Stuck in the Middle—The Reinsurance Intermediary
March 2006
The reinsurance industry is made up of two
major market components. First, you have the direct reinsurance market, which
includes a smallish number of large professional reinsurance companies that
negotiate and deal directly with ceding insurers without any assistance from
third parties. Second, you have the broker reinsurance market, which includes
a much larger number of reinsurance companies of varying sizes.
by Larry
P. Schiffer
LeBoeuf,
Lamb, Greene & MacRae LLP
In the broker market, there are no direct dealings between the ceding insurer
and the reinsurer. Instead, a reinsured's access to the broker reinsurance market
is only through a reinsurance broker, which the industry often calls a reinsurance
intermediary. This Commentary will discuss some of the legal aspects of the
reinsurance intermediary relationship to both ceding insurers and reinsurers.
What's It All about?
There have been brokers in the insurance industry probably from its very
beginnings. When the first insured risks began being reinsured by others willing
to assume a share of the original risk, it is likely that a broker was there
to introduce the original insurer to the reinsurer. In the London market, where
reinsurance effectively began, it is the reinsurance intermediary who, on behalf
of the ceding insurer, works through the reinsurance market by visiting the
reinsurance underwriters individually and providing them with the basic details
of the business to be reinsured.
Essentially, the reinsurance intermediary is a go-between, whose function
it is to bring together the reinsured and reinsurer to secure a contract of
reinsurance on terms agreeable to both parties. The reinsurance intermediary
often will assist the reinsured in planning and developing its reinsurance program,
put together the reinsurance proposal (called the placing information) and relevant
premium and loss statistics to present to the reinsurance market when soliciting
for reinsurers, propose to the reinsured the reinsurers to solicit, solicit
those reinsurers on the reinsured's behalf, and prepare the reinsurance slip
and, eventually, the reinsurance contract wording, that will be presented to
the reinsurance market for agreement. The reinsurance intermediary does all
of this for a brokerage fee, which is paid out of the premium ceded from the
reinsured to the reinsurer.
Duty To Disclose
One of the most important aspects of the reinsurance intermediary's role
during the placement of a reinsurance contract is to make sure all the material
information about the underlying risk is disclosed to the reinsurer. The reinsurance
intermediary should not pick and choose what it believes is relevant information
from what the ceding insurer has supplied, but must present to the reinsurers
all of the information obtained from the ceding insurer. The reinsurance intermediary
must promptly transmit any questions, concerns, or requests for more information
from the prospective reinsurer to the ceding insurer. Where all the information
is flowing through the reinsurance intermediary about the proposed reinsurance
deal, full and prompt disclosure is essential.
Maintaining the Reinsurance Relationship
Once the reinsurance has been placed, the reinsurance intermediary will act
as a conduit between the reinsured and the reinsurer for the administration
of the reinsurance contract. First, the reinsurance intermediary will make sure
that the formal contract documentation is all prepared and signed by each party.
Subsequent addenda or other changes to the reinsurance agreement will all flow
through the reinsurance intermediary. The reinsurance intermediary's contract
wording specialists handle the documentation aspect of the reinsurance arrangement.
Even before the contract wording is finalized, all reports, premiums, loss
payment requests, loss payments, and reserve information pass through the reinsurance
intermediary as part of its duties in maintaining the reinsurance relationship
during the life of the reinsurance contract. Reinsurance accounting and claims
specialists at the reinsurance intermediary will be responsible for these tasks.
These administrative service aspects are important to both the reinsured
and the reinsurer. The reinsured need only report to the reinsurance intermediary
and the reinsurance intermediary then takes care of allocating premiums and
losses to the relevant reinsurers participating on the reinsured's reinsurance
program. Conversely, the reinsurer does not need to maintain a large staff when
the reinsurance intermediary will allocate to it the appropriate premium (less
brokerage, of course) and will bill it the appropriate share of any losses.
Smaller reinsurers rely heavily on the reinsurance intermediary for accounting
and claims administration.
Continuing responsibility for administration, however, gets dicey when disputes
arise or when one of the parties goes into runoff or into insolvency. While
the reinsurance intermediary's brokerage fee is meant to compensate the reinsurance
intermediary for its ongoing administrative obligations until all claims are
settled, its financial incentive to continue with these tasks diminishes when
the prospect of future business is eliminated by a dispute or runoff.
A related issue arises when the reinsured and reinsurer dispute some aspect
of the reinsurance contract and the reinsurance intermediary is called on to
produce documents and appear as a witness. In certain markets, the cooperation
of the reinsurance intermediary is essential for the parties to resolve their
dispute. In the London market, it may be the case that the reinsurance intermediary
is the only source for the communications between the parties that could explain
the parties' intent when they entered into the reinsurance contract. The reinsurance
intermediary also may be the only source, or the most complete source, for the
contract wording and its negotiation and drafting. While the reinsurance intermediary
is not typically a party to the reinsurance contract, its cooperation may be
requested by the reinsured or subpoenaed by the arbitration panel.
Regulation
In the United States, reinsurance intermediaries have been regulated since
at least 1976. Most states have adopted a version of the Reinsurance Intermediary
Model Act, promulgated by the National Association of Insurance Commissioners.
Under the Act, there are two categories of intermediaries: intermediary brokers
and intermediary managers. Intermediary brokers are defined as any firm, association,
or corporation who "solicits, negotiates, or places reinsurance cessions or
retrocessions on behalf of a ceding insurer without having the authority or
power to bind reinsurance on behalf of such insurer." Intermediary managers
are those that have binding authority from the reinsurers and are really managing
general agents or underwriters (see Commentary, The Trouble with Giving Away the Pen,
June 2001).
The regulation of reinsurance intermediaries began with the bankruptcy of
Pritchard & Baird, a major reinsurance intermediary in the early 1970s. Pritchard
& Baird went bankrupt while holding funds paid to it by the reinsurer for claims
due under a reinsurance contract. Unfortunately, those funds never made it to
the reinsured. The reinsured sued the reinsurer for nonpayment, and the reinsurer
defended that it had paid the loss payments to the reinsurance intermediary
as the agent of the reinsured. The court refused to find that payment to Pritchard
& Baird was payment to the reinsured. The reinsurer was forced to pay twice
and had to absorb the credit risk of the intermediary.
Shortly afterward, the regulation of reinsurance intermediaries began in
earnest, and the industry developed a clause for reinsurance contracts that
specifically dealt with the credit risk associated with payment of funds to
a reinsurance intermediary. Below is the current Brokers & Reinsurance Markets
Association (BRMA) Intermediary Clause:
- (Intermediary Name) is hereby recognized
as the Intermediary negotiating this Contract for all business hereunder.
All communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company
or the Reinsurer through (Intermediary Name
and Address). Payments by the Company to the Intermediary shall be
deemed to constitute payment to the Reinsurer. Payments by the Reinsurer
to the Intermediary shall be deemed to constitute payment to the Company
only to the extent that such payments are actually received by the Company.
The BRMA Intermediary Clause, as do most intermediary clauses in most reinsurance
contracts, shifts to the reinsurer the credit risk of the reinsurance intermediary.
The clause provides that payment by the reinsured to the reinsurance intermediary
is payment to the reinsurer, but payments by the reinsurer to the intermediary
are not payments to the reinsured unless the payments are actually received
by the reinsured.
More Intense Regulation
Reinsurance intermediaries are now required to be licensed in most states.
Penalties are imposed on unlicensed intermediaries. In some states, led by New
York through its Regulation 98, reinsurance intermediaries must have written
authorization from a reinsured before procuring reinsurance for the reinsured.
The reinsurance intermediary must provide the reinsured with written proof that
a reinsurer has agreed to assume the risk. The reinsurance intermediary also
must inquire into the financial condition of the reinsurer and disclosed its
findings to the reinsured.
Recordkeeping requirements also exist, mandating that the reinsurance intermediary
keep a complete record of the reinsurance transaction for at least 10 years
after the expiration of the reinsurance contract. Reinsurance intermediaries
under these regulations are now responsible as fiduciaries for funds received
as reinsurance intermediaries. Funds on reinsurance contracts must be kept in
separate, identifiable accounts and may not be commingled with the reinsurance
intermediaries' own funds.
Whose Agent Am I Anyway?
The general rule is that the reinsurance intermediary serves as the ceding
insurer's agent. But there are aspects of the reinsurance intermediary's duties
that may be viewed as acting, in part, on the reinsurer's behalf. A determination
of agency will depend on the contractual relationships entered into and the
facts surrounding the relationships. The scope of any agency may be spelled
out in any written brokerage agreement between the ceding insurer and the reinsurance
intermediary. Common law agency rules will still apply, however, to the actions
taken by the reinsurance intermediary during the life of the reinsurance agreement.
Conclusion
The reinsurance intermediary has evolved from merely a "middle-man" that
helped bring reinsurance contracting parties together to a highly regulated
and integral part of the reinsurance industry. Most ceding insurers have formal
agreements with their reinsurance intermediaries that set out the duties and
expectations of both parties during the brokerage relationship. For certain
ceding insurers, and for many reinsurers, working with the right reinsurance
intermediary will be the key to a profitable reinsurance arrangement for all
concerned parties.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.