The New Reinsurance Dispute Landscape
by ~ Benjamin H. Nissim (Email) (Web Site)
The Massachusetts Reinsurance Bar Association's sixth annual symposium began with a keynote address by Robert W. Hammesfahr of HWR Consulting LLC.
Mr. Hammesfahr's presentation, "The New Reinsurance Dispute Landscape," provided an overview of dispute resolution in the reinsurance industry, with a discussion of the present, and future, state of the business of reinsurance. He first provided context - a discussion of the volume and distribution of the insurance and reinsurance business across the globe. Mr. Hammesfahr then moved to trends in claim handling and the new competition reinsurance companies face in the marketplace. After providing some business context for the reinsurance industry, Mr. Hammesfahr's remarks pivoted to reinsurance and the law - specifically, how the law is used and evolves in a global industry, and how lawyers can provide value to reinsurers and cedents alike. Finally, the remarks transitioned to thoughts about some of the likely drivers of reinsurance disputes, and predictions for how claims will evolve in the coming years.
Mr. Hammesfahr's wide-ranging career as an attorney and business executive provided the perfect foundation to introduce the theme of this year's symposium: Business Matters. As an attorney, Mr. Hammesfahr acted as lead counsel in numerous major reinsurance cases. He also quite literally wrote the book on the law of reinsurance claims, aptly titled The Law of Reinsurance Claims. After leaving private practice, Mr. Hammesfahr spent many years at Swiss Reinsurance Company, holding the title of Executive Claims Expert and Managing Director upon his retirement. Now having left Swiss Re, he works as a consultant for HWR Consulting LLC.
The keynote address began by discussing a simple, fundamental fact - that reinsurance works. As a business, as an industry, and as part of a partnership with direct insurers, reinsurance ensures capital growth, necessary transfer of risk, and the transmission of underwriting knowledge and support across the globe.
That said, there appears to be some confusion as to what the reinsurance industry actually is. The truth of the matter, Mr. Hammesfahr explained, is that the reinsurance industry is only a fraction of the insurance industry as a whole. Indeed, the insurance industry accounts for 2.4 million jobs in the United States alone; in recent years, $4.6 trillion has been collected globally in insurance premiums. By comparison, there is a total of 27,200 reinsurance jobs in the U.S., and only $591 billion in global reinsurance revenue.
But the smaller size of the reinsurance industry relative to the direct insurance market does not mean it is not a successful industry - indeed, the emergence of new competition in the market is a reflection of just that. There are clearly both positive industry trends - including projected industry revenue of $873 billion by 2018 and accompanying industry growth of 6-8% - and an increased presence of new competitors and types of reinsurance arrangements in the marketplace. A changing industry, Mr. Hammesfahr explained, means new opportunities.
'Delivery of Service is Key'
After providing significant insight into the scope and nature of the reinsurance industry, Mr. Hammesfahr turned to changing trends the industry faces. Important trends that were highlighted included those stemming from the economic crisis and the Affordable Care Act, and the changing nature of risks being insured (and reinsured). Also examined were the rise and scope of catastrophic losses, not just in the United States and Europe but throughout the developing world. Indeed, the import of developing markets and the new risks they represent was highlighted as a particular point of interest. The question was posed whether, at this point in time, with the infrastructure that exists, there is profitability in pursuing business in emerging markets?
In seeking to answer that question, the discussion led naturally to the next topic-the impact of alternative capital, off-shoring, and hedge funds on the reinsurance industry. It was acknowledged that these new(ish) market players are competitors to traditional reinsurance companies that are unlikely to go away. But they also represent opportunities for reinsurance professionals, particularly in modeling and projection work as well as effective delivery of service. Having identified these pressure points, Mr. Hammesfahr provided strong advice-that reinsurers deconstruct their services to determine their core competencies and to determine in what ways the reinsurer can provide the best service.
'Reinsurance is Contract Performance'
For the lawyers and business people in the audience, Mr. Hammesfahr had two important warnings: first, that reinsurance is contract performance; and, second, that where your dispute is centered will have a material impact on if, and how, your dispute is resolved. Mr. Hammesfahr made clear that significant differences exist between the English and American approaches to reinsurance dispute resolution. In particular, he explained, the English apply a 'strict construction' approach to reinsurance contracts. In contrast, one should expect a 'reasonable expectations' paradigm in an American court or arbitration. This creates the possibility of a serious gulf between interpretations of the same contract language.
Mr. Hammesfahr also discussed the differences between civil and common law jurisdictions, and the resulting impact on reinsurance disputes. He viewed the role of the judge in civil versus common law jurisdictions, and the fact that American discovery practice does not have its equal outside the U.S. and some Commonwealth countries, as particularly important.
'What Drives (and Will Drive) Reinsurance Disputes'
Mr. Hammesfahr then provided the audience with several important takeaways. First, he addressed those factors that tend to drive reinsurance disputes. Of those, he identified objections to underlying settlements, misrepresentation and fraud, and improper accumulations as the main sources of dispute. He also provided predictions about focal points of future reinsurance disputes, including the likelihood of continued attacks on arbitration panel neutrality, a focus on venue and law selection, and the use of custom and practice. The focus on venue and choice of law was seen as particularly important given the rise of new risks and increased business in developing markets. Mr. Hammesfahr additionally foresaw a likelihood of increased reliance on alternative dispute resolution methods.
Second, even in the face of these new dispute trends, Mr. Hammesfahr emphasized the fact that lawyers do add value to reinsurance claim handling. This value, he explained, is particularly relevant to the development of legal strategies and tactics that influence loss size and timing. Attorneys provide value by helping to define the legal framework in which loss modelers and reinsurance claims professionals make their underwriting and loss-handling decisions.
Finally, Mr. Hammesfahr encouraged attendees to remain professional, embrace new risks, and learn new ways to meet client needs. In that way, he counseled, the reinsurance industry would continue to grow.
Mr. Nissim is an associate in the Hartford office of Day Pitney LLP. He may be reached at email@example.com or (860) 275-0100.
The 2014 MReBA symposium presentations were for educational purposes only. Views expressed by presenters at the symposium were their own and did not represent the views of their respective companies, law firms, or clients, nor do they represent the views of Day Pitney LLP.
© 2014 Day Pitney LLP. All rights reserved.