Reinsurance Focus

Apart from legislative activity in the area of cat funds and cat risk reinsurance, there have been three recent items of interest with respect to alternative reinsurance arrangements:

• Hanover Re, which has been very active in securitizing reinsurance risks, has securitized reinsurance recoverables valued at approximately $1 billion, to accelerate the cash flow in that area;
• The World Bank has created a regional catastrophe risk insurance pool that is currently covering 18 Caribbean countries. Two press releases describe the pool and the initial funding for the pool, which will purchase reinsurance in the private market. A detailed report available at the World Bank's Internet site provides additional detail;
• Guy Carpenter & Company and MMC Securities Corp. has issued a detailed report titled The Catastrophe Bond Market at Year-End 2006, providing an annual review of the catastrophe bond market and an update on bond transaction activity and market dynamics. It provides interesting descriptions of different kinds of alternative risk transfer mechanisms, such as catastrohe bonds, side cars, and extreme mortality transactions, with listings of transactions in each category.

Having settled with the SEC over charges relating to allegedly fraudulent reinsurance transactions, MBIA may be finding closure on the civil side of that problem. Relying on a 1991 Supreme Court decision stating that litigation under Section 10(b) and Rule 10b-5 must be commenced “within one year after the discovery of the facts constituting the violation and within three years after such a violation,” a District Court has dismiss a securities fraud putative class action against MBIA as time-barred. Plaintiffs filed a consolidated securities fraud class action alleging that MBIA’s financial statements were materially misstated because MBIA improperly treated a series of transactions in 1998 as reinsurance agreements, and the associated proceeds as income, although they were in fact disguised loans. In re MBIA Inc. Securities Litigation, Case No. 05-3514 (USDC S.D.N.Y. Feb. 14, 2007).

Hannover Re has issued a $160 million securitization of catastrophe risks. Hannover described the issue as the completion of its “K3″ transaction, being composed of a variety of non-proportional reinsurance of natural perils (hurricanes and earthquakes in the United States, windstorms in Europe and earthquakes in Japan) and worldwide aviation business.

In an interesting form of alternative risk transfer, the Chicago Mercantile Exchange announced that it will commence trading Hurricane index futures and options contracts to hedge hurricane risks. A press release describes the financial instruments generally, while a separate page on the CME’s web site provides more detailed information. At about the same time, the New York Mercantile Exchange announced plans to trade futures contracts based upon the risk of catastrophic property damage from natural disasters. Weather futures are now traded on the Chicago Board of Trade, a NYMEX company. The two exchanges will trade somewhat different types of contracts, based upon different risks. It will be interesting to see what effect, if any, these offerings have on the reinsurance market.

The American Academy of Actuaries' Committee on Property and Liability Financial Reporting has published a Reinsurance Attestation Supplement 20-1: Risk Transfer Testing Practice Notice. This publication provides advisory, non-binding guidance to property/casualty actuaries regarding testing for risk transfer, in connection with the NAIC's new Supplement 20-1 titled the “Reinsurance Attestation Supplement: Attestation of Chief Executive Officer and Chief Financial Officer Regarding Reinsurance Agreements.”

Converium Holding, a Swiss reinsurance company, issued an IPO in December 2001. Converium's North American unit collapsed in September 2004 after four increases in reserves in a single year. Class action lawsuits followed, alleging that management had grossly misrepresented necessary reserves and failed to disclose reserve disputes with the company's outside auditor. The District Court dismissed claims against the IPO's underwriter and broker and claims against the company and individual defendants relating to the IPO, denying dismissal of certain other claims. In re Converium Holding AG Securities Litigation, Case No. 04-7897 (USDC S.D.N.Y. Dec. 28, 2006). This opinion illustrates the strategic problem of finding a solvent deep pocket in this type of situation, and discusses the “storm warning” doctrine, pursuant to which the Court found that the frequent increases to reserves, in increasing amounts, in a short period of time, put investors on notice of problems despite comfort statements by management.

The summary of the meetings of the NAIC's Reinsurance Task Force on December 9, 2006 and December 11, 2006 at the 2006 Winter Meeting has been posted on the NAIC's Internet site. It provides a brief description of the action taken on the proposed creation of the Reinsurance Evaluation Office to rate the financial strength of reinsurers as a basis for a collateral requirement, stating that the proposal should be “further refined” by the NAIC's Financial Condition (E) Committee no later than September 2007.

The NAIC's Reinsurance Task Force has posted on its Internet page the proposal to change the present collateral-based reinsurance credit system to one based upon the financial strength of the reinsurer. Proposal to Grant Credit for Ceded Reinsurance, NAIC Reinsurance Evaluation Office (October 31, 2006 draft). Comments on the proposal have already been posted from 17 organizations, including the RAA, Lloyd's and the European Commission. Further comments may be found on the Task Force's Internet page.

The California Insurance Commissioner has adopted broad revisions to California's regulations covering reinsurance accounting, credit for reinsurance, reinsurance agreements and oversight. The Department's Internet site includes the final regulations, a version that is redlined against the former regulations, statements of reasons for the revisions and a digest summarizing the changes. Comments submitted by various companies and organizations are also posted.

A US District Court has dismissed RICO claims asserted in a Second Amended Complaint against Gen Re (with leave to amend) arising out of the insolvency of Reciprocal of America, and Gen Re's provision of “accommodation reinsurance” that involved an undisclosed side agreement. The Court found a failure to appropriately plead proximate cause and reliance. State law claims were dismissed without prejudice since the only federal law claims were dismissed. In re Reciprocal of America Sales Practices Lit., MDL 1551 (USDC W. D. Ten. Sept. 29, 2006).