrowed its scope so that it applied only to (1) cooperation on carrying out certain research and producing compilations of data, and (2) nuclear and other catastrophe pools. The EC warned that, in the absence of strong and convincing supporting evidence, it might not renew the IBER again. In a report published on March 17, 2016, the EC has now repeated the view that it may not renew the IBER when it expires in 12 months’ time.

This report follows a wide-ranging consultation process that the EC conducted in 2014. Most respondents were in favor of maintaining the exemptions, and claimed that removing the IBER would result in legal uncertainty, thus affecting the industry’s incentives to exchange information or form pools, which would be to the detriment of policyholders.

The EC remains skeptical of the need to renew the IBER:

  • As regards the exemption for joint compilations of statistics and studies, the EC takes the view that cross-sector guidelines which it published in 2010 (on exchanging information in a compliant way) give insurers sufficient legal certainty.
  • As regards traditional insurance pools, the report noted that such arrangements are rare (only 46 had been identified across the EU), and that the market appears to be moving towards other co-insurance and co-reinsurance solutions which are more flexible and more competitive.

The EC will hold a meeting with stakeholders on April 26, 2016, which will give those parties involved a last opportunity to produce evidence that industry-specific exemptions are needed.