LEVERAGING LEGACY LIABILITY airroc.org Vol. 8 No . 3 Fall 2012
Where in the world is my money?
BARBAGALLO, HORBELT & ROTHSEID LOOK INTO THE CRYSTAL BALL • THOU SHALL COMMUTE...OR NOT? • FROM THE MOUTHS OF BABES • EDUCATIONAL TOOLBOX Run-off Matters
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270725 AIRROC Matters Advert v5.indd 1 01/06/2012 12:07 EDITOR’S NOTES
“Keep ‘Em Coming” Peter A. Scarpato
The success of our magazine others, personally attest to her drive, that is, all the more reason to read the depends upon the unbounded integrity and charm. She is more a article). friend than a colleague, and I will miss As you know, we are fond of roundtable generosity and prolific offerings of her – but we all stand securely on the our authors and interviewees. Lest interviews. For this issue, Connie firm foundation she so carefully and O’Mara and I were fortunate enough it seem to go unnoticed, we thank effectively laid. Thank you Trish, and to sit down and discuss the future of you all for your work. And yes, Godspeed. run-off and legacy business with Bill “keep ‘em coming.” Leah Spivey offers her interview of Barbagallo, Oliver Horbelt and Andrew Carolyn Fahey, in Future Plans for Rothseid in the Who’s Talking segment, We begin with John West’s Where in the AIRROC, giving us further insight into What Lies Ahead? Quick and candid World is My Money?, an investigative, the background and objectives of our with their informed observations, our quantitative report on the geographic new Executive Director. In response interviewees used lenses forged in the spread (or lack thereof) of reinsurance to Leah’s probing questions, Carolyn flames of past mistakes to peer into the balances due U.S. cedants. His results, presents her AIRROC “to-do” list, realm of future possibilities. including expansion in membership, surprising to some, reveal that most Include Nigel’s Present Value and you education and the use of technology. collection roads lead to or through have yourself a magazine. London. Next, in A Young Person’s Our Toolbox is brimming with useful Let us hear from you. l Perspective on the Blessing and Curse of info. Through quotes from session the Paperless Insurer, we get a refreshing attendees and summary articles by view from Cara Anne Milione on the Andrew Shapiro, Peter Matthews and double-edged sword of electronic Key Coleman, we get a glimpse into progress. To steal a phrase from the the success and substance of AIRROC’s presidential campaign, Cara asks “are we June 2012 Regional Educational better off today than we were years ago” Sessions in Chicago. Topics covered Peter A. Scarpato is an before the advent of the paperless office? include the many uses for Schedule arbitrator, mediator, Robert Bear, Vice Chair of AIRROC’s F, a “how-to” on commutations and a run-off specialist, Actuarial Committee, presents a mock arbitration. Not to be outdone, attorney-at-law and “Summary of Survey Results on the Bill Barbagallo, Bina Dagar and Joe President of Conflict Mandatory Commutation Clause,” Monahan penned summaries of the Resolved, LLC, based identifying, among other findings, three Educational Sessions during in Yardley, PA. peter@ that AIRROC’s Dispute Resolution the July 2012 membership meeting conflictresolved.com Procedure can greatly shorten the time in New York, covering the insurance/ and expense of actuarial arbitrations. reinsurance of sexual molestation Farewell to AIRROC is Trish’s goodbye claims, the state of tobacco litigation in to the beloved “child” she nurtured and Canada, and last but certainly not least, grew over her very productive tenure cutting edge claims for hydrofracking, with us. Having worked directly with nanotechnology, climate change and Trish since 2005, I can, like so many GMO’s (and if you don’t know what
AIRROC® Marc L. Abrams Joseph Monahan Vivien Tyrell Marketing Consultant [email protected] [email protected] [email protected] G. Pirozzi Consulting Publications Committee [email protected] Jonathan Bank Connie O’Mara James Veach Chair [email protected] [email protected] [email protected] Design, Photography & Illustration Leah Spivey Peter Bickford Nick Pearson [email protected] [email protected] [email protected] Advance Planning Committee Myers Creative Services [email protected] Editor & Vice Chair Nigel Curtis Frederick J. Pomerantz Chair [email protected] [email protected] The AIRROC® Matters Editorial Peter A. Scarpato Michael T. Walsh [email protected] Board welcomes authors’ new and [email protected] Bina T. Dagar Francine L. Semaya reprinted with permission articles on [email protected] [email protected] Maryann Taylor current topics of interest to AIRROC®’s membership. The Board reserves the Carolyn Fahey Teresa Snider [email protected] right to edit submissions for content [email protected] [email protected] and/or space.
AIRROC MATTERS / FALL 2012 3 Highly Knowledgeable.
Locke Lord is known as one of the world’s premier law firms for reinsurance companies. We understand the intricate science of reinsurance. The Firm’s expanded footprint in London and the UK adds a broad-based international team to collaborate across industries and geographic borders – clients count on our worldwide presence. Our team’s deep industry experience, innovative thinking and hard work provide clients with rock-solid advice and solutions for every type of reinsurance dispute or transaction. It’s a subject we know on a molecular level. Practical Wisdom, Trusted Advice.
www.lockelord.com Atlanta, Austin, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, New Orleans, New York, Sacramento, San Francisco, Washington DC AIRROC® Board of Directors and Officers Vol. 8 No. 3 Fall 2012 airroc.org Art Coleman (Chairman) Citadel Re Editor ’s Notes Kathy Barker (Co-Vice Chair) “Keep ‘Em Coming” Peter A. Scarpato 3 Excalibur Re Think Tank Marianne Petillo (Co-Vice Chair) ROM Reinsurance Management Company Where in the World is My Money? John West 6 Karen Amos Resolute Management Services From the Mouths of Babes Cara Anne Milione 10 Michael Fitzgerald Devonshire Thou Shall Commute ... or Not? Robert Bear 13 Glenn Frankel The Hartford/First State Survey Results on the Mandatory Commutation Clause Ed Gibney CNA AIRROC Update Peter Hirs Zurich
Farewell to AIRROC Trish Getty 15 Keith Kaplan Reliance Insurance Company in Liquidation Spivey Interviews Fahey Leah Spivey 16 Frank Kehrwald Swiss Re Future Plans for AIRROC Michael Palmer Citadel Risk Services Advertisers in this Issue 19 John Parker TIG Insurance Company AIRROC Board Elections 19 Jonathan Rosen (2010 Chairman) The Home in Liquidation A Day to Converge, Communicate & Commute in photos 21 Leah Spivey Munich Re America Toolbox Michael G. Zeller AIG Reinsurance AIRROC Educational Session Summaries / Chicago 22 Carolyn Fahey (Executive Director)* The Snapshot Speaks a Thousand Words 22 Joseph J. DeVito (Treasurer)* DeVito Consulting An Overview of Schedule F Bill Littel (Secretary)* Allstate How and When to Cut the Cord 23 David Raim (General Counsel)* Chadbourne & Parke Commutations Panel *Non-Board member
The Great Debate 25 AIRROC Executive Committees AIRROC Educational Session Summaries / New York 28 Actuarial Committee A Complex Conundrum 28 Chair Keith Kaplan Reliance Ins. Co. In Liquidation Sexual Molestation Claims Panel Summary Vice Chair Robert Bear RAB Actuarial Solutions A & H/Life Committee Smoke Signals from the North 29 Chair Barry Biller Transamerica Re Tobacco Litigation in Canada Education Committee Claims on the Cutting Edge 30 Co-Chair Karen Amos Resolute Management Services Hydrofracking, Nanotechnology, Climate Change & Co-Chair Kathy Barker Excalibur Re/Armour Genetically Modified Organisms Finance Committee Chair Marianne Petillo ROM Present Value IT/Website Committee News & Events / Mark Your Calendar 33 Chair Marianne Petillo ROM Illustrations: Vice Chair Bill Littel Allstate Rafael Edwards WHO’S TALKING Legislative/Amicus Committee Photos: What Lies Ahead? Peter A. Scarpato & Connie D. O’Mara 34 Chair Frank Kehrwald Swiss Re Jean-Marc Grambert Barbagallo, Horbelt and Rothseid Muse on the Future of Legacy/Run-off Business Marketing Committee Chair Michael Palmer Citadel Risk Services
Copyright Notice AIRROC® Matters is published to provide insights and commentary on U.S. legacy business. to educate Publications Committee members and the public, stimulating discussion and fostering innovation to advance the industry’s interests. Publishing Chair Leah Spivey Munich Re America and editorial decisions are based on the editor’s judgment of writing quality, relevance to AIRROC® members’ interests and timeliness of submissions. Published articles should not be deemed to reflect the views of any AIRROC® member, unless so stated. AIRROC® This magazine was produced as a endorsement of any views expressed in articles should not be inferred, unless so stated. Certified Carbon Neutral publication AIRROC® Matters magazine is published by the Association of Insurance and Reinsurance Run-off Companies. ©2012. All by measuring, reducing and offsetting its rights reserved. No reproduction of any portion of this issue is allowed without the publisher’s prior written permission. carbon footprint, which was 1 ton. THINK TANK
illustration / Rafael Edwards John West
In the every day challenge of due which have been collectable and top 5 countries. Correspondingly, 93% collecting reinsurance balances, outstanding on a paid basis for greater of the aged balances were due from than 90 days) which were due totaled those same five countries. By far, the UK there is usually never enough $2.5 Billion overall and the 2011 aged demonstrates the greatest lag time in time to sit back and put it all in balances totaled $2.4 Billion overall. payment, or processing of reinsurance perspective. Typically, emphasis On the face of it, those relative balances recoverables. is placed on the balance due – not don’t seem extraordinary and in fact In 2010, the aged balances due to U.S. necessarily where in the world it seem to show that aged recoverables cedents from reinsurers were as follows: will be coming from. But in fact, it decreased from one year to the next. • U.S. reinsurers owed $1.7 Billion The more intriguing point, and one is very interesting to take a look at (which is part of the overall balance of which deserves some consideration, $20 Billion – or 8%). how responsive markets around the is the geographic distribution of those world are to collection efforts from aged balances (see bar chart on page 9). Bermuda reinsurers owed $165 Million part of their overall of $2.8 Billion – or the U.S. cedents. Where in the world 6%. is your money? When it comes to 2010 recoverables • UK reinsurers owed $438 Million part reinsurance recoverables, chances of their $887 Million – or 50%. are that it is in London! 197 other countries 7% In 2011, the aged balances stay UK 3% consistent: A single cedent in the U.S. can face Bermuda 11% • U.S. reinsurers owed $1.1 Billion collecting from hundreds of reinsurance (which is part of the overall balance of markets in the world. London being the $22 Billion – or 5%). fourth reinsurance market in size, it is US 79% only natural that a large portion of U.S. • Bermuda reinsurers owed $172 cedents’ reinsurance recoverables are Million part of their overall of $3.6 due from London players. In addition Billion – or 5%. to amounts due from UK domiciled • UK reinsurers owed $350 Million part reinsurers, large reinsurance balances 2011 recoverables of their $866 Million – or 41%. are also brokered through London or The obvious question begging to be otherwise ultimately administered in 197 other countries 12% answered is, “Why is the UK lagging London on behalf of non-UK domiciled so far behind the rest of the world reinsurers. This is a reality we all suffer. UK 3% when it comes to indemnifcation What makes it interesting, is the fact Bermuda 12% of those companies in the U.S. (and that the oldest recoverables are due from presumably elsewhere) where they provide UK reinsurers. reinsurance?” US 73% In 2010 the aged balances which were due By far, the UK demonstrates the greatest totaled $2.5 Billion overall and the 2011 lag time in payment, or processing of aged balances totaled $2.4 Billion overall. reinsurance recoverables. At the end of 2010, the annual statement Possible reasons for this situation: data which is collected by the NAIC There is no other country that comes 1) Brokerage through London to (National Association of Insurance close to the UK in relative volume to non-UK domiciled reinsurers and 2) Commissioners) reflected that over comprise the same percentage of aged Reinsurance balances administered by $26 Billion was due in reinsurance balances against total outstanding. If offices located in the UK on behalf of recoverables from markets domiciled one looks straight at the bottom line of non-UK domiciled companies. In other around the world to ceding companies aged balances against overall balances words, direct collections, brokered domiciled in the United States. By the (around the world), the average dollar activity and collections on reinsurance end of 2011, that gross outstanding amount against the overall was 10% administered in London all combine number had increased to $30.2 Billion. in 2010 and 8% in 2011. There are to affect a bottleneck of activity in an The pie charts show how these balances currently about 200 countries in the extremely concentrated and complicated were distributed geographically. world. $29.2B (or 97%) of the total environment which exists within a Of those amounts due and outstanding, amount due in reinsurance at the end couple of square miles in downtown in 2010 the aged balances (amounts of 2011 was shown to be due from the London. Even though a U.S. cedent
AIRROC MATTERS / FALL 2012 7 THE LITIGATION BOUTIQUE FOR COMPLEX CORPORATE ISSUES
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Where in the World is My Money? (continued)
Over 90-day debt position per country collection for a certain cedent to the front of the line. over total outstanding In London, there is a distinct sense of 50% hands-on dealing when it comes to the 50 actuality of the business at hand. 45 What can be done to decrease the time 41% lag? Properly used – communication, 41 relationships and documentation are the tools needed to reduce turnaround time 35 US to bring it in line with the rest of the 30 world. Companies can also mitigate the Bermuda known causes of the lag: 25 UK 1) Replace ineffective brokers with one which is equipped to handle legacy 20 Other issues. Consolidate many brokers into 15 countries one. Having a single point of contact reduces time and energy previously 10% spent on communication, record 10 8% 8% transfer and reporting mechanisms. 6% 5% 6% 5 2) Use a third party who can tap into 0 the social aspect of how the London market works. To have someone on the 2010 2011 ground in London who knows the right people, the processes and the reality of might have a collection due from a In London, there is a distinct sense of turnaround time will make a big impact company domiciled in Japan, effectively, hands-on dealing when it comes to the on your ability to forecast, manage your that balance could be administered and actuality of the business at hand. There expectations and control your costs. ultimately paid out of their London is a profound feeling of ownership and Also, having a representative constantly office. pride in making sure that client’s claims working your balances creates an I was helping my son untangle some are paid in accordance with contractual efficiency in collections going forward. fishing line the other night and it felt terms. The combination of transactional The markets are more acutely aware like I was trying to explain the London volume, focus on detail and a very that you are pursuing your recoverable Reinsurance Market. If one was to concentrated environment lends itself balances vigorously. draw lines to represent the movement to a natural lag on processing which 3) Be conscious of the financial health of reinsurance placement from one can be accommodated most effectively of your reinsurers and develop a plan by a very pro-active, interpersonal country to another and one company to (through commutations, or other) to interaction which is the way business has another, it would look like a ball of yarn collect as much of your current and been done in London for over 300 years. being pulled through the eye of a needle. future exposure as possible. l In fact, when the market was trying to The most effective way of resolving one’s unravel the LMX spiral in the 1990’s, reinsurance issues is through direct that is exactly what had to be done. contact between relevant parties. This There were so many primary contracts, would be true whether those parties John West is Senior reinsurance contracts, brokered events, include the Lloyds market, whether Vice President, HelixUK, in charge of Business circular placements that an incredible there is a direct cedent to reinsurer Development and loss was impacting the market which relationship or whether one of the Marketing in North should never have even existed! As an parties is a broker and is dealing either America. example, there was one specific loss with the cedent or the reinsurer. Walking [email protected] which impacted primary policies for around the city with an oversized pouch about $12M. However, as that claim containing the required documents is circulated through the LMX spiral, the the best and most effective way on a amount which impacted the market daily basis to collect reinsurance funds became closer to $60 M! which are due. It literally moves the
AIRROC MATTERS / FALL 2012 9 THINK TANK From the Mouths of Babes… A Young Person’s Perspective on the Blessing and Curse of the Paperless Insurer illustration Edwards / Rafael
By design, computers and I am a third year college student with employees with increased efficiency and e-technology improve efficiency and a summer job at Munich Re, whose easy accessibility to documents which effectiveness, nowhere more evident major project consists of preparing have been collected from various sources hard copy documents for electronic over many years. than in the paperless insurance scanning. Specifically, my work entails While doing my daily work, it is office. What before took reams of sifting through hundreds of file folders, paper, countless hours and endless fascinating to think back to when these which contain copies of insurance and documents were first created, before phone calls, now flashes by in the reinsurance contracts from the 50’s, 60’s we had the benefit of computers. Even click of a mouse. But are these and 70’s. I then organize the documents though computers have been around as impersonal efficiencies improving with unique bar-coded sheets, recording long as I have been alive, they continue the business? In this article, an the corresponding information onto to transform the way companies aspiring college student spending a master list. Ultimately, the goal is to function and do business. Although establish an online coverage inventory my summer project is rooted in new the summer at Munich Re prepping of documents contained in hard copy technology, each day I have to literally documents for e-scanning, ponders folders as part of a larger paperless walk back and forth to a colossal bank how IT advances have helped and environment initiative. This coverage of filing cabinets approximately 30 yards hindered the business of insurance. inventory will provide Munich Re away, where the hard copy folders are
10 AIRROC MATTERS / FALL 2012 Cara Anne Milione
housed, back to the flat screened PC in storage ensures consistent organization. can improve the environment. Beyond a modern cubical to which I have been Traditional filing cabinets of the past simply reducing its use of paper, assigned. In the midst of all this paper were sometimes left in a messy clutter Munich Re has also taken bigger strides and furniture, I realized the remarkable of papers as soon as the drawer opened. in technological advancements, like a impact that technology has on our lives The improved use of technology also solar panel installation project recently and in the workplace. reduces the degree of human error. begun in the building’s main parking Thinking about the time that my lot. Upon completion, the solar panels father started in the business decades Although we want to enjoy will provide a source of renewable energy, further emphasizing Munich ago, when underwriters and claims the strategic benefits of professionals would have to cope with Re’s environmental awareness. The technology, we must be an overwhelming mountain of paper, solar panels also remind us that new I marvel at the amount of time that careful to avoid losing technology is everywhere, not confined was required to find a particular file the human interpersonal to one place in the office. or document. Even with the benefit of dimensions which are While technology certainly has its alphabetical and numeric filing systems, building blocks upon advantages including improved there was no capacity to conduct which many successful efficiency and accessibility, it is not an electronic search among a sea of without some possible shortcomings. As thousands of documents. This transition organizations are founded. our world moves toward computers and to no paper and less storage furniture ------electronics, does this limit the value and and space is probably no more dramatic importance of human interaction? Many than moving from scribed documents to Many companies are embracing a of us would prefer to work from home. the printing press. nearly paperless work environment, and But how will this affect our ability to Although the documents in my project this is only just beginning to change form important business relationships are not yet fully available via an the way that companies operate. As and leverage our strengths through electronic system, the implications for companies around the globe transition teamwork? Although we want to enjoy the future are great. Employees will be to paperless environments, we see many the strategic benefits of technology, able to locate their desired documents benefits from an eco-friendly system, we must be careful to avoid losing the with an electronic search feature. The like space saving and more efficient and human interpersonal dimensions which convenience and time saved will be effective use of square footage. Also, an are building blocks upon which many considerable. Few would dispute that increasing number of employees are successful organizations are founded. electronic systems expedite processes being given the opportunity to do their In this small way, we can be true to the significantly. In addition, electronic work from remote locations (e.g., from credo that makes great companies great: document storage improves accessibility. home). The overall cost savings are paying homage to the old tradition For example, if an employee needs to tremendous. of person-to person connections (my forward a document to someone else, As a matter of fact, due to this and writing and your reading this article); he or she no longer needs to retrieve other expense initiatives, Munich Re while at the same time enjoying and manually photocopy it. Instead, he America is able to repurpose one of its the advantages of enhanced use of or she may just send a link or make an four buildings at its Princeton location. technology in the traditional business electronic copy and e-mail it. Instead of office and file storage space, of reinsurance. l In addition, electronic storage permits the building will house a conference and many different people to view a given fitness center. This change will enhance document simultaneously. In the the workplace experience of employees past, people would have to wait for who take full advantage of the facilities Cara Anne Milione is a junior at Vanderbilt a document or folder to be returned provided. In addition, there will be a University’s College of Arts & Sciences majoring in and checked in. Those days are gone. savings due to the decreased need to Political Science/Financial Economics. She is a Dean’s Moreover, manual filing systems created rent offsite facilities for large meetings. List student and is studying in Florence, Italy this Fall opportunities for misplacing documents A paperless document system is just Semester. and folders. Electronic document one way that insurers like Munich Re
AIRROC MATTERS / FALL 2012 11 Run-Off Powerhouse
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Thou Shall Commute…Or Not? Robert Bear Summary of Survey Results on the Mandatory Commutation Clause
In late 2011, Betty Barrow and Steve the contract calls for commutation after Dispute Resolution Process may be able Herman led the Actuarial Committee in a certain number of years. to expedite the actuarial arbitration its effort to conduct a survey regarding 2. For contracts with mandatory process. mandatory commutations. Respondents commutation clauses: A Power Point presentation with were given the following instructions: a) Commutation is required on a per graphical responses to the questions “This is a questionnaire about claim basis at least 10% of the time, is available upon request to the email mandatory commutation clauses, which address below. we are defining as reinsurance contracts b) About 50% of contracts allow inclusion of IBNR, and Our next survey on Sources of Actuarial (ceded or assumed) with active liabilities Information will be conducted later this where either side has the right to require c) There is a wide range for these year and summarized in a future edition a commutation, and where the contract percentages, depending on the book of of AIRROC Matters. l contains either a preset formula, or business. procedure such as an actuarial valuation 3. IBNR is usually estimated based on panel. For any of the questions below a formula in the contract, or actuarial Robert Bear is a with percentages, please give us your arbitration if the parties don’t agree. Consulting Actuary best ballpark estimate, on a per contract and ARIAS-US Certified 4. Very few of the respondents had basis….” Arbitrator in the firm experience with actuarial arbitrations, he has established, RAB While twenty-two responses were but those who did reported that the Actuarial Solutions LLC. received, only a small number of the process can take from 6 months to He currently serves as respondents had experience with over 2 years, and that the process Vice Chair of the AIRROC actuarial arbitrations. Below is a could be improved by shortening it. Actuarial Committee. summary of major results: The Actuarial Committee concluded [email protected] 1. The clause is usually invoked because that the use of actuaries identified on the contract requires it – usually because the AIRROC Arbitrator List within its
Call for Authors If you like the new look and focused content of AIRROC Matters, why not be a part of the message by submitting your own article? We are constantly “spanning the globe” for current issues and knowledgeable authors to address them for our growing, international audience, many of whom could be your current or future client. Articles range from 1200 to 1800 words in length, accompanied by your headshot, brief bio and email address. If you are interested, please contact Peter Scarpato, [email protected], and/or Maryann Taylor, [email protected]. We will be happy to discuss your ideas and get you on the road to submitting an article for our readers. Let us hear from you.
AIRROC MATTERS / FALL 2012 13 Legalobstacles: creative counsel finds a way. bingham.com
Attorney Advertising © 2011 Bingham McCutchen LLP One Federal Street, Boston MA 02110 T. 617.951.8000 Prior results do not guarantee a similar outcome. UPDATE
Farewell to AIRROC Trish Getty
Trish has consistently demonstrated The initial board of directors was strong positive leadership, a can– comprised of not only companies in run- do–it attitude and a great sense of off but ongoing writers and receivers so humor—all of which helped to grow nobody was speaking to the choir. Input from various perspectives was essential to and strengthen AIRROC. a thriving association. Why did AIRROC Trish is a generous mentor to many succeed? That’s easy, it was the right time. folks in the industry including me. I expect that AIRROC membership will continue to grow as more companies What I learned from Trish — the with legacy run-off books and related personal approach matters and issues learn about our association that stay positive — never take no for an has so many values, particularly as they answer! appreciate the value of networking with counterparties. I urge all of you to reach Katherine Barker out to writers who would benefit from Co-Vice Chair of AIRROC, AIRROC membership. I recall a member Excalibur Re who told me that their membership gave them the ability to know their counterparties and thereby avoided at When I was asked by the RAA to form least a dozen arbitrations. Think about My tenure with AIRROC since June 2, AIRROC, I thought that, given my the expense that saved them as well as it 2004 has been one of the most rewarding industry experience, this was the perfect did for other members. experiences of my career. My forty place for me since I could relate to virtually any interested party. The people I have come to know seven years in the insurance industry through my work at AIRROC have was primarily driven as a reinsurer but Our twenty-seven founding members become so very special to me. You will I also stood in the shoes of a ceding were clear in their desire to establish a all be tremendously missed. However, company, an intermediary, primary venue where risk bearing entities could it is time to focus on my family and claims agent, liquidation reinsurance meet principal to principal to discuss other personal interests as I enter into administrator then marketing director their issues in managing their legacy retirement. Keep AIRROC healthy and for an acquisition party. books. In our early days we established growing! Farewell. l committees and members agreed to I know of no single individual with a participate on the various committees. With strength of mind and spirit Trish deeper commitment to integrity and In January of 2005, I observed spawned AIRROC from a fledgling professionalism in our industry than counterparties entering committee meetings rather looking each other up organization into a market leader. She Trish Getty. AIRROC’s promotion of and down. Six months later they greeted was a guiding light whose dedication these values in the run-off space is a each other in a cordial manner! What will be sorely missed. living, lasting tribute to Trish, as its I hoped for happened as I observed founder. members quietly setting aside time to Jonathan Rosen meet face to face to discuss their issues Past Chair and Current Board Paul Dassenko which made my heart sing! We were Member of AIRROC Past Runoff Person of the Year making a difference. The Home in Liquidation
Trish and Tom Getty From left: Leah Spivey, Karen Amos, Marianne Petillo, Trish Getty and Kathy Barker
AIRROC MATTERS / FALL 2012 15 UPDATE Spivey Interviews Fahey Future Plans for AIRROC
During the July Membership Meeting, Carolyn Fahey, AIRROC’s new Executive Director, had reserved a conference room to accommodate various committee meetings and individual appointments. I happened to overhear Carolyn letting participants know that she could be found in room 3604 if not in the hallway or main meeting room. So, following a scheduled meeting, Carolyn and I stole an opportunity to sit down in Room 3604 to have a candid discussion about Carolyn and AIRROC. Leah: While most of AIRROC’s constituency knows you, Carolyn, many do not know about your background. Would you please give us a rundown of your past experience? Carolyn: I started in the industry with photo / Jean-Marc Grambert the RAA, the Reinsurance Association of America where I spent 14 years and learned a great deal about association management. I was initially responsible for the RAA’s ReLaw publications – the Digest, Compendium, Contract Clauses, Arbitrators Directory and Carolyn Fahey, Excutive Director of AIRROC ReArb.com – so some may know my name from those resources. I was also networking and resources that will help reinsurance training programs for the very involved with the Claims, Law me in my role at AIRROC. industry. Most notable for AIRROC was and Underwriting committees and the the Scottsdale Insurance and Reinsurance RAA’s ReEd programs. I also attended I also spent some time at the EEAC, the Equal Employment Advisory Council, as Insolvency Roundtable, which many and worked with several industry-wide AIRROC members would regularly groups, including Excess/Surplus Lines, its first Director of Training and Develop- ment. I was responsible for instituting attend. Two years ago HB partnered the IUA of London, the Insurance with AIRROC so I provided the and Reinsurance Arbitration Task professional training programs within a human resource focused organization. It educational session of that year’s October Force, Mealey’s – those all helped me Commutation Event. to get to know many leading industry was there that I was most involved with professionals. On a non-industry issues of management and diversity re- Leah: With all of that experience and note, during my time at the RAA, quirements, EEO and affirmative action background, what about AIRROC I also became a member of ASAE, programs, and internal investigations. I attracted you to accept its leadership the American Society of Association developed programs to educate HR pro- position of Executive Director? Executives and the ASTD, the American fessionals from the EEAC’s members. Carolyn: Good question, Leah. I Society of Training Developers. Those I then moved to HB, formerly Mealey’s, have known the organization since its organizations provide me terrific with responsibility for all insurance and infancy and have a relationship with
16 AIRROC MATTERS / FALL 2012 Leah Spivey the original board members and Debra that the quality of our planned programs potential as a leading industry resource Hall and Frank Nutter. I also informally remains high with continued participant for education and networking? consulted with Trish Getty in her role satisfaction before recommending any Carolyn: The greatest challenge is as the founding Executive Director of changes. We may just need to change how the busy schedules of the Board of AIRROC. I have always been impressed we do things not change the things we do. Directors themselves as many of them with how well AIRRROC developed and chair committees and are responsible maintained its presence in the industry. We are enhancing our for much of the day-to-day activities of As a matter of fact, I always wondered if it AIRROC. I see my major responsibility was a good decision to establish AIRROC tracking of marketing efforts as making their high level of input into as a separate entity from the RAA. I and will be clarifying our the organization easier in any way that suppose in the long run it was, especially I can. Again, putting more structure given my present circumstances. message and implementing around the organization with something Truthfully, after leaving the RAA, I really an overarching marketing as simple as an AMS will be a great missed the association world, specifically and membership growth start. Working with the Executive Board committee work, board governance, and plan by year’s end. Members, Board, and on all Committees member relations. I truly believed that will also go a long way in assuring that my past experience was one of the gifts ------these volunteers are most productive for I could bring to AIRROC. So, when I AIRROC. heard of the opportunity, I felt strongly I have started working with all of the Another challenge but also a great need that I should apply. The selection process committees and the Board of Directors is constant and clear communications left me with a good feeling of synergy. on our immediate plans for the between directors, committees and Ultimately, I agreed to offer my talents Commutation Event in October and the membership. This is the only way we to this worthwhile endeavor, a new and September and October Educational will increase member engagement. I exciting chapter in the life of AIRROC. Programs as well as outreach to existing am committed to making sure that we Leah: Now that you have been with and potential new members. We are fully utilize the robust communication AIRROC for a whole 2 months, what have enhancing our tracking of marketing capacity of our new AMS. I am also you identifed as your top priorities as its efforts and will be clarifying our message always reaching out to individuals new Executive Director? and implementing an overarching involved in projects, programs and Carolyn: Short term my top priority marketing and membership growth plan plans to make sure that I have the is some additional structure around by year’s end. latest information to share with all. the organization. Operationally we Leah: Do you see any challenges or AIRROC has grown and changed will be implementing a new AMS, or obstacles to AIRROC reaching its full since its inception and we now need Association Management System, to provide a database structure to enhance the AIRROC website, communications and member interaction. Think of this like a company intranet – I know that many of our members are used to working within those at their companies. A key feature is that it will allow for much more flexible interactive use by members, the Board of Directors and committees. There appears to be a need to solidify the strategy that the Board implemented a couple of years ago, that some working groups explored and made recommendations to follow. I also have some ideas on initiatives but need to gather more data and information on the present state of affairs before finalizing my transition plan. I also need to assure
AIRROC MATTERS / FALL 2012 17
UPDATE
Future Plans for AIRROC…Interview with Carolyn Fahey (continued) to revisit and clarify our Mission and • Possible cross association affiliations After putting her frst very successful align our Strategy. This is the challenge • Closer relations with selected Risk AIRROC Membership Meeting behind her, that we have ahead of us and that I Management Schools Carolyn returns to her home in Virginia – have personally taken on in the role of just outside of Washington DC – where she • Creation of CROP (Certified Run Off Executive Director. lives with her husband, two daughters (14 Professional) Leah: What would you like to see and 4), one son (13), 5 fsh and a hound Leah: Thank you so much, Carolyn. Before accomplished by AIRROC over the next dog. And, room 3604 at our new legal we conclude, is there anything that you couple of years? counsel, Chadbourne & Parke’s Rockefeller would ask of the Board of Directors or Center Office will never be the same… l Carolyn: I would like to see several Membership at this time? successes and I will list them: Carolyn: My virtual door is always open Leah Spivey is Senior • Substantially expanded membership to ALL involved in AIRROC! Your ideas Vice President and • More engagement of current and new are always welcome and while I am Head of the Environ- members through committee work continuing to assess the next steps for our mental/Mass Tort Claims Department of • Better use of technology organization I want to hear from you! I am blessed to have the support of such Munich Re. lspivey@ • Expansion of the Regional Educational a fantastic Board and set of volunteers munichreamerica.com Programs and look forward to working with all of • More virtual learning events you as we take AIRROC into the next • Outreach abroad generation. Stay tuned and stay involved. • Joint ventures with the CPCU …… ADVERTISERS IN THIS ISSUE Find out how your company can benefit from advertising in AIRROC Matters. Contact Carolyn Fahey: tel 703-730-2808 or email [email protected]. Bring Out the Vote! It is time for the AIRROC Board of Directors 2 KPMG 26 Saul Ewing LLP& Dicker LLP elections – remember to go to the AIRROC 4 Locke Lord LLP 32 Buxbaum Loggia website (www.airroc.org) and cast your vote. 8 Butler Rubin Saltarelli 36 Stalker Vogrin Bracken We have five directors who are up for election & Boyd LLP & Frimet this year with terms expiring at the end of 2012. New Board members will be announced at the 12 Freeborn & Peters LLP 38 Inpoint Annual Meeting of Members at the October 14 Bingham McCutchen LLP 40 Mound Cotton Wollan & Commutation and Networking Event. 18 R&Q/AIRROC Commutation Greengrass Make sure you register for the event! AIRROC 20 Wilson Elser Moskowitz 43 AIRROC DRP members get one free registration – a terrific Edelman & Dicker LLP 44 Edwards Wildman benefit of membership…see you there! 24 Devonshire
AIRROC MATTERS / FALL 2012 19 Insurance. Reinsurance. Reassurance.
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AIRROC MATTERS / FALL 2012 21 TOOLBOX AIRROC Educational Session Summaries / Chicago
AIRROC is on the road! We likely to focus on information regarding conducted a regional educational the company’s uncollectable reinsurance. What they are Cosentino contrasted that viewpoint saying.... session at the AON Center with that of rating agencies, which use in Chicago on June 11, 2012, Schedule F to assess the company’s fulfilling our commitment to financial strength. He suggested that Materials presented in a rating agencies will use Schedule F way that connected with bring educational programming to determine who is reinsuring the to everyone in our member company so that they can assess the the entire group organizations involved in legacy financial strength of the company’s reinsurers and apply appropriate risk Greatly increased and run-off business. Three of the charges. Cosentino further explained knowledge of the subjects sessions are summarized in this that the risk-based capital model section. used by regulators typically does not presented and had fun strongly differentiate between the during the process creditworthiness of different reinsurers. The Snapshot Speaks A different perspective was offered by Matthew Moore, Inpoint Evan Bennett, Director, Reinsurance Consulting with Blackman Kallick a Thousand Words LLP, who identified some of the issues … An Overview of Schedule F that an auditor focuses on when using Schedule F. Generally, explained Phenomenal job on the Summarized by Andrew Shapiro Bennett, auditors are most interested workshop & stunning in determining whether controls are in A distinguished panel of industry place to ensure that data is “accurate success professionals presented the program’s and reliable.” Bennett noted, however, opening session: “Schedule F: An that auditors also typically assess the Great networking tool Overview and Who Uses It and How.” adequacy of the company’s reinsurance With Mitchell Orpett of Tribler Orpett protection, asking whether the company has a system in place to ensure that its Look forward to future & Meyer, P.C. moderating, panelists Evan Bennett, Timothy Corley, Michael reinsurance is collectable. In Bennett’s workshops Cosentino and Joseph Scognamiglio view, many audit clients expect their provided thought-provoking insights brokers to monitor their reinsurers’ Sue Riehman, Allstate into the real-world use of Schedule F, financial stability. It is becoming more evoking audience participation and common, however, for cedents to more discussion throughout the presentation. closely scrutinize the security provided … by their reinsurers and to consider As Senior Manager — Reinsurance whether the reinsurers will be around of the Office of the Special Deputy to pay claims down the road. Joseph Well thought-out, well- Receiver, Michael Cosentino began the Scognamiglio, President of Quantum session by offering a rare opportunity to organized, well delivered Consulting, Inc., opined that the identity hear how regulators and rating agencies of the company’s reinsurers was the most use Schedule F in their unique oversight Very beneficial to attendees important piece of information set forth roles. Noting that those groups serve in Schedule F, and careful consideration in building knowledge and different constituents—regulators look of the reinsurers’ financial strength out for policyholders, while rating sharpening skills is important when determining the agencies serve corporate investors— collectability the company’s reinsurance. Cosentino confirmed that the groups Met new interesting people often focus on different aspects of Timothy Corley, Senior Solutions Schedule F than company management. Executive of Inpoint, Inc., provided Ed Gibney, CNA Cosentino explained that in using a broker’s perspective of Schedule Schedule F to assess a company’s F. Corley explained that, historically, solvency protections, regulators are the broker uses Schedule F to gain
22 AIRROC MATTERS / FALL 2012 market intelligence and to find business members were Sheila Chapman (Vice opportunities. For instance, Corley said, President, Zurich), Matt Moore (Senior if the schedule shows that a company is Solutions Specialist, Inpoint), and Alan Content well organized paying a large penalty, the broker may Hines (Managing Director, PwC), all of be able to offer the company a plan whom have a great understanding of the that will save the company money by world of commutations and were able to Variety of presenters with reducing the penalty. Corley also noted approach the topic from their respective that the broker may focus on overdue and diverse skill sets. experience from various reinsurance to determine whether the Matt drew on his wealth of claims and perspectives company has a collectability problem. reinsurance expertise gained at Travel- The balance of the session included ers, Nationwide and Ace. Topic time allowance discussions about what is necessary to Alan’s deep understanding of the Actu- formally classify something as a dispute arial world was insightful and Sheila’s perfect and facility in Schedule F and the role outside reinsurance career, in particular her role quite good counsel can play to assist parties before at Zurich, meant she was able to apply an arbitration demand is filed. Mitchell her expertise and practical application to Orpett suggested that using in-house the world of commutations. Breakout session was a or outside counsel early in the process Yours truly has negotiated many is critical to developing a successful great experience commutations over the past 15 years strategy and to reducing the company’s varying greatly in size from as little as long-term legal expenses. $15,000 to as much as $10,000,000. Able to touch base Overall, the session provided a unique For the benefit of the audience with peers view of how different industry players Catherine defined what a commutation actually use Schedule F on a day-to-day actually is. Sheila then went on to detail basis to achieve their goals. l the motivations for a company seeking Laura Prescott, Swiss Re Andrew Shapiro is a Partner at Butler Rubin Saltarelli commutation with a counterparty & Boyd LLP. [email protected] including the need for liquidity, dispute … resolution (including slow/non-payment activity), reduction of administration costs, elimination of risk from an Enjoyable, productive, How and When to assumed book, exiting the market or a informative particular line of business due to run-off or insolvency. Additional commutation Cut the Cord triggers were identified or expanded Breakout groups Commutations Panel upon such as solvency risk (where a real conducting mock danger is present that a reinsurer could Summarized by Peter Matthews no longer be in business before the year commutation negotiation is out) and the sale of a book of business or portfolio to a third party which then really added value, a first I was one of four panelists on the drives a proactive commutation strategy Commutations Panel. Our Moderator time experience for some in where the acquirer seeks to extract was Catherine Isley (a partner at value from the acquisition as quickly as Butler Rubin) and the entire event was possible. Met excellent new organised by Barbara Murray (SVP, Lumbermens Mutual). We then moved on to discuss the contacts and strengthened chronology of a commutation. Once Both Catherine and Barbara did a great a company has decided to look at relationships with others job in making this industry event one commutation, a team of professionals of the most engaging, informative and from both inside and outside the Peter Matthews, interactive that I have attended. company then become involved. Whilst I was the only individual from the UK each company will have its own formal/ Global Re Group for the event and greatly enjoyed our informal procedures for managing the panel discussion. My fellow panel commutation process there will be a
AIRROC MATTERS / FALL 2012 23
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AIRROC Educational Session Summaries / Chicago (continued) typical chronology to work through. Our panel was also due to address Sheila outlined this chronology but the special concerns in relation to commented that all commutations negotiating commutations with foreign will be approached slightly differently companies but unfortunately we did not Great program as well depending on whether they are more have enough time to cover this topic in as interaction with other actuarially or claims driven, for example. any real detail. (Perhaps a subject for a future AIRROC Educational Session!) With Alan and Matt being the Actuarial attendees and Claims experts respectively, The panel concluded with the members each detailed their roles in the pre- advising their top tips when dealing Appreciated other negotiation commutation process which with commutations. Comments such as highlighted the coordination needed ‘Making sure you involve all the internal perspectives and between these key areas. processes at the start’ and ‘Being careful when negotiating a global deal’ were approaches Other key component areas involved made. in the commutation process are Accounting, Management, Legal, the The Mock Commutation Negotiation Environment provided Broker and, if appointed, the Consultant. between Matt Moore and myself was a lot of fun and provided an excellent base easy communication Once the scope of the commutation has for the workshops that then took place with others been defined (i.e. single contract, multi in the afternoon. contract, or global) then the negotiation All in all a great panel to be a part of – I can begin. learnt a lot and hopefully the audience Ursula Merten, Negotiating the commutation itself is gained some further insight into the Lumbermens Mutual key and should be conducted by those wonderful world that is Commutations. l Group individuals within the organisation who possess sufficient expertise in handling Peter Matthews is a CEO of Global Re Group which this process and also have the necessary amongst other areas of consulting expertise special- … authority to conclude the deal when ises in the successful conclusion and negotiation of appropriate. commutations for its worldwide client base. [email protected] Be sure to tailor the topics Every commutation negotiation is dif- ferent but many of the same approaches to the experience level of usually manifest themselves such as the the attendees for best and ‘Start High, Counter Low, Meet in the The Great Debate Middle’ scenario. However, you should efficient use of time always be in a position to justify your “What the great ones do, the less IBNR number to the other party. prattle of…” William Shakespeare Continue this sort of The successful finalisation of a commu- tation may not always run smoothly and Summarized by Key Coleman regional education certainly if parties become entrenched in their positions they will never reach a The reinsurance greats and runoff mutually agreeable number. kingpins were out in force on when Sufficient time to network Other ways that a commutation AIRROC came to Chicago. They were welcomed with a sizeable crowd and can fall apart is where the receiving Michael Baschwitz, Zurich great enthusiasm. party is too slow to accept what their Insurance Group reinsurer is telling them such as their After a morning of reviewing the lack of financial ability to pay. In this ‘nuts and bolts’ of the statutory annual instance the reinsurer then goes into statement’s infamous Schedule F, Messrs. liquidation or 141 procedure before DiGiovanni and Hermes (Nick & Bob) the commutation is concluded and put our knowledge to the test with a a substantial or major portion of the rousing mock arbitration. previously available commutation Our fact pattern included two funds are then lost. companies that had each reinsured
AIRROC MATTERS / FALL 2012 25
TOOLBOX
AIRROC Educational Session Summaries / Chicago (continued) each other on two separate fronting Nick, always on his game, jumped out arrangements. front, not only to frame the case, but also The first company, Luck Be a Lady to name its key witnesses, Ms. Lina Lina Huge success! Tonight (Luck) had wisely signed onto Pants-on-Fire and Mr. I. M. Truthful. Relying on the Truthful affidavit, Nick a reinsurance contract covering a $1 Pat Van Wert, Inpoint 2 billion book of Residual Value Aircraft argued that, even though there were no Policies (will they ever learn) from the contract wordings available, the parties second company, Help Me Help You should be compelled to arbitrate because … (Help). As Luck would have it, Help was the custom and practice in the industry needed to reconcile Schedule F balances was to arbitrate and because the parties Very good overall program between the two companies. had previously arbitrated other disputes between them. informative, educational On the flip-side, Help had reinsured Luck’s prize book of workers comp Bob bolstered Help’s side of the and engaging business under a cleverly constructed argument stating that if no agreement “carve-out reinsurance agreement” exists regarding the parties intentions (smile when you say that – it’s the to arbitrate, then the court should Presenters kept our summarily conclude there was no gift that keeps giving). Help does not attention while discussing allocate IBNR by program, so there is no intention to do so. Bob cited Luck’s way to tell if they match up to Luck on VP of Reinsurance Claims, who, in an the topics and provided Schedule F. affidavit, stated that the CEO had told the ceded reinsurance department to various views or positions Little or no contract documentation stop issuing certificates that included on the topic could be found, and about the only thing arbitration clauses. the companies agreed upon is that they will continue to deny each other’s claims. When it came to the set off argument, Nick claimed Luck should be able to set Benefits as to providing With this backdrop, Nick & Bob duked off $50 million in paid losses it is owed information and meeting it out on two tantalizing arguments: by Help from the $150 million Help is 1. Luck’s motion to stay litigation and claiming from Luck. Nick claimed that others in the insurance compel arbitration, and collateral should be reduced by $50 field and various views of 2. Help’s motion to compel Luck to million. provide additional collateral and Luck’s Conclusion the same topic corresponding motion to allow set off or off set. Once arguments were made, the esteemed audience was given the chance Engaged in conversation With regard to the first argument, Nick to draw their own conclusions on the with other company was quick to point out the fact that issues. Their consensus opinion was one could expect different treatment in that: representatives to enable litigation versus arbitration on certain issues such as: 1. No parties are bound to arbitrate future commutation without such an agreement in writing, 1. Expenses in addition to limits, and and discussions 2. Follow the settlements. 2. The right of offset is well established. Vickie Montgomery, He went on to argue the benefits of AIRROC members and attendees were, arbitration include the fact that it indeed, Lucky to have Help of this Liberty Mutual is a long-standing tradition in the calibre in wrestling with issues of this reinsurance industry, it is confidential, magnitude. l and it is better equipped to handle a situation like this (where contracts Key Coleman is Managing Director at Grant Thornton have been lost) due to the fact that LLP. [email protected] experienced reinsurance professionals can find their own way in the dark.
AIRROC MATTERS / FALL 2012 27 TOOLBOX
AIRROC Educational Session Summaries / New York
Greg Caruso of Munich Re, Andrew Lewner of Stroock & Stroock & Lavan, Julie Secor of Eastpoint, William Barbagallo of PricewaterhouseCoopers, and Michael Goldstein of Mound Cotton Wollan & Greengrass
AIRROC hits the Big Apple! On July A discussion ensued surrounding the mined by a variety of factors including 19, 2012, an AIRROC Membership definitions of an insured and occurrence, the number of times the individual was meeting was held at the New York liability and damages, as well as loss and molested, the frequency of medical care, expense allocation. Although it is agreed, lifestyle impact, and the action taken by City offices of our new general as in most cases, coverage determinations the employer once they became aware counsel, David Raim, Esq. of and reinsurance contract applicability that the act had occurred, if any. Cases Chadbourne & Parke. This section are made based on both the facts of the rarely reach trial due to the monetary summarizes the topical, thought- loss, the policy language and contract implications. Most plaintiffs seek the provoking educational sessions wording, there was agreement amongst highest settlement they can obtain. To the panelists that these losses are some of effectively achieve that goal, they must presented at the meeting. the most difficult to evaluate due to the not only prove that the acts committed inflammatory element of the act itself. by the employee were horrible but that Many of the losses reported involve the employer consciously disregarded A Complex allegations against the employer of the safety of the victim and was grossly the perpetrator for negligent hiring, negligent and reckless in either their Conundrum negligent supervision, vicarious liability, hiring or supervising practices. If this is and “respond eat superior”. Oftentimes successfully proven, the insurance car- Sexual Molestation Claims the cases involve multiple acts of rier can more strongly assert that the Panel Summary molestation over multiple years and actions of not only the employee but the may also involve multiple employees employer were intentional and therefore Summarized by Bill Barbagallo and multiple victims. The employees not covered. Without the insurance pro- responsible for the acts of molestation ceeds, there is less money available for Bill Barbagallo moderated a panel to are not considered “insured” under victim compensation. For this reason, discuss coverage issues associated with a General Liability policy due to the settlements are compromised with con- Sexual Molestation cases. The panel, intentional nature of the act. The tributions from both the employer and consisting of Julie Secor with Eastpoint, number of occurrences is determined carrier. As a result, there is no guidance Greg Caruso with Munich Re, Andy by the acts of molestation, and the to help quantify the average settlement Lewner with Stroock & Stroock & total years of loss is most commonly value of these claims. Levan, and Michael Goldstein with calculated based on the beginning and Once a settlement is reached, the Mound Cotton, assumed cedant and ending dates of loss. amount of the carrier’s loss and expense reinsurer roles as a fact pattern was The evaluation of the plaintiffs claim is contribution is then allocated amongst presented. extraordinarily variable and is deter- the year(s) of loss. The carrier then
28 AIRROC MATTERS / FALL 2012 bills the reinsurer for their share of consistent with how the settlement with the contribution based on the impact the policyholder was allocated. to the affected policies. Although Given the fact specific nature of these this explanation is arguably straight losses as well as the volatility associated forward, panelists offered that disputes with potentially large jury awards, these have often occurred when the carrier’s sensitive cases remain challenging for reinsurance submission contains a both the insurers and reinsurers to different allocation amongst impacted evaluate and resolve. l policies presumably for the purpose of maximizing their reinsurance recovery. Although the reinsurer acknowledges William C. Barbagallo is Managing Director at their duty to participate in the loss PricewaterhouseCoopers and consults with clients per the terms of the contract, the on claims, reinsurance and insolvency issues. allocation to impacted policies should be [email protected]
narrower classes, and there are several Smoke Signals class actions pending nationwide. There are generally two types of classes: 1) from the North addiction to cigarettes; 2) injury caused by tobacco through inhalation. Tobacco Litigation in Canada All eyes currently are on Quebec, which Summarized by Bina Dagar has the biggest class action case pending, Letourneau/Blais/ Quebec Counsel on According to Roderic McLauchlan, Tobacco and Health. Trial started in Roderic McLauchlan of Clyde & Co (Canada) Partner, Clyde & Co (Canada) LLP, the March 2012 and will continue into 2013. history of tobacco litigation in Canada This case consolidated two class action Although non-pecuniary damages are goes back 20 years. Individual claims claims, for addiction (Letourneau) capped in Canada, they represent big started appearing in the 1980s and 1990s and for illness caused by tobacco sums. For Letourneau, claimed damages and were unsuccessful. Class actions (Yvan Blais). Quebec is unique among total about $17 billion, and for Blais/ by smokers followed in the 1990s, of Canadian provinces in being a civil law Quebec Counsel, about $10 billion. which many, such as Caputo in Ontario, jurisdiction. And it is one of the most Tobacco companies’ response to this stumbled at the stage of certification. lenient in terms of certification in North class action is that that they followed The court did leave the door open to America. government guidance, the public knew all along of the risk, and this is just an “opportunistic cash grab” on the part of the plaintiffs. The biggest hurdle for the plaintiffs is to prove specific causation and damages. The other notable private law claim is for “light” cigarettes where the Knight case has been certified in British Columbia (BC) as a statutory claim under the Trade Practices Act of 1996 seeking damages and refund by Imperial of all sums paid (unqualified) by class members for light cigarettes. Of even greater consequence is the cascade of government healthcare cost reimbursement claims, led by BC. In Canada, about 90% of health costs are borne by government. BC’s Tobacco
AIRROC MATTERS / FALL 2012 29 TOOLBOX
AIRROC Educational Session Summaries / New York (continued)
Damages and Health Care Costs Recov- ery Act of 2000 allows the government “a direct and distinct action” to “recover cost of health care benefits caused or contributed to by a tobacco related wrong.” (BC Act s. 2 (1)). While the government must prove breach of duty to persons under common law, statute or equity, the act reverses burdens of proof, permits epidemiological evidence, and apportions damages based on market share. Its constitutionality was upheld in 2005. Limitation periods are waived. Nearly all provinces have followed suit, and the estimated provincial healthcare costs claimed to date are in excess of $130 billion. From left: Mark Travers, Jeremy Dongilli, Timothy Krippner, David Wallis, David Raim, Karen Amos With such high stakes, tobacco compa- an engaging panel discussion entitled nies are launching constitutional and Claims on the Emerging Issues: Hydrofracking, jurisdictional challenges. Faced with re- Nanotechnology, Climate Change and jection, they say they will fight all the way. Cutting Edge Genetically Modified Organisms. This Insurance coverage will raise many old article provides just a useful summary of and new issues: fortuity, whether the Hydrofracking, Nanotechnology, the many covered topics. losses are named perils, and aggregation. Climate Change & Genetically Mr. Dongilli first defined “nanotechnol– Given that over 50 years of policies Modified Organisms ogy” as “the understanding and control might be in play, exclusions will differ of matter at dimensions between significantly. With uncertainty regarding Jeremy Dongilli, Senior Complex approximately 1 and 100 nanometers, liability, these matters may wait to be Director of Mass Tort Claims for where unique phenomena enable novel tested only after litigation is over. l Chartis, Timothy Krippner from Segal, applications.” He put this in perspective McCambridge, Singer & Mahoney, Ltd., by noting that if Big Ben were reduced Bina Dagar is President of Ameya Consulting, LLC, Mark Travers, principal at ENVIRON, to a nanometer, the UK would be about ADR & Re/Insurance Advisory Services. and David Wallis, partner with the size of a red blood cell. He next gave [email protected] Chadbourne & Parke, LLP presented a few examples of how the technology is commonly used today, including the automotive industry, cosmetics, band aids and sunscreens. The technology is popular and widely used in the health and fitness area because silver nano- particles have anti-microbial properties. Mr. Dongilli also explained that as research progresses, nano-technology might be used to develop far less invasive and more targeted drugs to combat disease by, for example, delivering medicine directly to a particular cell. Mr. Dongilli’s turned to a consideration of nanotechnology risks. Though not pres- ently known, several studies have shown some potential health risks, including a mesothelioma-like cancer, similar to the result of exposure to asbestos, and poten- tial DNA damage caused by exposure to Members of the audience
30 AIRROC MATTERS / FALL 2012 As part of the “first generation” GMO litigation, Mr. Wallis explained that some suits involved neighboring farm proper- ties, with one farm growing GMO crops and the other attempting to grow organic crops. Due to the inevitable migration of seeds across the boundary line, the or- ganic farm might inadvertently produce GMO crops, leading to potential loss of the farm’s organic certification, ability to meet contractual production obligations, and ability to market its crops at premi- ums associated with organic product. Such suits have arisen against the GMO farm for nuisance, trespass or negligence. Other suits have been filed against neigh- From left: Mark Travers, Jeremy Dongilli, Timothy Krippner, David Wallis, David Raim, Karen Amos boring non-GMO farms for intellectual property infringement by virtue of their nano-particles. Other studies suggested that in defending such actions, it is diffi- growing and selling GMO product sold possible environmental impacts from cult to prove a causal connection between to the neighboring GMO farm. Mr. Wal- the escape of silver nano-particles from an extreme weather event, for instance, lis spoke of the “second generation” of clothing in wash water. As Mr. Dongilli and human influence. While the scientific GMO liability, claims for failure to label closed, however, he noted that presently community is close to agreeing that hu- or disclose the use of GMO products in no one knows which nano-particles are man causes contribute to global warming, something otherwise called “natural”. hazardous to humans, and if they are haz- good challenges can still be made to a These suits are often based on consumer ardous, at what level of concentration the plaintiff’s causation theory. He explained fraud statutes, which sanction treble particles must be found to cause harm. that while data from the Environmental damages and attorney fees for the plain- Protection Agency may give enough sup- Mark Travers next discussed hydraulic tiff. They have also given rise to class port for a general causation argument, fracturing or “hyrdofracking”, a tech- actions, leading to, as Mr. Wallis noted, it may not be enough for specific causa- nique used in drilling for oil and natural “gigantic monetary obligations,” another tion of a particular weather event, for gas deposits trapped in source rock. form of “GMO.” l The technology creates fractures in rock example. He closed by noting that even if into which particles and chemicals are a plaintiff cannot prove causation, where a defense obligation exists, these suits are Joseph C. Monahan is a Partner in the Philadelphia forced to free the deposits. While the office of Saul Ewing LLP. [email protected] industry could not economically access still very expensive to defend. these deposits until relatively recently, David Wallis was last, speaking about hydrofracking and advancements in di- genetically modified organisms or rectional drilling afford access to these “GMOs”. He opened by noting that deposits. Mr. Travers explained that while GMOs have been around for a long time, more “green” chemicals are now used in marked by farmers’ harvesting seeds hyrdofracking, the process nevertheless based on their yields, their hardiness, raises significant environmental issues etc. and the selective breeding of plants because the wastewater from the wells and animals. Now, however, more contains chemicals, metals and potential- DNA modification and transplanting of ly radioactive materials. Other potential genes across species have occurred. He issues include the increased amount of discussed three particular fields where methane migrating from drilling zone to GMOs are prevalent: medical, industrial, groundwater, potential silica exposure at and agricultural, the last of which is the sites, and at least a potential for earth- responsible for the most litigation over quakes caused when fracking destabilizes the past ten years. Mr. Wallis gave as the ground. an example of agricultural GMOs the Tim Krippner followed, speaking of cli- creation of herbicide resistant crops, and mate change litigation. He emphasized noted that 94% of soy beans are GMO. Rahul Mehta and Kathy Barker
AIRROC MATTERS / FALL 2012 31 • • •
• • • •
PRESENT VALUE
News & Events Nigel Curtis
wrote UK domestic, as well as some White Mountains on international, insurance and reinsurance acquisition spree before being placed into runoff earlier MARK YOUR this year. The transaction, subject to regulatory approval, is expected to close CALENDAR in the fourth quarter of 2012. At March 31, 2012, BIL’s gross and net October 8 – 11, 2012 NAPSLO Annual Convention reserves were approximately $1.9 billion and $1.3 billion, respectively, its cash Atlanta, GA and invested assets were approximately www.napslo.org $1.9 billion, and its book value was approximately $530 million. October 14 - 17, 2012 8th Annual AIRROC/R&Q RiverStone will purchase BIL at a Commutation & Networking White Mountains Solutions, the wholly discount to its book value, adjusted owned subsidiary of Bermuda-based for certain pre-closing dividends. The Parsippany,Event New Jersey, USA White Mountains Insurance Group, has purchase price for BIL is expected to www.airroc.org www.rqih.com announced two further acquisitions. be approximately $300 million, subject to certain adjustments at closing. The The specialist runoff unit is to acquire March 1, 2013 Physicians Insurance of Ohio and acquisition is expected to be financed IRLA Academy 2012/13 Citation Insurance Company from using internal resources at RiverStone. claims litigation & updates PICO Holdings. Both companies ceased The renewal rights, operations and assets London, England underwriting in the mid-1990s and have of BIL’s UK regional operations were www.irla-international.com been in run-off since. sold to QBE Insurance (Europe) in Under the terms of the agreement, April 2012. White Mountains Solutions will pay approximately $17 million subject to certain targeted pre-closing dividends. Catalina acquires Expected to be completed in the legacy businesses third quarter of 2012, the transaction PEOPLE and related dividends are subject to from HSBC Department of Insurance approvals in both California and Ohio. Catalina Holdings (Bermuda) Ltd. has signed a definitive agreement to In a separate acquisition, White Moun- acquire two legacy businesses from tains Solutions has announced it will buy HSBC Holdings plc.; HSBC Reinsurance American General Indemnity Company Limited and HSBC Insurance (Ireland) Brian O’Hara is planning a return to the and American General Property Insur- Limited. ance Company from American Inter- market with a new run-off facility, three national Group, Inc. The $35 million With assets of approximately $273 years after retiring as chairman and chief transaction is expected to close during million as of March 31, 2012, the two executive of XL Group. Speaking at the the third quarter of 2012, subject to cus- HSBC units predominantly wrote Insurance Day Summit Bermuda in June, tomary closing conditions and regulatory creditor, property, travel and motor he told delegates that he was working approval from the Departments of Insur- business. HSBC Reinsurance Limited to build a new model for run-off of ance in Illinois and Tennessee. was placed into run-off in June 2010 and discontinued lines, focusing on a different HSBC Insurance (Ireland) Limited was legal approach in Bermuda. l placed into run-off in June 2009. RiverStone buys Established in 2005, Catalina has made If you are aware of items that may Brit run-off six acquisitions to date with average qualify for the next “Present Value,” consideration in excess of $100 million, such as upcoming events, comments or RiverStone, the run-off subsidiary of including Overseas Partners, Quanta developments that have, or could impact Canada’s Fairfax Financial Holdings, Capital, Alea Holdings UK, Western our membership, please email Nigel has agreed to purchase Brit Insurance General Insurance, Glacier Reinsurance Curtis of the Publications Committee Limited (“BIL”) of London, which and Residential Loss Control Holdings. at [email protected].
AIRROC MATTERS / FALL 2012 33 WHO’S TALKING What Lies Ahead? Barbagallo, Horbelt and Rothseid Muse on the Future of Legacy/Run-off Business
No one has THE crystal ball…if they did, the future would be boring. But our three distinguished panelists, Bill Barbagallo, Oliver Horbelt and Andy Rothseid, explore the possibilities that lie over the mountain in an insightful, candid discussion with Connie O'Mara and Peter Scarpato.
Connie O’Mara: What is the current transactions involving discontinued When a company is yielding 3 or 3.5% state of the runoff business and is there blocks of business and an increased on investments and seeing reserve a trend if you see one? concentration and effort by runoff deterioration, conservatively, of a acquirers to look beyond traditional minimum of 5%, there must be a way it Andy Rothseid: The runoff business runoff blocks of business and examine can increase its financial performance continues to prosper and opportunities asset-rich, active underwriting platforms. and return to shareholders. This comes to increase financial performance These ongoing platforms provide runoff from the volume of assets under are motivating opportunities in the acquirers with opportunities to leverage management. marketplace. their existing balance sheets. Existing underwriting platforms, We are seeing an increased focus on Connie: Andy, can you give me an while perhaps not profitable as companies looking for balance sheet ongoing ventures, frequently lack the relief, rationalizing their financial example of a way in which a runoff performance, removing volatility from company might leverage an existing their books of business and legitimate balance sheet strength? Pictured above from left: Bill Barbagallo of Pricewater- devices to access trapped capital. There Andy: We are in an extended period houseCoopers LLP, Oliver Horbelt of Munich Re, and are more reinsurance and acquisition of low investment yield returns. Andy Rothseid of RunOff Re.Solve LLC
34 AIRROC MATTERS / FALL 2012 Peter A. Scarpato & Connie D. O’Mara loss characteristics and loss reserve and capital repatriation and efficiency. operate it as a runoff platform. What does development that plague traditional Obviously, when the ten year Treasury this say about a market that negatively runoff businesses. Runoff acquirers yields less than 1.5%, the margin for values the franchise values of many seeking platforms in the active market cheating has basically disappeared and enterprises? are looking for asset rich portfolios with the pressure towards balance sheet This all happens during a time when workouts has increased. limited downside liability risks to increase supervision and regulatory frameworks their return to shareholders. become more stringent. We experienced Connie: Essentially a company that has …there is plenty of capital something similar in the banking indus- studiously reserved would be asset rich try which introduced heightened capital with little downside because it planned for on stand-by to support requirements amidst major turmoil in losses, to the extent that’s possible given transactions like runoff the macroeconomic environment and volatility in some lines of business? acquisitions and insurance the adjustment process is prolonged and ongoing. Andy: It’s being both studiously reserved, buyouts and restructurings, and less exposed to the more volatile Andy: There have been many runoff risks, asbestos, pollution and health well beyond the pure acquisitions in the last two or three hazard risks, that are the common concept of runoff deals. years. The acquirers have either their denominators among legacy books of own internal financial resources or a business. The absence of these types of — Horbelt track record that allows them to attract liabilities allows runoff acquirers to find ------additional capital. these ongoing platforms attractive. As to valuation and balance sheet There is a tremendous amount of Bill Barbagallo: We’re also seeing a trend leverage, carrying substantial long-term capital looking to be deployed in the towards a different group of exposures liabilities is absorbing capital, limiting market and it is the fnancial investor, that companies are looking at for the underwriting of potentially profitable not the insurance or reinsurance runoff, the primary one being worker’s future business. At the same time, those strategic investor, who wants to enter compensation. More companies are reserves are tying-up risky assets, which the market, but perhaps with unrealistic looking at old worker’s compensation many European insurers face after return expectations based upon their losses still on their books. Many self- experience with other businesses. For insured corporations have these old investing in presumably risk-free assets, which turned out to be anything but risk the market to move more efficiently and worker’s compensation losses still on for these businesses to be transferred their books. free, and so many companies are getting squeezed on both sides of the balance more expeditiously than we have seen in They represent substantial reserves but sheet. Many Loss Portfolio Transfer even the last 12 to 18 months, financial when you’re talking about volatility, inquiries in Europe today are probably investors will hopefully realize that value they’re pretty low because many old cases driven as much by the asset side as by the exists within these balance sheets and are now life pension cases. Decisions have liability side. that the traditional range of expected already been rendered. It’s known, but for investment returns does not necessarily a pure actuarial exercise using the latest Peter Scarpato: What is the impact uniformly apply to all books of business. mortality tables, granted medical costs of current fnancial market conditions can still be unknown, but once again, like interest rates and availability of Connie: Regarding this increase in when you’re dealing with older worker’s fnancing on acquisitions? the sales of books of business over the comp losses even medical is somewhat past few years, what is the relative Oliver: Interest rates are low for most known and stable. concentration of legacy versus pure developed economies. Interest rates as runoff being sold? Is more segregated So, there’s a trend right now in expanding well as credit default swaps are not so low within companies or actually trans– beyond traditional toxic tort, asbestos, in certain peripheral economies within ferred to either companies that environmental and health hazard books, Europe. As to financing availability, there specialize in that business or to third to worker’s compensation. is plenty of capital on stand-by to support party administrators? Oliver Horbelt: I wouldn’t say that we transactions like runoff acquisitions and see a trend in the current market that insurance buyouts and restructurings, Bill: You’re seeing all of that. If I were hasn’t been in the market over the past well beyond the pure concept of runoff to pick, I would say we are seeing less few years. As to finality, there are still too deals. If the market is trading at around of an entire company going into runoff many buyers chasing even fewer deals. 80% book value, it might be attractive to but rather a certain lines of business Also, sellers’ motivations are fairly stable, target a going concern, if one can buy it or exposures being placed in runoff centering on corporate restructuring, at a sufficient discount to book value and or sold to companies that specialize in
AIRROC MATTERS / FALL 2012 35
WHO’S TALKING
What Lies Ahead? (continued) that business. Companies are making we are seeing all manner of classes of Bill: To manage a runoff, just from an decisions to segregate that portion of business subject to sale transactions operational level, is a complex decision the business going into runoff and then Oliver: There’s a third category beyond involving systems, strengths of personnel conducting an internal expense exercise pure legacy and runoff. In Continental and on the other side of the house, what to determine whether it can be completed Europe and the Middle East, there is Andy and Oliver were discussing relative internally and staffed with competent “the going concern business,” in many to the assets and how those assets will be individuals, or should be outsourced. cases the core business where insurers managed and invested. I am not aware of any studies that have written significant business that, From an operational standpoint, the determined which is best. It depends depending upon the tail, continues to determination whether you have the upon the specifics of a particular absorb risk capital. proper systems and personnel to handle company. the business and the evaluation of Andy: It differs among marketplace In my experience, the whether a third party is better suited to and regulations. In the United States, majority of operations handle the business at a reasonable cost that allows the desired rate of return most reserves in runoff are not within set up to handle runoff standalone runoff companies. The on your investments is a company to majority of property and casualty initially were woefully company exercise. reserves, excluding the financial inadequate because most In my experience, the majority of guarantee marketplace, are in companies companies wanted to avoid operations set up to handle runoff with discontinued liabilities written the costs required to put initially were woefully inadequate within the same legal entity where they because most companies wanted to avoid continue to write active business. The together an effective run- off management system. the costs required to put together an household names of major property effective run-off management system. and casualty companies all have those —Barbagallo Runoff becomes the stepchild, with exposures. more concentration given to ongoing Even these companies are more likely ------business than runoff, even though runoff to rationalize balance sheets, improve may represent a significant liability to financial performance, and remove The past 18 months have shown the company that must be addressed. volatility by, for example, segregating an increasing tendency to cede Only after that liability continues to be a where possible the handling and those loss reserves using retroactive significant drain on the active company disposing of owned or inherited legacy reinsurance to deleverage the balance do they step up and incur the costs business to a different legal entity. sheet. Interestingly, this is mostly the necessary to put together an effective We are restricted in the United States companies’ bread and butter business system and staff to manage the runoff. without Part VII transfer legislation, which they would not normally cede Whether companies that only deal in which is prevalent in the UK. Through through a quota share or similar runoff are the best companies to handle the European reinsurance directive, prospective reinsurance. But the capital runoff remains to be seen. You’re as good this transfer mechanism can apply over relief from transferring loss reserves is as your people and your systems. I have various stages to Continental Europe, now understood, increasing the tendency seen very effective runoffs of certain lines allowing a company to distance itself to offload reserves or to accelerate the of business occur within companies that transparently from legacy liabilities, balance sheet to release risk capital tied providing value to shareholders and have segregated rather than outsourced to existing reserves and corresponding the business. . security to policyholders by transferring assets. From a solvency and capital the business to a well-capitalized partner. efficiency perspective, it is often more Andy: Bill’s general statements are United States’ assumption and novation favorable to cede one dollar of liabilities completely correct. Even after the regulations are often more restrictive than than one dollar of premium – for the transition into runoff, large property those available elsewhere. This regulatory same underlying business. and casualty writers are trying to environment limits the options available manage legacy and live liabilities side- to owners of the runoff companies to Connie: Since we’ve been discussing by-side with dedicated staff that are responsibly and transparently pay their the expertise of managing runoff, could not properly incented or motivated to obligations to their policyholders or someone talk a little bit about how achieve optimal financial performance, cedents and terminate their exposure to you judge the expertise of managing something ignored by chief financial prospective liability. As a consequence, runoff? What metrics are used to see officers and chief executive officers capital is trapped and not deployed for if a company is handling those assets of many companies. Even companies more beneficial purposes. Consequently, efficiently? that outsource their runoff or their
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What Lies Ahead? (continued) runoff management regularly do so unfavorably. However, I am not sure that of the difference between its Tier 1 to third parties that are not incented an outside solution is necessarily more capital base and the modeled capital to achieve finality. Frequently these effective. How many of the approximately requirements of its current business plus managers are not compensated based 15 or so buyers of runoff liabilities the entire business written in the past to upon the improved financial results of are really equipped and have the scale the extent that losses are not fully settled. the company they have been hired to to manage the business so that value The sum of premium, reserve and market manage. can be maximized while safeguarding risk explain over 85% of the Solvency II policyholders’ interests? We are going to see increased failures capital requirements. of companies to end their runoff Heightened transparency of an insurer’s exposures properly until they address Heightened transparency capital intensities will lead to a more inte- the need to achieve finality of runoff of an insurer¹s capital grated view of how it optimizes in-force exposures in a manner that allows them intensities will lead to a business vis-à-vis new premium volume. to maintain business relationships with The flip side for an acquirer of runoff li- existing and previous clients, maintain more integrated view of abilities is that – at least in a Solvency II their reputation within the market how it optimizes in-force or equivalent world – size and diversifi- as companies that honor their claim business vis-à-vis new cation matter. It will be bad business to obligations in an open and transparent premium volume. write one asbestos deal every three years; manner, and achieve finality and scale and diversification will determine motivate their employees to focus on —Horbelt the sustainability of this business model bringing about finality rather than simply and if it can be adequate for the risk-ad- maintaining their position for the runoff ------justed returns that must be generated. duration, which can be 25, 35, 40 years Andy: There are two sides to the or longer. Andy: The question turns to how regulatory question. Companies often do not fully appreciate one defines maximizing value. If Recently within the United States, we the financial impact of discontinued you are looking at management fees have seen proactive regulation regarding business. It’s a management and financial and earnings achieved from those discontinued books of business that is distraction, mired in reserve volatility management fees to satisfy shareholder not founded in any specific regulatory with reserves that rarely, if ever, improve concerns, perhaps that is maximizing authority. Traditionally, United States’ as they progress. value. Another perspective is that maximizing value is mitigating your regulators monitor property and Bill is correct that worker’s compensation reserve exposure, controlling your casualty insurance companies based liabilities have become attractive to expenses, eliminating volatility and upon their risk based capital levels. runoff acquirers because the underlying maximizing the return received from Recently financial regulators have liabilities are more easily modeled than your outward reinsurance protection. allowed arguably insolvent companies asbestos and pollution risks. For the to either continue in solvent runoff or Perhaps one or two acquirers of worker’s compensation liabilities, the be transferred to third parties, even discontinued books really focus on these only end in sight is the longevity of the though those companies are technically types of metrics. For the most part, underlying claimant. If the company insolvent and should properly be placed however, acquirers appear to be focused becomes financially impaired, there is no into liquidation or rehabilitation. cap on guarantee fund exposure for the on assembling and leveraging assets, We may see more instances where worker’s compensation liabilities. removing volatility where they can, but generating other forms of earnings to financial regulators continue to take Companies that transition into runoff satisfy shareholders. a proactive role in the operations of must determine where they are in the financially impaired companies, rather progression of their runoff liabilities’ life Peter: We’ve talked a little bit about than allowing them to go under. how the regulatory climate has tightened cycle and what they can do quickly to Bill: I agree with Oliver and Andy. I have achieve finality which will allow them and become more restrictive. How will a different twist on this, the change in the to be more capital efficient and improve companies in this increasingly restrictive regulatory climate will have an impact on their performance for shareholders, while regulatory environment stay proftable or corporations as a whole and we’re talking honoring obligations to policyholders. become more proftable? about large corporations that are self- Oliver: We agree that managing Oliver: Regulation is focusing on insured as well as insurance corporations runoff in a going concern is mostly an transparency and a fair value view of and smaller companies that carry afterthought, only given the attention insurance assets and liabilities. An insurance. The Dodd-Frank Act will have needed when things start to develop insurer’s capacity to write is a function significant implications to corporations
AIRROC MATTERS / FALL 2012 39 When Experience Counts WHO’S TALKING
What Lies Ahead? (continued) because of the heightened legal liability Oliver: In the UK and Continental commission on the prospective business that these companies now face as well Europe, I see that consolidation obviously and looking for commission on the next as the increase in compliance costs. The leads to an increased size and with that book of active business, will naturally increase in costs will require companies to a higher ability to absorb legacy issues. focus efforts on more commercially viable to start relieving some of their liabilities Obviously, some disagree with this profit centers, not legacy liabilities. in an effort to free up more money to theory, but we’ve seen that consolidation address the regulatory issues and become in the primary market has produced an Connie: Do any of you have a sense in compliance. increased ability and willingness to deal of where we are in the curve of the remaining asbestos related runoff Although regulatory compliance issues with runoff or legacy issues internally. This could obviously change as a result liabilities? People have studied this for are usually excluded from D&O and of solvency regimes that make the true years. There have been ups and downs. E&O policies there are some creative economic costs of holding on to legacy Where are we now in 2012? policies that extend some coverage for business transparent. these potential costs but the expansion Andy: It’s really two questions. One into whistleblower provisions of the act question is are we going to continue to are leading many companies to seek see asbestos liabilities emerge within insurance products that address those Broker records are the active or discontinued insurance risks associated with these investigations. historically difficult marketplace and the second question As a result, we are seeing an increase to obtain for runoff is how will companies manage these liabilities moving forward? Clearly the in claims filings with regards to the companies, a reflection whistleblower activities, violations of market believes that these liabilities privacy, network security issues regarding of the commercial reality have either plateaued or are on the usage of social media and data leakage, that the broker, though not downturn, at least within the United and an increase in personal injury claims necessarily disinterested States. Whether that’s the case in the for defamation and slander. United Kingdom or elsewhere remains in legacy business, is more to be seen. What all of this means to runoff is that forward, than retrospective, Managing those exposures raises a this whole change in the regulatory looking. environment is adding additional stress completely different issue. From that on the company’s financials which is a perspective, asbestos liabilities are here motivating factor in a company’s decision — Rothseid to stay on company’s balance sheets to consider runoff as a future strategy. ------unless all stakeholders involved in those exposures – the insureds, insurers and Peter: How, if at all, will recent consolida- Bill: I hope that Oliver’s experience their reinsurers – can accept the available tions in the broker and company markets makes its way here in the U.S. Unfor- transparent closure mechanisms that impact the legacy and runoff management tunately, I have not seen where that can conclude these liabilities by fairly business? consolidation has been helpful in the assessing the value of the liabilities and Andy: Broker records are historically runoff environment. Although the broker insuring that there’s money to pay the difficult to obtain for runoff companies, community has represented a greater truly injured. a reflection of the commercial reality commitment with the transmission of Connie: What are those mechanisms? that the broker, though not necessarily data to runoff entities, the experience is disinterested in legacy business, is more still one of runoffs sitting in the back of Andy: The scheme of arrangement, forward, than retrospective, looking. the bus and much of the change is still by which has worked repeatedly within the Broker records, for such matters as way of lip service. Runoff organizations United Kingdom and Bermuda market- common account and other forms of must still chase information. Information place. In Rhode Island, as we saw with inuring reinsurance are relied upon by often is lost or misplaced, correspondence GTE RE, the Commutation Plan process runoff companies simply because there and emails often are either not responded allows companies to end their runoff is no alternative. Dependent upon the to or delayed which affects collection obligations cleanly and transparently broker’s records since inception, the activity. while honoring their obligations in full runoff company would rather continue Andy: In the last seven to ten years, to their cedents – even with a portfolio of to rely on the broker’s information broker replacement service entities have assumed reinsurance that contained un- rather than re-create the allocation emerged and become successful in the derlying asbestos, pollution and worker’s model themselves. Outward reinsurance marketplace, a reflection of companies’ compensation risks . allocations were often calculated by the appreciation for the commercial Bill: Asbestos was banned in the early broker and not by the ceding company. reality that the broker, having earned 70’s. The latency for mesothelioma is
AIRROC MATTERS / FALL 2012 41 WHO’S TALKING
What Lies Ahead? (continued)
anywhere between 25 and 50 years AIRROC’s membership is diverse educational sessions, forward thinking arising out of exposure. I believe the and reflects the existing marketplace. topics to assist those handling runoff with latest information is that the average Hopefully, the industry will come to a more tools to handle the issues before age for diagnosis for mesothelioma is point where they can speak with one them. Some programs have addressed 62. So if you start to do the math, the voice, calling for legislation that allows topics that many attendees deal with peak occurred in the early 2000’s, so just companies to eliminate liabilities through regularly, affording little benefit. Probably simply due to the time and the age, we are various means on various transparent greater attention can be spent on seeing it on a downhill scale. bases, addressing items discussed today, developing different, creative programs Now as to whether or not there’s light at like rationalization of balance sheets, risk that might address the future of runoff the end of the tunnel for everyone is open elimination, increased yield of investment rather than the past. returns, increased capital efficiency. to debate as it depends on who you are I understand, especially being on the insuring, when the policies were written educational committee, and appreciate and a lot of other factors and certainly the AIRROC should continue many of the sessions already presented, disease type. to provide, in their but AIRROC needs to adjust to meet Is there anything like asbestos? I would educational sessions, those needs and if the changes mean that say no. There are a lot of latent injuries there are different types of exposures in out there, but nothing with that kind forward thinking topics to runoff or we see an increase in worker’s of magnitude. I do see that there are an assist those handling runoff comp as the asbestos and health hazard increasing number of cases that are being with more tools to handle losses are beginning to go down, we dismissed every year, so even though the issues before them. need to look at the members are dealing there are still steady filings, the number of with and continuing to start to address cases that are outstanding are decreasing. —Barbagallo those rather than just simply looking at the past. Oliver: Just an observation. Looking ------at all concluded legacy deals, or at Andy: The need for a US commutation least the ones where we have sufficient forum, which had to be a motivation information over the past 15 years - and Oliver: Looking at the mission statement for AIRROC’s formation, may not this is not just asbestos but often includes and considering that AIRROC combines be as relevant today as it was at the APH and other lines - the valuations of about 60 companies throughout the outset, simply because of marketplace those books are close to the trading levels entire spectrum , AIRROC found a consolidation. The numbers and of the broader going concern market, common denominator and operated portfolios transferred to a small number in terms of price to book multiples. So successfully since inception. I agree with of acquirers would probably lead to either the runoff market feels that the Andy to a degree that more could be those types of productive sessions to be risk inherent in those latent exposures done on the regulatory side to better held among four or five different people is somewhat contained, or the runoff represent the particular interests of the rather than the general membership. I market is sufficiently competitive that the runoff sector, both in the U.S. and maybe agree with Bill’s and Oliver’s suggestion price is really a question of supply of and Europe. Secondly, I’d like to see the Life & to bring live market companies into demand for finality, somewhat detached Health market better represented as well. AIRROC. Forward focused educational from a technical evaluation of reserves. Bill: I echo these comments. AIRROC topics will serve the membership and Multiples for runoff transactions have should continue to provide, in their the industry well. l steadily approached industry valuation levels for active companies, which is surprising. Connie D. O’Mara of Peter A. Scarpato is Peter: How should entities like AIRROC O’Mara Consulting, President of Conflict adjust to assist people in this community LLC, practices in the Resolved, LLC, and to be more efficient, improve their areas of arbitrations, Editor of AIRROC communications and share valuable mediations, and expert Matters. peter@ information for all handling this type of review. connie@ conflictresolved.com business? cdomaraconsulting.com Andy: Although succeeding very well as a forum for discussion and leadership, it would be good to see a unified voice in the industry toward legislative change.
42 AIRROC MATTERS / FALL 2012 DISPUTE RESOLUTION PROCEDURE (DRP)
Close out your costly disputes quickly and efficiently
PROCESS BENEFITS Award no later than 30 days after Agreement between parties Binding submission of briefs or conclusion of to all terms & conditions No precedent set hearing of DRP Cost effective, efficient, expedited process
No discovery, briefs and average 3 - 4 months, top to bottom One arbitrator documentary evidence only Over 60 approved AIRROC No live witness testimony Designed to primarily address 1 - 2 contractual issues Procedures posted to arbitrators, rate $150 hr. unless the parties agree AIRROC website: otherwise Reduction of dispute resolution expenses www.airroc.org WHEN IT COMES TO INSURE. INSURANCE AND REINSURANCE . . .
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It's not enough to solve legal challenges. The best counsel acts to protect your entire business. At Edwards Wildman that's what we do. We understand the impact that the law can have on your business. That’s why our Insurance and Reinsurance team works to provide prompt, comprehensive and effective representation in contentious, transactional and regulatory matters. With offices in the US, London and the Far East, our lawyers work around the world and around the clock to help you advance your business goals. That’s business-minded legal counsel at its best.
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