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CHICAGO-The Illinois Insurance Exchange is looking to the state Legislature for help in restoring its credibility and stability after a third syndicate insolvency in the past eight months.
The Chicago-based exchange is asking the Legislature to increase the Illinois Insurance Department's oversight, which means modifying 1979 enabling legislation that has allowed the exchange to operate largely independently since it began in 1981.
It remains to be seen, though, whether the IIE's willingness to trim its own wings will encourage brokers and buyers to seek coverage there.
"The (proposed) regulation seems like it could only be a positive step," said Scott Weicholz, the Coral Gables, Fla.-based chief operating officer of both Britamco Underwriters Inc., an IIE syndicate, and Preferred National Insurance Co.
However, he asked, "You can have all the regulation in the world, but if you don't have the business coming in, what good is it? The IIE's future is contingent on its ability to attract major syndicate members, which will allow it to resume writing in California and Texas," which are important surplus lines markets.
Mr. Weicholz's companies write about $60 million in gross premiums year for commercial multiperil and other liability risks.
Executives there decided to accede to the repeated requests of independent agents and write all new business beginning March 1 through Preferred National, rather than through the IIE syndicate Britamco. At the same time, Britamco also voluntarily withdrew from writing new or renewal business in California.
However, the company does plan to continue as an IIE member and service Britamco policies, he said.
Since the IIE began, about 18 IIE syndicates wrote more than $2.5 billion in gross written premium, including a record $294.7 million in 1994.
Over the years, several of those syndicates have combined or withdrawn, with the most recent withdrawals Transco Syndicate #1 Ltd. and First Mercury Syndicate Inc. Comprehensive Ensurers Market Syndicate Inc. is litigating over withdrawal arrangements. Now, the number of syndicates actively writing risks is down to a handful.
In addition, the IIE's latest financial figures show syndicates wrote $89 million in gross premiums through the third quarter of 1996, compared with $108 million for the same period a year earlier.
The latest syndicate liquidation was ordered Feb. 27 by a Cook County Circuit Court judge, who found Resure Syndicate Inc. insolvent by at least $3.5 million (BI, March 3).
Resure's insolvency heightened the exchange's concern with the pending legislative bill, which "is going to give the Illinois (Insurance) Department a more specific, direct role pertaining to the financial solvency. . .of the existing and future syndicates of the exchange," said James E. Tait, IIE president and chief executive officer.
The eight-page bill sponsored by Sen. Robert Madigan, R-Lincoln, requires state insurance regulators to regularly examine the IIE's financial records, to impose stricter financial reporting requirements and to reject any new or modified IIE operating rules that regulators consider threatening to policyholders.
However, the bill proposes that IIE rules adopted before the bill's proposed Jan. 1, 1998, effective date will be considered approved.
"We believe, at this state, that the bill will be, in most respects, non-controversial and will be viewed as being in the best interest of all the parties that are impacted by it," the IIE's Mr. Tait said.
However, exchange officials have some more talking to do to fully convince state insurance regulators that the bill goes far enough.
Regulators want to subject syndicates to greater solvency standards and greater departmental authority, said Chief Deputy Director Arnold L. Dutcher. However, he declined to discuss specifics because of the ongoing negotiations.
Those negotiations are expected to end soon so the Senate's Insurance and Pensions Committee can review an updated version of the bill before the March 14 deadline for senate committees to report bills.
Resure Syndicate, a wholly owned subsidiary of Talon Re Holdings Inc., a Nevada holding company based in Las Vegas, reported in its most recent annual statement that it wrote $13 million in gross premium in 1995, making it the sixth-largest of 10 syndicates then on the exchange (BI, Sept. 16, 1996). However, Resure had not been actively writing new business since December 1996.
When the Insurance Department stepped in, Resure had $2.2 million in unpaid claims and loss adjustment expense and did not meet the IIE's minimum solvency margin of $3.5 million.
Most of Resure's claims stem from contractors' legal liability coverage a managing general agent wrote in California from 1990 to 1994, said syndicate President and Treasurer Wolfgang D. Daniel.
Application of the continuous trigger theory of liability coverage to building defect cases has created a major headache and substantial legal defense liability for the syndicate, Mr. Daniel said (BI, Feb. 10). The continuous trigger theory, which the California Supreme Court let stand in 1995, stems from the case of Montrose Chemical Corp. of America vs. Admiral Insurance Co.. In that case, an appellate court ruled that a policyholder facing pollution-related claims can tap all of its CGL policies from the time pollution begins until the liability is known.
The syndicate recently asked Illinois regulators for protection from lawsuits that would have consumed assets for legal fees rather than the runoff of valid claims, but the department considered that plan unworkable, he said.
The Illinois liquidator will notify policyholders that coverage is canceled effective 12:01 a.m. March 30, unless it expires or is terminated earlier.
Resure participates in the IIE's $35 million guaranty fund, which is designed to provide up to $300,000 per claimant with an aggregate cap of $15 million per insolvency to cover policyholder claims.
"However, due to the number and complexity of claims against Resure, it is not known when or to what degree those funds will be available," said Richard Darling, chief operating officer of the department's Office of Special Deputy.
The two prior syndicate insolvencies are expected to partially drain that fund, although officials have not yet decided whether to exercise an option under exchange rules that would combine them under a single $15 million cap, according to IIE President Mr. Tait. That option would allow two insolvencies that occur within a short span of time to be considered as one.
However, the liquidator has not taken a position on whether it is appropriate to combine those insolvencies, Mr. Darling said.