Expert Commentary

Find the Right Reinsurer Years after Contract Termination

It seems like a simple thing: a ceding insurer that purchased a contract of reinsurance should easily know the name of its reinsurer. And, for the most part, that is the case. But when latent claims arise out of insurance policies issued many years ago, identifying the relevant reinsurers may not be so simple.


Reinsurance
December 2013

The when, how, who, and why an insurance company will choose to purchase reinsurance depends on the ceding insurer, the book of business, the economic climate, and myriad other factors.

An insurance company may wish to purchase reinsurance for a specific insurance policy written for a specific complex or unusual risk of a specific policyholder. That kind of reinsurance is typically called facultative reinsurance. An insurance company may wish to purchase reinsurance for a portfolio of its insurance policies—say all its professional liability policies written during a specific policy year. That kind of reinsurance is typically called treaty reinsurance.

When an insurance company purchases facultative reinsurance, one reinsurer typically issues a facultative certificate of reinsurance that provides the reinsurance for that specific underlying insurance policy or risk. But, it certainly is possible and common to have a number of reinsurers issue facultative certificates for that one insurance policy or risk, with each reinsurer taking a certain percentage or layer of that risk.

In the treaty reinsurance context, typically there are multiple reinsurers sharing the liability on the ceded portfolio of insurance policies. But that is not always the case. Some reinsurance treaties are written by a single reinsurer providing all the reinsurance for the entire ceded portfolio of insurance policies.

Reinsurance Billing

Ceding insurers generally have ceded reinsurance departments and related reinsurance accounting functions that keep track of all their reinsurance contracts and relationships. These personnel (or computer systems) should know whom to bill when an insured loss is paid and subject to reimbursement under the reinsurance contracts.

Ceding insurers that use reinsurance intermediaries (brokers) to obtain the reinsurance for them also have the advantage of the reinsurance intermediaries' record of the reinsurance relationships. Typically, the reinsurance intermediary handles the claim billing for the ceding insurer, which means the broker should know whom to bill. Where the ceding insurer uses a reinsurance intermediary, typically that broker handles the billing of claims and the collection of reinsurance until all the claims are paid. This takes quite a burden off the ceding insurer. Nevertheless, a ceding insurer must still be fully involved in this process as it is the ceding insurer that has the contractual right of reinsurance reimbursement, not the broker.

Under either scenario described above, it is incumbent upon the ceding insurer to keep careful track of the reinsurance contracts it enters into and the billing and contact information for each reinsurer. While this used to be done by ledger sheets and hard copy files, today, virtually all ceding insurers and reinsurance intermediaries have computer programs that handle the reinsurance information and billing function.

How To Determine Your Reinsurer

In a typical scenario, determining a ceding insurer's reinsurer should not be that complicated. After each reinsurance contract is entered into, it should be recorded on the ceding insurer's reinsurance system and given a reinsurance contract code. This code identifies the reinsurance contract and often distinguishes between facultative and treaty, line of business reinsured, and other relevant characteristics. When an insurance policy is issued by the ceding insurer, the policy information is recorded on the ceding insurer's business records. Typically, there is a place to record a reinsurance code, which then alerts the ceding insurer's personnel that the insurance policy may be subject to reinsurance protection once a loss is paid. The reinsurance accounting function for the ceding insurer typically takes over at this point on a quota share treaty. On an excess-of-loss treaty and on facultative reinsurance, the claims handler may be the one to cede the loss to the reinsurers. In either case, the function or person responsible for billing the loss to the reinsurers should have little trouble billing the correct reinsurers if the initial coding was done correctly and if the information is kept up to date.

Problems Identifying the Proper Reinsurer

Putting aside coding errors and the odd facultative certificate that an underwriter forgot was purchased, ceding insurers generally know whom their reinsurers are and how to bill them. The problem of identifying the proper reinsurer arises, however, when there have been mergers and acquisitions or insolvencies or where there are latent claims that arise many years later.

A ceding insurer needs to be cognizant of changes to the reinsurer's ownership, group affiliation, and possible portfolio transfers or assignments. For example, Reinsurer A assumed a 25 percent share of a ceding insurer's directors and officers liability portfolio over a 5-year period. If Reinsurer A makes a strategic decision that it will no longer write directors and officers reinsurance, it may look for ways to rid itself of the business it assumed from Reinsurer A.

There are a number of ways to transfer its liability for the ceding insurer's business, including a loss portfolio transfer to another reinsurer. Generally, a loss portfolio transfer will not relieve Reinsurer A of its direct contractual obligation to the ceding insurer unless there is a novation and the ceding insurer agrees to enter into a new contract with the reinsurer assuming the loss portfolio transfer. Nevertheless, in many loss portfolio transfer scenarios, the new assuming reinsurer will contact the ceding insurer and ask to be billed directly. If not properly coded, this could result in confusion about which is the proper reinsurer when losses have to be paid.

Another example is Reinsurer A transferring the responsibility for the ceding insurer's book of business to a runoff manager. Typically, the runoff manager will be asked to be billed directly, even though Reinsurer A is still the legal contract party. Where a ceding insurer's book of business is reinsured by Reinsurer A retroactively, it is typically retroceded at 100 percent, and the retrocessionaire writing the retroactive reinsurance will take over full responsibility for the business either directly or through a manager. Again, without a novation, the original reinsurer is legally liable but may have nothing to do with the reinsurance contract, regardless of the lack of a novation.

If Reinsurer A is purchased by Reinsurer B and no longer exists as a stand-alone company (merged into Reinsurer B), the ceding insurer will have to make sure it changes its reinsurance billing system to keep up with the corporate change. When companies have a succession of corporate changes, it is easy for the ceding insurer to lose track of the correct reinsurer and billing information. Maintaining a careful watch on developments in the reinsurance market is important to maintain an accurate ceded reinsurance contact list.

Latent Claims

The most frequent area in which difficulty in identifying a reinsurer arises is when claims appear many years after the underlying insurance policies were issued and many years after the reinsurance contracts have terminated. Policies written years ago often did not have aggregate limits of liability and were often written on an occurrence basis. The reinsurance contracts that assumed those insurance policies also tended not to have aggregate limits and tended to be written so that the reinsurance contracts would continue to respond to claims no matter how long those claims took to be reported and resolved.

It is not unusual in asbestos, pollution, and other health hazard liabilities (known by some as "APH" claims) that claims are brought decades after the underlying insurance policies were issued. This not only makes the underlying claims adjustment situation very difficult, but it also makes locating and notifying the correct reinsurer even more difficult.

With facultative certificates, identifying the reinsurer potentially responsible to reimburse the ceding insurer on latent claims is nothing short of a nightmare for many insurance companies. Facultative reinsurers issued millions of facultative certificates to ceding insurers, which, in turn, issued policies of insurance to nearly all asbestos products manufacturers, industrial companies with potential toxic waste sites, energy companies, and other large commercial entities. Locating facultative certificates 20, 30, or more years after issuance when latent claims arise is problematic, especially since many companies have gone out of business or have been merged and acquired numerous times.

Moreover, it is not unusual for a ceding insurer to have purchased treaty and facultative reinsurance covering different portions of the same underlying insurance policy. The ceding insurer may have a treaty covering all its casualty insurance policies written for commercial risks but may have also purchased facultative reinsurance on any number of those risks where it wrote an insurance policy with limits in excess of its treaty limits. For example, the ceding insurer's excess-of-loss treaty may protect it for losses in excess of $500,000 up to $1 million. If the ceding insurer wrote insurance policies for some of its insureds with a $2 million limit of liability, it may have purchased facultative reinsurance to cover 50 percent of the excess over $1 million on a policy-by-policy basis. Finding these facultative certificates after many years may be impossible if they were not coded or filed in a way that someone today can find them.

In the recent cases involving former National Football League (NFL) players suing the NFL for personal injuries manifesting in serious brain damage, claims go back to the 1940s and 1950s. Both the NFL and the insurance companies that allegedly insured the NFL are having some difficulty locating these early policies. Now imagine those insurance companies having to identify any reinsurers that may be responsible for reimbursing the ceding insurers should they have to pay these losses. Easy it is not.

Conclusion

As a ceding insurer, keeping track of your reinsurer is critical. No ceding insurer can afford not to collect on its reinsurance. This is even more critical where the ceding insurer wrote policies years ago without aggregate limits and on an occurrence basis. Latent losses, especially asbestos, pollution, and health hazard liabilities, test the ability of ceding insurers, reinsurance intermediaries, and reinsurers to figure out who is responsible to share in these latent losses. And, if latent losses arising from insurance policies issued decades ago weren't complicated enough, acquisitions, mergers, retroactive reinsurance, and runoff purchases help mask the identity of the proper reinsurer even more.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do 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.

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