Vol 1 (2004) - Issue 2

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Rhode Island Jurisdiction and Impact on Insurance/Re-Insurance Restructuring

The run-off market in the United States continued to expand in 2003. Established companies either stopped underwriting, sold renewal rights, exited major lines of business or undertook other modes of strategic restructuring.
‘Traditional’ risks that have plagued the insurance industry for close to a generation - notably asbestos, pollution and health hazards (‘APH claims’) – remain problematic and unresolved. The inability of industry, government, unions and claimants to agree a legislative solution for asbestos liability further delayed resolution of this troublesome exposure.

Like a computer virus, asbestos liability spreads, without abatement, from insured to insured, and, in turn, from insured to insurer, from insurer to reinsurer and, finally, from re-insurer to retrocessionaire. Initially it affected just the companies that mined and manufactured products containing asbestos fibers. It has progressed through the economic matrix of manufacturing - beyond insulators to the manufacturers of brake linings, cigarette filters and from there to the other entities in the process – even distributors of the products. As a result, companies that in the late 1980s most certainly never anticipated potential economic ruin simply from handling the product, find themselves now struggling to stop the flow of cash to impaired and, most significantly, allegedly unimpaired claimants.

Little has been accomplished to stem the tide. Traditional coverage defences have been ineffective. The insureds - in their own fight for survival – have appeased claimants’ groups by paying bulk settlements for those who may now be unimpaired but perhaps will be impaired later. Insurers find the insured often asserting claims for coverage for the losses under theories once thought inapplicable. Worse yet, the consequential bankruptcy of numerous insureds has subjected the insurers to potentially faster payout patterns than were ever anticipated.

The problems facing the industry do not end with APH claims. Additional risks - construction defect claims, surety claims, finite re-insurance - have added significantly to the billions of dollars in run-off in the U.S.
Various non-traditional sources of capital entered the market after September 11, perhaps hoping to take advantage of a hardening market. While some hardening in price has occurred, and premiums have grown, it is too soon to tell whether these portfolios will experience loss development consistent with strict underwriting standards.

A notable development concurrent with the post-September 11 premium growth has been a troublesome growth in re-insurance balances both in paid claims and reserves. It is unclear, and perhaps unfair to conclude, that the expansion in unpaid re-insurance is the direct result of the drive to generate large premium volume. Regardless, the ceded re-insurance balances - particularly with recent entries into the run-off market - remain high.

Companies remain eager to explore methods and practices that will allow them to manage and bring finality to these long-tail and often volatile portfolios. Companies that are no longer actively writing new business are forced to come to grips with their ceded or outwards re-insurance exposures. Where a focus of the ongoing business may have been premium generation, the ‘run-off’ company - whether formally or informally in run-off - must now preserve capital, reduce volatility of inwards exposures, control expenses, maintain regulatory compliance and, most importantly, continue to honour valid policyholder claims.
Various factors complicate the process. Declining interest rates have lead to reduced yields on investment portfolios - particularly those that are not heavily invested in equities. More and more significant companies are also shutting down lines of business. This can lead to difficulties in collecting re-insurance cover - or even communicating effectively with the reinsurer regarding the cover.

For those US companies that no longer write new business, re-insurance assets and their collection are paramount to their ongoing financial health. There should be a greater willingness to explore settlement opportunities with re-insurers, which may lead ultimately to commutation.