sixth annual symposium october 2, 2014 business matters harvard club back bay boston, massachusetts

SIXTH ANNUAL SYMPOSIUMOCTOBER 2, 2014

BUSINESS MATTERS

HARVARD CLUBBACK BAY

BOSTON, MASSACHUSETTS

THANK YOU TO OUR SPONSORS

Disclaimer

Today’s symposium presentations are for educational purposes only. The views

expressed by the panelists are their own, and are stated in the context of this educational

program. The views expressed do not represent the views of their respective

companies, customers, law firms, or clients.

The New Reinsurance Dispute Landscape

ROBERT W. HAMMESFAHRHWR CONSULTING LLC

Reinsurance Works

Capital: Balance Sheet and Earning Protection

Risk TransferKnowledge Support re Underwriting,

Pricing/Reserving, ClaimsArbitrage

Regulatory Tax, Currency, Interest Rates Risk Valuation

Key Reinsurance Industry Facts

Insurance Premiums: $4.6 trillion 56.8% life/43.2% non-life 82.7% Developed and 17.3% Emerging Source: III August 2014

US Insurance Jobs: 2.4 million Reinsurance: 27,200 Source: US Bureau of Labor Statistics May 2014 as

reported in Best’s Review

Key Reinsurance Facts Continued

Global Reinsurance Revenue: $591 bn (2013)Projected R/I Revenue: $873 bn (2018)Growth: 6.3% to 8% (Excess of GNP

Growth?)Employment Worldwide: 344,000Number of Reinsurance businesses: 10,920Products: 1. Life, 2. Accident, Health &

Medical, 3. Property and Casualty, Surety & Title, Investment Assets


Key Reinsurers:Big four: Berkshire, Munich Re, Swiss

Re, Hannover ReOther Large European: Lloyd’s, SCOR,

Partner Re, Ace, XLAsian: China Re, Korean Re, Tao Re,

JapaneseBermuda ReinsurersUS Reinsurers: RGA


Total Reinsurance Capital: $540bn ($316bn or 58% is property cat)

Growth of Alternative Capital: $50bn or 14% of $540bn and $40bn or 19% of $316bn)

“Alternative capital is transforming market and pushing down prices” III August 2014

If 2% of $7 trillion of private pension funds invests in AC, AC will be increase to $140 bn

ROI of AC: 5% - 8% versus traditional 8% - 10% and distress returns of 12%-20%

Nat Cat Losses: 16 US - $231 and 5 Non-US - $84.5 All number Billions

Industry, Liability and Service Trends

Industry Trends:Offshoring of ReinsuranceHedge Fund Reinsurance: The FloatAlternative Capital: Bond Rate Return Model

Liability TrendsImpact of Economic Crisis and ACANew RisksRise of Mediation and ADR

Delivery of ServicesInternet Impact: Transparency, Speed, Decision Maker Model

Deconstruction of ReinsuranceData analysis/software tools and new loss models

Reinsurance Law

Contract LawReasonable Expectations v. Strict ConstructionSource of Decisions, Treaties, Industry

Publications, Mock Decisions, Market Practice

Follow the Fortunes

ARIAS versus UK Arbitrations/Litigation

Role of Custom and Practice

Lessons Learned

Legal Assumptions Civil versus Anglo Saxon law

Independence/Strength of Judiciary and Bar Common law v. Code Advocacy v. Inquisition legal system Discovery Cultural issues: compensation, negotiation and other

expectations Languages Role of academics, economists and business

Lesson Learned continued

WTC

Subprime Economic Losses

California Wildfires

KRW

Asian Nat Cats

Deepwater

Pollution/Asbestos/Health Hazard (APH)

Reinsurance Dispute Drivers

Objections to Underlying Settlements Recovery after Settlement – UK v. US Settlement to avoid criminal fines

Misrepresentation and Fraud Disclosure Requirements – UK v. US Discovery

Improper Accumulations NatCat versus asbestos

Five Claim Predictions

Attacks on Neutrality of Arbitration Panels

Use of Reinsurance Custom and Practice

Focus on Venue and Law Selection

Reliance on ADR

Rise of New Emerging Risks and Markets

Conclusion

New dispute patterns are emerging

Legal strategies and tactics really impact loss size and timing

Reinsurance claims professionalism is key to industry

Reinsurers needs to embrace new risks and client needs


BUSINESS MATTERS



PANELISTS:

ALEXANDER G. HENLIN E D WA R D S W I L D M A N PA L M E R L L P

KRISTIN SUGA HERESZ E L L E H O F M A N N V O E L B E L & M A S O N L L P

JOHN H. PHILLIPSG E N E R A L R E I N S U R A N C E C O M PA N Y

STEPHEN ZERAA I G P R O P E R T Y C A S U A LT Y

Developments in Property Reinsurance

Disclaimer

Today’s symposium presentation is for educational purposes only. The views

expressed by the panelists are their own, and are stated in the context of this educational

program. The views expressed do not represent the views of their respective

companies, customers, law firms, or clients.

INSURANCE AND REINSURANCE IN THE AGE OF ECONOMIC SANCTIONS


Economic and Trade Sanctions

Economic and trade sanctions have long been used to advance foreign policy goals.

The U.S. and other countries/EU are increasingly using sanctions to manage threats to their security, foreign policy, and economies.

Office of Foreign Assets Control (OFAC)

BNP Paribas: A Cautionary Tale

BNP faced criminal charges for decade-long conspiracy to evade U.S. trade sanctions

Agreed to pay a record $8.9 BILLION penalty

Takeaway: There are real consequences for ignoring sanctions.

In the good old days, things were simple.

States and persons targeted by sanctions were well known, providing insurers with some level of predictability when evaluating and underwriting risks (e.g., Cuba, Iran).

Today, the playing field has changed.

The United States’ ever-expanding sanctions programs and lists of Specially Designated Nationals (SDNs) present new challenges for insurers and reinsurers. Russian oligarchs Emerging terrorist groups

What does this mean for insurers/reinsurers?

Many entities with whom business was done routinely are now off-limits. Entire books of business called into question.

Increased diligence required at all stages: Underwriting: Can we issue this policy? Claims: Can we adjust this loss? Payment: Can we pay out on this loss?

Can U.S. insurers remain competitive?

But there’s more!

In addition to sanctions imposed by the U.S., companies must worry about sanctions imposed by other countries and economic communities (e.g., EU).

There are significant variations among the sanctions imposed

Between a “block” and a hard place

Some countries have “blocking” statutes or regulations that forbid compliance with certain U.S. sanctions (e.g., Cuba-focused sanctions).

This puts some insurers in a tough position: comply with U.S. sanctions programs or face penalties in another (perhaps their home) country.

What can we do?

Stay “in the know” when it comes to sanctions OFAC website: http://www.treasury.gov/resource-

center/sanctions/Pages/regulations.aspx

Check and recheck . . . and check again

Use appropriate policy language Exclusions Geographical limitations

THE RISKS OF REGULATORY UNCERTAINTY


Emergence

Brought to the fore by Superstorm Sandy:

New Jersey Executive Order 107

Pronouncements from the New York Department of Financial Services

Domestic Developments

New York Insurance Circular Letter No. 8 October 28, 2013 http://www.dfs.ny.gov/insurance/circltr/2013/

cl2013_08.pdf

International Developments

The Canterbury/Christchurch Earthquakes

Canterbury Earthquake – September 4, 2010 (7.1 magnitude)

Christchurch Earthquakes

February 22, 2011 (7.1 magnitude)

June 13, 2011 (6.4 magnitude)


The Canterbury/Christchurch Earthquakes


Reinsurance in place, but…

Rates rose heavily New reserving rules and regulations

Implications for…

Loss modeling Adjustment of “loss” Concerns about nationalization

THE UNCERTAIN FUTURE OF TRIA


Status of TRIA’s renewal

Terrorism Risk Insurance Act (TRIA)

Initially passed in 2002

Renewed in 2005 and 2007

Set to expire on 12/31/14

Competing Bills

Looks like TRIA renewal will happen . . . eventually.

The U.S. Senate passed a bill approving TRIA’s renewal in July.

The House had passed its own bill in June, but has not yet responded to the Senate’s bill with a new one of its own.

Senate and House bills must be reconciled.

Sticking Points

Length of renewal

Program bifurcation for nuclear, biological, chemical, or radiological attacks

Insurer co-pay percentages

Program trigger points

BAD FAITH AS AN ELEMENT OF PROPERTY CLAIMS


Origins

Bad faith has long been an element of casualty claims

More recent development in world of property claims Katrina Rita Wilma

Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187, 886 N.E.2d 127 (2008)

Developments

Case Law

Jane Street Holding LLC v. Aspen Am. Ins. Co., 2014 WL 28600 (S.D.N.Y. Jan. 2, 2014)

Travel Re-Insurance Partners, Ltd. v. Liberty Travel, 2012 WL 1623855 (D.N.J. May 9, 2012)

Implications?

Code Upgrades

Direct Claims

Reinsurance

RIGHT TO ASSOCIATE &ACCESS TO RECORDS


SUPPLY CHAIN RISK


WEATHER RISK


Final Thoughts


BUSINESS MATTERS



LIABILITY UPDATE

A PANEL DISCUSSION

Our Esteemed Panel

Randy LeffelmanMunich Re (Chicago)

Bill PerryCarter Perry Bailey (London)

Jason T. VerdoneThe Hartford

HERE TO STAY OR THE NEXT Y2K?

Cyber Liability and Data Breach

Recent Examples

http://www.google.com/url?url=http://www.diabetesmine.com/designcontest/about-the-summit/target-logo&rct=j&frm=1&q=&esrc=s&sa=U&ei=rMApVMKsHcnlsASdr4K4Dg&ved=0CBgQ9QEwAQ&usg=AFQjCNEFD1wC7c-Ds3C_3Ml6DBc_8jHWMQ

http://www.google.com/url?url=http://www.eos-surfaces.com/geos/geos-in-home-depot/&rct=j&frm=1&q=&esrc=s&sa=U&ei=18ApVPLqF-PksAT1wIKQBQ&ved=0CBgQ9QEwAQ&usg=AFQjCNGS0aMfNu6rWhnqvrc2bhYFdlXnHA

J. Law

The Facts

Cyber liability and data breach issues are here to stay Data breaches increased 20.5% during first six

months of 2014 (Identity Theft Resource Center)

Home Depot and Target alone involved some 80 Million customers

The Facts

It is not a matter of if, but when the company is likely to the hacked. Advanced Persistent Threats (APT’s)

Advanced – sophisticated & organized attacks Advanced – Specific targeted attacks Persistent – Lateral movement Persistent – Maintains access to compromised

infrastructure Threats – Extraction of personal information Threats – Attacks against critical infrastructure Threats – Industrial espionage/sabotage

Governments, Organized Crime, “Hacktivists”, Insiders

What are the Issues for Insurers and Reinsurers?

Traditional Wisdom

Case law involving cyber-liability has largely focused on coverage under general liability policies. But coverage case law will begin to develop as cyber claims are litigated under cyber liability forms Sony (PlayStation) sought coverage under CGL in

a NY court – further raising awareness for the need for separate enumerated coverage (cyber)

Untested legal environment that varies from jurisdiction to jurisdiction

Unsettled legislative environment

GL Issues

Coverage A

Is there physical damage to “tangible property”

Electronic data exclusions

What if there is damage to the system itself instead of just data theft

GL Issues

Coverage B

“”Personal and advertising injury”

“oral or written publication, in any manner, of material that violates a person’s right of privacy”

Is There a “Publication”?

Zurich v. Sony Corp.

Hackers stole personal information Sony: Unauthorized use = publication Zurich: Must be the actions of the insured to constitute a

potentially covered publication

New York Trial Court

ZURICH WINS But certainly not going to be the end of the case or

the debate.

Restrictions on GL Coverage

When in doubt, exclude it.

2014 ISO form “Access or Disclosure of Confidential or Personal Information Exclusion”

The Wording

Coverage B excludes:

“Personal and advertising injury” arising out of any access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.

Excluded Damages

This exclusion applies even if damages are claimed for notification costs, credit monitoring expenses, forensic expenses, public relations expenses, or any other loss, cost or expense incurred by you or others arising out of any access to or disclosure of any person’s or organization’s confidential or personal information.

Define It

With respect to Coverage B Personal and Advertising Injury Liability, paragraph 14.e of the Definitions section does not apply.

April 2013 ISO form.

The Market

Cyber insurance market is big and getting much bigger Cyber insurance market is expected to grow to as much as

$2B 77% of midsize-to-large companies plan to purchase cyber

insurance within the next 12 months (MRe) Other policies can be implicated:

Cyber/Network/Privacy Liability Directors and Officers (including shareholder derivative suits

filed on the company’s behalf) Errors and Omissions Commercial Crime CGL

Solutions

Cyber liability policy forms vary greatly and cover a variety of first party and third-party risks Vendors may be required to purchase cyber insurance

as underwriters look into the risk management controls of the entire supply chain.

First Party Cover

1st Party – Data breach, security failure Loss of income/business/network interruption Data loss, hardware damage Forensic investigations, hardening of systems Notice/response costs, crisis management Cyber Extortion

Third Party Cover

3rd Party – Data breach and network security failure Breach of privacy/regulations Negligence, breach of contract, Indemnity Media/multimedia liability Infections of 3rd party systems Other categories of costs—unlimited!!

The Future

Internet of Things (IoT) – technology that relies on sensors to collect data and can be transmitted for analysis and real time updates; Internet of Everything (IoE) – the networked connection of people, processes, data and things

Concern for insurance/reinsurance will be ever expanding use and greater potential for disruption in the marketplace

Reinsurer Beware

What is the exposure of your ceded risks?

Who are you reinsuring?

Are certain categories of business more vulnerable than others?

What forms are they using—consistency of coverage

Class Action Update

US Market—Cyber???

United Kingdom and Europe

Employer Liability

What are the “new” employment claims?

Getting around the WC bar/Exclusive remedy doctrine

Insurer responses

Exclusivity provisions of Illinois WC Act do not bar claim against former employer for asbestos-related diseases

Worked at plant from 1966 to 1970

Diagnosed with meso 41 years later

Folta v. Ferro Eng.,14 N.E.3d 717(Ill. App. 2014)

Exceptions to the Bar

Injury not “accidental”

Injury did not arise from “employment”

Injury not received during course of “employment”

Injury not “compensable” under the Act

The Court’s Answer

Not compensable under the Act because:

Diagnosis was 41 years after employment and thus long after the 15 year statute of repose

Long after 3 year statute of repose in Illinois Worker’s Occupational Disease Act

The Court Observed

“Through no fault of his own, plaintiff never had an opportunity to seek compensation under the Act.”

Thus, his injury was not “compensable”

Walston v. Boeing,2014 WL 4648090

(Sept. 18, 2014)

Exception to WC bar where employer deliberately injures employee

Operative test is whether “”the employer had actual knowledge that an injury was certain to occur and willfully disregards that knowledge”

A Matter of Proof

Walston worked at Boeing 1956 to 1995 (lots of asbestos around)

Specific incident of exposure in 1985

Failed to show that Boeing had knowledge that injury was certain to occur.

Employer Liability

What are the implications for the reinsurer?

Social Media

#MREBAPanel2

Twitter, Facebook, Instagram

New Exposures

Employment

Cyber-torts

But if it isn’t private?

Predictive Modeling

A new tool for the future

The Gloves are Off!

http://www.google.com/url?url=http://sites.psu.edu/connorzimmerman/2014/04/24/rocky-a-legend-pt-1/&rct=j&frm=1&q=&esrc=s&sa=U&ei=ncopVMihGs3lsAStloHQCQ&ved=0CDYQ9QEwEA&usg=AFQjCNFPRBZ9G0KswqN_rAQ3TQ_T1H0nFg

Can’t We Just Get Along?

New Exposures Mean New Problems

How is the dialogue evolving

Are there are potential solutions

Cedent v. ReinsurerClaim Administration

Increased level of scrutiny by reinsurers

Impact on the ceding companies

Focus on GL/AL cases

More claims oriented than accounting

Why Now?

Internal pressure on reinsurers:

Reserving Cash Flow Amount/accuracy of claim data Underwriting modeling and pricing

New Requirements

The Dreaded Audit

Scheduling Level of documentation Scope of “access to records”

Does it Ever End?

Claim files?Underwriting files?Legal files?Paper or electronic?Privilege issues?Confidentiality?Copying

Impacts

Schedule F concernsMore documentsMore follow upMore pressure on brokers

The Buck Stops Here

The Impacts

SLOWER Payments

Internal pressure to collect

Reduce turnaround time between direct payment and reinsurer reimbursement

Any solutions?

Electronic communicationsImproved dataACCORD messagingWeb portalsSecure system access

Questions and Comments

Randy Leffelman

Jason Verdone

Bill Perry

John Harding

And Don’t Forget

#MREBA PANEL 2

Many Thanks.


BUSINESS MATTERS



PANELISTS JOHN CHAPLIN , COMPASS REINSURANCE CONSULTING

DAVE MACINTOSH , AON BENFIELDMATT STANWOOD, JLT TOWERS RE

MIKE MULLINS , DAY PITNEY

MODERATORSUSAN HARTNETT , SUGARMAN ROGERS

THE INTERMEDIARY’S PERSPECTIVE

on Program and Placement Trends, and Dealing with Disputes

reinsurance intermediaries

Brokers who act as intermediaries between reinsurers and ceding companies. For the reinsurer, intermediaries operate as an outside sales force. They also act as advisers to ceding companies in assessing and locating markets that meet their reinsurance needs.

IRMI.com

IntermediaryA reinsurance broker who negotiates contracts of reinsurance on behalf of the reinsured, receiving a commission for placement and other services rendered. Under the terms of one widely used intermediary clause, premiums paid a broker by a reinsured are considered paid to the reinsurer, but loss payments and other funds (such as premium adjustments) paid a broker by a reinsurer are not considered paid to the reinsured until actually received by the reinsured.

Guycarp.com

Key Functions Performed by Reinsurance Intermediaries

Developing Reinsurance Programs on Behalf of Ceding Companies Understanding the ceding company’s goals Understanding risk being reinsured Perform catastrophe and other modeling for

clients Evaluate the most cost effective means to achieve

the ceding company’s financial objectives (i.e. Traditional Market or Capital Market)

Emerging Risks and Modeling


Placing Reinsurance on Behalf of a Ceding Company

Client Advocate Understanding the market Evaluating market security Educating reinsurers about the ceding company and

program and securing participation


Placing Reinsurance on Behalf of a Ceding Company Negotiating terms and conditions of coverage, which

includes obtaining ceding company’s approval of terms and conditions prior to going to market

Identifying the broker’s compensation and obtain ceding company’s approval of compensation prior to binding lines

Contract drafting expertise

Reinsurance Intermediaries should seek to keep their clients informed and aware of all of the available options in contract wording.


Administering the Reinsurance Contracts Acting as the conduit for information Collecting and transferring premium, commissions

and handling claims information (i.e. tracking reserves and transferring loss payments)

Managing the relationship to avoid disputes

And if Disputes Between Cedents and Reinsurers Cant Be Avoided . . .

Is the intermediary caught in the middle?

Whose agent is the intermediary?

Disputes Between Cedents and Reinsurers

Disputes Between Cedents and Reinsurers

Arbitration/Litigation subpoenas and document requests - where are those old contract files, anyway?

The Intermediary’s Perspective:Topic for Discussion

Is the business of reinsurance changing?

What are the key drivers in the purchase and placement of reinsurance today?

What are cedents’ goals in today’s market?

What does the market look like?

What risks are being reinsured and how?

Is the broker’s role changing?

How may this impact parties down the road?

Finance

The Company can write more business

Stabilization

The Company can reduce fluctuations in results from year to

year

Capacity

The Company can write larger policies

Catastrophe

The Company can protect itself from a major loss occurrence

“Traditional” Functions of Reinsurance

Prepared by Aon BenfieldPrepared by Aon Benfield

MReBA’s Sixth Annual SymposiumBusiness Matters – Industry Trends in 2014October 2, 2014

Legal Disclaimer

David’s comments are his alone and may or may not be representative of Aon Benfield’s position or point of view.

State of The Market

“The global reinsurance market is in the depths of a tough market cycle. Intense market competition, sluggish cedent demand, in addition to the onslaught of alternative capital, which is anticipated to drive down prices even further, have been cited as the main contributing reasons for the downgrade market outlook from stable to negative from all leading rating agencies.” – Swiss Re’s CUO Matt Weber, at Monte Carlo Rendezvous

“The traditional reinsurance model is not just under threat from alternative capital, insurance linked securities (ILS) and capital market investors, but also from external sources, such as corporations and technology companies that could become substitute providers of risk protection.” – S&P

“… (a) high volume of catastrophe bonds coupled with 11 sidecar transactions totaling $1.4 billion and collateralized reinsurance vehicles, allowed alternative capital to capture approximately a 20 percent market share of property catastrophe reinsurance volume in the 12 month period leading up to June 30, 2014” - ” Aon Benfield’s, “Capital Revolution – Alternative Markets Fuel Dynamic Environment”

“ … the broadening of investment by ILS investors further eats into the territory of traditional reinsurers, which forces them to shift capacity to other lines of business where demand can be stagnant.” - Moody’s Vice President and Senior Credit Officer Kevin Lee, at a recent London press conference

“The pressure on reinsurance pricing is so intense that it would take two simultaneous “shock scenarios” to turn rates upward again.” - S&P

Reinsurance Supply Evolution Continues

Source: Individual company reports, Aon Benfield Analytics

Global reinsurer capital continued to increase in Q2 2014, up USD15 billion from Q1 to USD570 billion, and up USD 30 billion, or 6 per cent from year end 2013.

Capital market investors participation continues to expand Pricing effect of ongoing convergence is testing the ability of ‘traditional’ capacity

providers to adapt to the changing market environment

Bond and Collateralized Market Development

Source: Aon Benfield Securities, Inc.

Non-traditional market capital has increased 18 percent since year end 2013 to USD58.6 billion

All segments have seen strong increases in 2014 with collateralized ILW capacity up nearly 100 percent to USD3.5 billion

Catastrophe Bond Issuance by Year, 2005 to 2014 (Years ending June 30)

Source: Aon Benfield Securities, Inc.

Form of Transaction

Source: Aon Benfield, Aon Benfield Securities, Inc.

An Intermediary’s Role In Arbitration

Topics For Discussion

Background | The Intermediary Clause

Panel Subpoenas | The FAA

Intermediaries As Arbitration Parties

Intermediary Clause (1)

(Intermediary Name) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder.

All communications…relating thereto shall be transmitted to the Company or the Reinsurer through (Intermediary Name and Address).

Brokers & Reinsurance Markets Assoc., Clause 23A

The Intermediary Clause

Intermediary as Conduit of Information


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 Intermediary Clause

Intermediary as Conduit of Information

Intermediary as Holder of Funds

Premium Dollars Flowing From Cedent Claim Dollars Flowing From Reinsurer

Credit Risk of Intermediary

In re: Pritchard & Baird, Inc.,8 B.R. 265 (D. N.J. 1980) affirmed673 F.2d 1299 (3d Cir. 1981)


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.



(Intermediary Name) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder.

All communications…relating thereto shall be transmitted to the Company or the Reinsurer through (Intermediary Name and Address).


Panel Subpoenas

“The arbitrators … may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.”

9 USCS §7

Panel Subpoenas

Available Legal Arguments

Business Considerations

Current Clients Former Clients, Active In The Market Former Clients In Runoff

Intermediary As Arbitration Party

International Ins. Agency Services, LLC,2007 U.S. Dist. LEXIS 22229 (N.D Ill. 2007)

THANK YOU TO OUR SPONSORS

MReBA SUSTAINING MEMBER FIRMS

sixth annual symposium october 2, 2014 business matters harvard club back bay boston, massachusetts

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