NEW YORK-A legal battle between Swiss Reinsurance Co. and Lincoln National Corp. is the latest dispute over hundreds of millions of dollars of claims spiraling through the personal accident reinsurance market.

In circumstances that resemble the notorious excess-of-loss spiral that plagued the London market in the 1980s and early 1990s, many reinsurers today are exposed as both cedents and reinsurers on accident risks that were carved out of workers compensation policies.

Several reinsurers are refusing to pay the claims, arguing that they were not informed that they were assuming the same risks several times over.

While many of the disputes are being arbitrated, problems in the personal accident market are turning up in the courts.

In a lawsuit filed April 24 in federal court in New York, Swiss Re Life & Health America Inc., an Armonk, N.Y.-based unit of Swiss Re, seeks to reduce by $770 million the $2 billion it initially agreed to pay Lincoln National for its life reinsurance operations. The dispute is tied to personal accident reinsurance written by Lincoln National Reinsurance Co. (Barbados) Ltd.

Swiss Re argues in its lawsuit that if Lincoln National refuses to return the money, the purchase agreement requires that the dispute be arbitrated. But, in its court filing, Fort Wayne, Ind.-based Lincoln National counters that the dispute seeks "to rewrite the terms of the purchase agreement" and therefore exceeds the scope of arbitration.

Swiss Re's acquisition of the life reinsurance business included a series of reinsurance transactions as well as the purchase of stock in certain Lincoln National companies.

Among other things, Swiss Re is disputing its assumption of $200 million in liabilities through one of the reinsurance contracts, how Lincoln National calculated reserves for personal accident business, an accounting change made by Lincoln National and taxes assumed by the insurer.

Swiss Re and Lincoln National refused to discuss the litigation.

Meanwhile, another legal battle over personal accident risks is being closely watched by other reinsurers involved in similar disputes.

In that case, currently underway in London, Sphere Drake Insurance Ltd. alleges its predecessor was defrauded by a managing general agent and broker Stirling Cooke Brown Holdings Ltd. into writing more than 100 personal accident contracts (see story, page 18).

Nature of the spiral

The business at the heart of these disputes relates to workers compensation carve-out business written in the mid-1990s by several U.S. and Canadian life insurance companies. Under the carve-out programs, the accident and health component of workers comp policies was separated from the employers liability component. Much of this was then ceded to the personal accident reinsurance market.

Aviation and marine bodily injury carve-out business also was extensively written in the personal accident reinsurance market and now also is being disputed.

The carve-out business was written at lower rates than was generally available in the traditional property/casualty market during the 1990s and reinsured extensively in the personal accident excess-of-loss markets in Bermuda, the United States and London. The carve-out business led to large losses for many companies that found themselves both as cedents and reinsurers of the same business.

During the past few years, many reinsurers have refused to pay personal accident reinsurance claims, and dozens of disputes are in or awaiting arbitration.

Because many of these carve-out claims are being disputed, that is causing cash flow problems for some companies caught up in the complex claims circle, market observers say.

The "suspension of claims payments is creating tremendous problems and distress for many companies in the reinsurance market," said James Lawless IV, general counsel for Stirling Cooke Brown in New York.

"Companies are suffering considerable cash flow difficulties, particularly smaller companies with less muscle in the marketplace," one reinsurance executive commented.

Willis Group Holdings Ltd. echoed that observation in a recent filing with the Securities and Exchange Commission.

"As a result of the significant amount of underwriting losses that the underwriters for personal accident reinsurance have incurred, settlements between reinsureds and reinsurers have largely stopped," according to Willis.

In at least two arbitrations of such claims, reinsurers successfully argued that they were no longer bound by parts of their reinsurance program, Willis stated in its filing. It did not provide additional detail of those examples.

"Reinsurance recoverables is always an important issue particularly when (failure to collect) impacts cash flow, as cash is very necessary to keep a company alive," said Joyce Sharaf, managing senior financial analyst for A.M. Best Co. in Oldwick, N.J.

She noted that reinsurance disputes are blamed for Mutual Risk Management Ltd.'s current financial woes. MRM is restructuring its operations, and two of its insurer subsidiaries are in rehabilitation (BI, May 13).

Ms. Sharaf did not discuss the nature of MRM's disputes. But, according to the company's 2000 annual report, the most recent filed, MRM is involved in "ongoing arbitration and litigation," including arbitration proceedings involving a series of accident and health programs as well as reinsurance treaties with a U.S. life insurance company that wrote workers comp reinsurance.

Tracing spiral's origins

The current problems with personal accident reinsurance first became widely known in 1999, when Cologne Reinsurance Co. reported a $275 million pretax loss related to its participation in the Unicover pool.

Unicover, a Lisle, Ill.-based MGA, managed workers comp reinsurance facilities in which reinsurers kept small portions of their risks and retroceded the vast majority to others, most of which retroceded the business again (BI, March 15, 1999). Lincoln National was among the participants in the Unicover pool, which was one of several workers comp carve-out facilities.

Some trace the origins of the current personal accident problems to an earlier spiral in the London market.

Many disputes from that earlier personal accident spiral have been settled through market agreements and commutations, according to Lloyd's of London.

"Lloyd's regulators were instrumental in driving the PA spiral out of the Lloyd's market at the end of 1994. The underwriters involved have all left the market and the syndicates involved are now all making progress towards closure," said a Lloyd's spokesman.

However, several former Lloyd's personal accident underwriters subsequently worked for Stirling Cooke or MGAs that wrote much of the workers comp carve-out business that is now in dispute.

According to Lloyd's, its exposure to the current wave of "alleged abnormal personal accident spirals" involving workers comp carve-out business, is limited to only two syndicates. Syndicates 957 and 1101, both of which are now in run-off, are managed by Duncanson & Holt Syndicate Management Ltd., a reinsurance underwriting manager owned by UnumProvident Corp. of Portland, Maine.

UnumProvident shut down its Lloyd's syndicates as part of its withdrawal from the reinsurance business in 1999, which consisted of the Lloyd's syndicates as well as reinsurance pool management and participation. Although Duncanson & Holt was placed on the block, efforts to sell the company were unsuccessful.

In 1999, UnumProvident took charges of $270.1 million against earnings related to its pullout. In 2000, it recorded an additional $37.4 million in charges related to its participation in London personal accident reinsurance pools.

UnumProvident's reinsurance pool business consists of more than 20 different pool facilities, the majority of which are managed by D&H and a few pools that are managed by third parties, according to the company's 2001 annual statement filed with the SEC March 28.

In 2001, UnumProvident ceded reserves of about $324 million to reinsure its Lloyd's syndicate and disability reinsurance liabilities as well as future business underwritten and managed by Duncanson & Holt Services Inc.

Filings detail other losses

Several other insurers also reveal their exposure to ongoing personal accident reinsurance disputes-and illustrate the extent of the current spiral-in their 2001 annual statements.

For example, in its 2001 annual statement, Philadelphia-based CIGNA Corp. notes that certain CIGNA reinsurance operations now in run-off wrote a 35% share in the primary layer of the Unicover pool. The statement says that four retrocessionaires have commenced arbitration in the United States against CIGNA and other pool members, seeking rescission or damages. A hearing on their claims is scheduled for July.

Two of the retrocessionaires-Sun Life Assurance Co. and Phoenix Home Life Mutual Insurance Co.-commenced a separate arbitration in the United Kingdom claiming that CIGNA owed retrocessional coverage to them. The arbitrator ruled earlier this year that CIGNA did not provide them with retrocessional coverage.

If the arbitration outcomes are unfavorable, the annual statement said, "CIGNA could incur losses material to its consolidated results of operations." However, it added, "management does not expect the arbitration results to have a material adverse effect on CIGNA's liquidity or financial position."

Another insurer embroiled in the disputes is John Hancock Mutual Life Insurance Co.

In its 2001 annual report, John Hancock confirms it set aside $133.7 million in 1999 for liabilities related to workers comp carve-out business-a portion of which originated through the Unicover pool-written through its group health insurance companies.

Under the workers comp arrangements, John Hancock "both assumed risks as a reinsurer, and also passed 95% of these risks on to other companies. This business had originally been reinsured by a number of different companies, and has become the subject of widespread disputes," the company states.

CNA Financial Corp. subsidiaries also are embroiled in a complex personal accident dispute in which claims payments have ground to a halt as reinsurers have "disavowed their obligations," according to the company's 2001 annual report.

In 1997, London-based subsidiary CNA Reinsurance Co. Ltd. entered into an arrangement with IOA Global Ltd., an MGA based in Philadelphia, to develop and manage a book of accident and health risks, CNA reports. IGI Underwriting Agencies Ltd., a personal accident reinsurance managing general underwriter, was appointed by IOA Re to underwrite the book, which included "a number of reinsurance arrangements with respect to personal accident insurance worldwide," the CNA report said.

"CNA Re Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of those risks to other companies, including other CNA insurance subsidiaries and ultimately to a group of reinsurers participating in a reinsurance pool known as the Associated Accident and Health Reinsurance Underwriters Facility. CNA's Group Operations business unit participated as a pool member in the AAHRU Facility in varying percentages between 1997 and 1999," according to CNA's annual report.

CNA arranged "substantial reinsurance protection" to manage its exposures under the IGI program but "certain reinsurers dispute their liabilities to CNA and CNA has commenced arbitration proceedings against such reinsurers," the report notes. CNA announced it was quitting its London market operations last fall.