Panel mulls options for 'uninsurable' risks

BURLINGTON, Vt.—Reinsurers interested in helping craft creative solutions to clients' problems can often work with captive insurers and their parent companies to address unique or seemingly uninsurable exposures.

Moderating a panel on creative reinsurance trends and structures at this year's Vermont Captive Insurance Assn. conference last month in Burlington, Vt., Stuart Grayston, president of Hamilton, Bermuda-based USA Risk Group (Bermuda) Ltd., said the market for reinsurance in the alternative risk transfer market is "not a commodity-type market."

In general, reinsurance transactions in the ART market involve trying to negotiate a solution between the reinsurer and the captive insurer that is to the benefit of both parties, Mr. Grayston said.

Essentially reinsurance deals happen when both parties can agree on retention, limit and premium, said Alan Waring, president of Crump International Ltd. in Hamilton, Bermuda.

Mr. Waring suggested that various approaches, often involving some element of a financial or capital markets structure, can often be developed to help reinsure captive parents' unique or "uninsurable" exposures.

Getting close to clients

Most of the reinsurers looking to enter into creative problem solving for clients want to enter into relationships with those clients, Mr. Waring said, and are attempting to understand and help manage their clients' risks, making reinsurers less likely to retrocede those exposures.

That's a plus for reinsurance buyers, he said, because "in terms of the long-term security of your reinsurance program, if (reinsurers) are transferring most of their risk out, as soon as they lose their reinsurance you lose your reinsurance."

In putting creative reinsurance deals together, Mr. Waring said he usually works with markets that are associated with financial institutions that understand the sort of risks he's bringing them.

Mr. Grayston said he thinks some of the innovative deals emerging in the reinsurance market "are a result of the hedge funds entry into the insurance business." Financial institutions, he said, "are starting to overtake the insurance industry" in terms of developing solutions to unique exposures.

In putting creative reinsurance deals together, Mr. Waring said the biggest challenge from his perspective is "the quality, the form and the standard of the data. A load of stuff in a PDF file doesn't work."

MORE IS MORE

Another panelist, Mark van Zanden, structured risk underwriter at Catlin Insurance Co. Ltd. in Hamilton, Bermuda, said the more information the reinsurer can get on the captive's loss activity the better. And in advance of putting deals together, it helps if clients have gone through the process of understanding what their risks are, Mr. van Zanden said.

Fred Ruck, senior vp at Max Re Ltd. in Hamilton, Bermuda, offered a similar view. "The better information we get it's always going to give us more of a comfort level and the more risk we're going to be willing to assume," he said.

While various investigations, financial restatements and high-level executive departures tied to finite reinsurance transactions have caused many to shy away from finite risk deals, another panel at this year's VCIA conference suggested that finite deals still have a place under proper circumstances.

Edward Koral, senior manager at Deloitte Consulting L.L.P. in New York, said finite risk structures still can be useful in providing coverage for uninsurable risks such as a product recall or some property catastrophe exposures, potential adverse developments such as asbestos exposures, risks that are more predictable over a five- to 10-year span than in any one year or in basket aggregate transactions.

When he worked as a broker, Mr. Koral said, one thing he learned was "you try not to describe what you're doing in any of the documents as income smoothing." In fact, he said, "Income smoothing generally is a byproduct of buying insurance."

But with finite reinsurance contracts, "income smoothing needs to be a byproduct of the transaction, Mr. Koral said. "It shouldn't be a goal of the transaction." As regulators are paying more and more attention to what is and what isn't a legitimate insurance transaction, it's essential to pay attention to what constitutes genuine risk transfer and what is purely income smoothing, he said.

Bryan J. Fuller, senior reinsurance manager at the Kansas City, Mo.-based National Assn. of Insurance Commissioners, said that in looking at the finite reinsurance market, regulators concluded that the documentation of risk transfer "was woefully inadequate in many cases" and wanted to do something about it.

As a result, for regulators eyeing those transactions now, "basically you're looking at risk transfer disclosure and the accounting treatment that's involved for all parties in the transaction," Mr. Fuller said. "Also you're looking at whether there's deception."

To meet the heightened scrutiny of finite risk deals, "documentation is very critical in setting up the files-the underwriting files that will forever remain with the contract," said Sheldon Rosenberg, consulting actuary at Perr & Knight Inc. in Jersey City, N.J. That documentation should include support for the fact that real risk transfer is occurring in the deal, Mr. Rosenberg said. IF