LONDON—Actuarial models can be used to calculate payments due on complex reinsurance claims related to the Exxon Valdez oil spill and aviation losses from the first Gulf War, a U.K. court has ruled.
In a case focused on the so-called London market excess of loss spiral, the English Commercial Court in London ruled earlier this week in Equitas Ltd. vs. R&Q Reinsurance Co. U.K. Ltd. that Equitas could use actuarial models to calculate its reinsurance recovery for claims that were incorrectly aggregated by the London insurance market, rather than try to establish the actual liability for each contract.
The case pitted Equitas, the entity created to absorb the pre-1992 liabilities of Lloyd’s of London syndicates, against R&Q (U.K.), the company that manages the run off of Brandywine Reinsurance Co., the entity that absorbed the old liabilities of CIGNA Corp.’s property/casualty business after it was sold to ACE Ltd.
The dispute involved reinsurance claims generated by the 1989 Exxon Valdez oil spill off the coast of Alaska and claims caused by the 1990 destruction of aircraft at an airport in Kuwait during the first Gulf War. Market experts say it is impossible to assess the exact and final value of the claims, but say they likely run to hundreds of millions of dollars.
The claims are difficult to assess because insurers wrongly aggregated the claims in an attempt to maximize reinsurance recoveries, courts ruled in 1996 and 1999 in the cases. In addition, the claims were complicated by the fact that they were insured and reinsured in the LMX spiral, whereby Lloyd’s syndicates and other London market insurers reinsured and retroceded risks several times over, often with syndicates reinsuring the same risk multiple times.
The Kuwait case was further complicated by the involvement of $139 million of refunds paid to Equitas, which now is managed by Resolute Management Services Ltd., which is owned by Berkshire Hathaway Inc., on behalf of Iraq through the U.N. Compensation Commission.
The reinsurers said they could not settle the claims until the exact liability was established for each contract, but Resolute Management Services argued that models could be used to determine the claims’ value.
The Commercial Court agreed that models could be used, paving the way for Equitas to finally settle the claims. According to the court, Equitas’ reinsurance recovery rate should be 86% for the Kuwait claims and 75% for the Exxon Valdez claims, said Howard Kaye, group general counsel of Resolute Management Services, who welcomed the ruling.
“This case was brought to enable the LMX spiral to recommence turning. The case has particularly wide market implications since the stopped spiral had prevented other losses being paid,” Mr. Kaye said.
In a statement, R&Q said it is considering “a counterclaim to apply a discount to substantial sums previously paid to Equitas and is considering whether the judgment gives appropriate grounds for an appeal in whole or in part.”
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