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CHICAGO-Illinois Insurance Exchange officials are trying to reassure brokers that lost confidence in the surplus lines market during a dispute that culminated in a plan for the largest syndicate to withdraw after assuming an affiliate's liabilities.
Under the plan, which Indiana regulators partially approved Dec. 29, Classic Syndicate Inc. will reinsure all the liabilities of Geneva Assurance Syndicate Inc. and then withdraw from the IIE to merge with its parent, Classic Fire & Marine Insurance Co. of Crown Point, Ind.
"The whole situation has had an impact on the market and the exchange has to regain the confidence of the brokerage community," said IIE President James M. Skelton, who is preparing presentations on the restructuring for brokers and buyers.
"There is no question that the exchange is surviving," he said.
At least one broker, a Dallas wholesaler, has stopped using the IIE because of the Classic Syndicate problems, and others are watching events very closely.
"There is a lot of speculation but not a lot of details," said Hank Mueller, assistant vp with Travis-Pedersen & Associates Inc., a Chicago wholesaler that has used the IIE as a source of coverage. "I'm looking forward to learning more about the terms of the agreement."
Policies remain in force until they expire, at which time Classic Fire & Marine will consider renewing them.
However, Classic Fire may not be eligible to renew all policies because it's approved in fewer states than was Classic Syndicate.
Classic Syndicate was able to provide surplus lines coverage in about 42 states, Mr. Skelton said. Classic Fire & Marine can now write surplus lines business in about two dozen states, though it plans to seek approval in others.
Behind the disputes with Classic Syndicate Inc. and affiliate Geneva Assurance Syndicate Inc. were large claims stemming from the disastrous 1994 earthquake in Northridge, Calif., Mr. Skelton said.
Classic wrote $64 million of gross premiums in 1994, or 21.7% of the IIE total. The liability insurer, which also wrote some property coverages, was the only IIE syndicate with an A- rating from A.M. Best Co.
Geneva, which also wrote property coverage, was No. 2, with $55.5 million, or 18.8% of the IIE's total.
After months of negotiations, the IIE and regulators from Indiana, Illinois and Florida last month forged a plan-including the reinsurance, withdrawal and merger-to resolve financial complications involving those syndicates (BI, Jan. 1).
Indiana Insurance Commissioner Donna Bennett approved the merger Dec. 29, effective immediately, Chief Deputy Commissioner Marjorie Maginn said.
Other favorable regulatory reviews are expected, said Bruce Ricci, executive vp of Concord General Corp. of Concord, Calif., Classic Fire's parent. He declined to provide details.
The parties involved say the reorganization will consist of Classic and Geneva putting most of their assets into new trust accounts to pay claims. Classic is required by the IIE to put in assets worth at least 110% of its liabilities; Geneva only needs to put in assets equaling 100% of its liabilities but is required to have another $4.7 million in reinsurance.
Among the funds that will be placed in the trust accounts are those now held in IIE-required custodial accounts on behalf of policyholders.
Claims payments will be handled by Concord General operations, though the IIE will monitor their handling on an ongoing basis, and the Indiana Insurance Department will have regulatory authority over claims, said Mr. Skelton. Geneva will remain on the exchange as an inactive syndicate.
The exchange said the agreement "resolves a major concern about the announced runoff of Geneva's liabilities," which Mr. Skelton now estimates at $59.9 million.
Geneva Assurance voluntarily ceased underwriting new or renewal policies last May and began a financial analysis in response to the IIE's concern about its capital adequacy (BI, May 22, 1995).
Classic Syndicate had been temporarily suspended last year after it failed to file a certified audit. A court then ordered Classic to limit its underwriting until it complied with IIE conditions. In addition, the Syndicate withdrew from writing coverage in California as of Sept. 1, 1995.
Policyholders would be adequately protected under the agreement, said Mr. Skelton.
If Classic's assets exceed the required 110% of liabilities, the parent could withdraw excess funds.
However, if loss experience deteriorates in the future, Classic Fire & Marine could be called on to replenish the trust up to the aggregate amount of the trust before any withdrawals, Mr. Ricci said.
Both syndicates' obligations are expected to be met without triggering the IIE's $35 million guaranty fund.
"The Illinois Insurance Department doesn't expect that Classic Syndicate's withdrawal will trigger the exchange's guaranty fund," said Jack Messmore, deputy director of the Illinois department's financial/corporate regulatory division.
A 1979 law gives IIE officials primary regulatory authority, while state regulators play only a secondary role. However, exchange officials have kept Illinois regulators informed about developments, and regulators "have no objections to what is taking place there," he said.
Still, if either syndicate were to be insolvent, claims could be made against the IIE guaranty fund, which consists of $35 million already collected from premium surcharges, as well as individual syndicate custodial accounts.
Individual syndicates are committed to pay $500,000 per insolvency, up to a $1 million maximum, for subsequent insolvencies.
Exchange rules limit guaranty fund payouts to $15 million per aggregate insolvency, $300,000 per claimant per insolvency and also limit the return of unearned premium to $10,000 per claimant.
Elimination of new underwriting by Classic and Geneva will hurt the exchange.
In simple terms of premium volume, Mr. Skelton estimates the 1995 total will be off 15% from 1994 levels, "which is not that bad-all things considered."
Some of the slack will be taken up by other syndicates like the RCA Syndicate #1 Ltd., which was reactivated Jan. 1, 1995, he said.
But the impact goes beyond capacity. Would-be investors have put their plans on hold during the disputes and some brokers are questioning the adequacy of policyholder protections.
Some wholesale brokers have stopped using the IIE in recent months, including the Crump Insurance Services Inc. unit of Sedgwick Group and Delaware Valley Underwriting Agency Inc. of Hatboro, Pa.
Dallas-based Crump had been using Classic Syndicate and had also placed business with lower-rated syndicates with letters of authorization from clients, said Orville D. Jones, Crump's chairman and chief executive officer. However, the broker stopped using the lower-rated syndicates and also dropped Classic when the syndicate ran into trouble with the IIE last year, he said.
Delaware Valley stopped using IIE syndicates in the fall, simply because it had other markets and no longer needed the exchange, said Chuck Conway, the agency's president.
Other brokerages are very interested in the IIE agreement.
"I'm going to watch this very, very closely," said Dick Smith, executive director of the Excess Line Assn. of New York, which acts as a stamping office.
No IIE syndicate currently writes in New York, though applications are pending from Classic Syndicate, Britamco Underwriters Inc. and Transco Syndicate #1 Ltd., which wrote $24.8 million in 1994 gross premium on $22.1 million in policyholder surplus.
"Because security is such an important part of the surplus lines marketplace, caution is always part of the process. I would expect that the situation at the exchange would cause brokers to continue to be very cautious about whatever security any insurer has," said Mr. Smith.
"It is never a positive thing when a market-for whatever reason-withdraws," said Edgar Clark, executive director of The Surplus Lines Assn. of California.
The IIE's Mr. Skelton said there is a need to reassure brokers about the market's viability. He will emphasize that the IIE still has "some very strong syndicates that are big players in the market." These include Britamco, which wrote more than $40 million in gross premium in 1994 on $41.6 million in surplus. The IIE considers Britamco its largest syndicate because it has the highest policyholder surplus. Its 1994 rating from Best was B++.
Concord General's Mr. Ricci sees Classic's withdrawal as having a mixed impact on the IIE.
"On one hand, Classic and Geneva were the two largest syndicates in terms of 1994 premium volume, so that would reduce exchange writings. On the other hand, it (the withdrawal agreement) provides new business opportunities for other exchange syndicates," he said.
"Our (Classic Syndicate's) withdrawal from the exchange is something we always contemplated," Mr. Ricci said, as the insurance company seeks to focus on its core business. The withdrawal also prompted other restructuring, so that four companies are merged into two and United Southern Assurance Co. of Florida becomes a unit of Classic Fire & Marine, he said.
Douglas McLeod contributed to this report.