Claims Control

While many commentators have focused on the influx of new capital into the property catastrophe reinsurance arena, this is not the only place that capital is flowing towards. The casualty reinsurance market is now experiencing the effect of the “bow wave” triggered by dislocation in the property market.

Casualty reinsurance markets are not, however, only witnessing an influx of former property capital looking for a new diversified home.

In addition, new risk capital, converged with investment capital, is arriving.

This has the potential, at least in theory, to be transformational. A superior investment yield relative to “normal industry average returns” when integrated into a pricing model and applied to classes of business where duration is material, is at worst a competitive advantage, and at best a possible game-changer.

Cedants faced with greater choice need support and guidance in triaging that choice more than ever. Selecting reinsurers is multi-faceted and requires careful consideration in all lines of business.

However, casualty business by its nature – the tail, frequently more complex and nuanced losses and loss events – necessitates additional scrutiny of a reinsurer’s approach to claims.

Filtering out the background noise, established reinsurers are seeking to reinforce the value and strength of incumbency, while new markets offer innovation, spread and other enticing benefits – much of it centred around price and coverage at the point of sale, but with little focus on claims performance and the discharge of contractual obligations.

Historically, insurers settled and paid their own claims, rarely consulting with reinsurers about how to handle matters. Little by little, established dynamics have shifted with reinsurers increasingly asking for claims meetings, additional information and original claim reports. The greater the sums involved, the more assertive the behaviours can become; unless forcefully managed.

NEED FOR REFORM

The elephant in the room, and one that can turn out to be a deeply corrosive issue, is who should be controlling the claim? Willis Re believes now is the time to focus on these issues and to consider three core principles to carry the weight of the appropriate reforms.

Point of control

First, at least in the case of casualty treaty reinsurance, there are powerful reasons for complete control of the claim to reside with the insurer. In all common sense and normal business practice, the insurer’s claims team will never be aiming to settle on any basis that is more generous than the essential obligations of the insurance policy.

The reinsurer has many opportunities and information to assess the business outlook of the insurer, and the quality of its claims operation, before entering any treaty.

However, “following the fortunes” appears to be treated as more of a question than a “given.”

The solution is to underline the right of the insurer to settle claims, and stipulate that all such settlements are binding on the reinsurer. This removes doubt that any loss may be settled at the sole discretion of the insurer.

The burden of proof should shift back to a reinsurer, in cases of dispute, of proving how a claim is not covered under the reinsurance terms and conditions, rather than debating if and how it is under the original policy.

Consider language to reinforce those principles, such as the following:

The reinsurer agrees to abide by all loss settlements of the company, which the company, at its sole discretion, shall adjust, settle or compromise. All such adjustments, settlements or compromises shall be unconditionally binding upon the reinsurer provided they are within the terms and conditions of this contract. The reinsurer shall also benefit in due proportion from any salvages, recoveries and compromises effected or negotiated by the company.

Second, clearly, scenarios can emerge that are sufficiently complex and that require good faith discussions between the parties. So in a market that relies on subscription and syndication, how should clients respond where reinsurers A to V supports a course of action, but reinsurers W to Z have different views and interests?

The solution that Willis Re advocates is a “Super-Majority Settlement Clause.” This text would provide that once claims have been agreed totalling a fixed percentage – say 75% for illustrative purposes – all of the participating reinsurers on a given contract are deemed to be bound by the majority decision and further dissent is not possible.

Philosophically, the claim has been arbitrated by the majority, thus binding the remainder of the participating reinsurer panel. Such an approach preserves the established benefits of spread in a subscription-based market – those who had to replace a 100% participation when a reinsurer non-renews following a “change in strategy” will identify here – while avoiding minority dissent or worse over recoveries where “the tail wags the dog.”

Third, other techniques are required where a reinsurer (perhaps no longer enjoying an ongoing commercial relationship) has taken to raising questions about the validity of the settlement, not out of a sense of dismay that a foolish error has been made, but simply because the reinsurer has found this to be an effective tactic in delaying, or negotiating downwards their share of the settlement.

The solution may be the wider introduction of language already accepted in many treaties, where a reinsurer who delays payment faces a penalty interest clause for that delay. Typical clauses require interest at the 90-day Treasury Bill rate (or equivalent in other territories), plus a fixed percentage.

A reinsurer signing up to such a clause is demonstrating confidence in the speedy settlement of losses.

With such a condition, cedants have economic recourse against poor performance. More practically, the deterrent effect of an interest penalty suppresses prevarication and disincentives behaviour by eliminating the economic advantage of delay.

Regardless of market conditions, unless brokers and reinsurers grasp this issue and focus more on the performance and efficacy of casualty reinsurance transactions when losses occur, rather than enticing but non-contractual assurances, the product itself loses value.

Current market conditions in Canada provide a helpful platform for reinsurance buyers faced with increased choice. They might consider reviewing possible improvements in their ceded casualty placements as a differentiator in market selection.

By tightening possible wording deficiencies, clients will be addressing an area that can yield tangible economic, administrative and counter party benefit for decades. In turn, this provides reinsurers – keen to differentiate their product on a basis other than just price – an opportunity to demonstrate their willingness to support their clients and tackle an elephant in the room.