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.
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.
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 in part because of 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 ceding insurer for premiums due to reinsurers under reinsurance contracts. Unfortunately, those funds never made it to the reinsurers. A dispute arose in bankruptcy court over who had claims against the estate for the premiums: the ceding insurer that originally paid the premiums and was now being forced to pay those premiums again directly to the reinsurers to avoid cancellation of the reinsurance contracts or the reinsurers to which those premiums were intended. The court refused to find that payment of premium to Pritchard & Baird was payment to the reinsurers, holding that Pritchard & Baird was the ceding insurer's agent. The ceding insurer ended up bearing 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.
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.
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