2007 AIRROC/CAVELL 2007 COMMUTATIONS & NETWORKING EVENT

Why runoff disputes often linger

Growing professionalism in runoff operations benefits all

Why runoff disputes often linger

By REGIS COCCIA

Published Dec. 24, 2007

EAST RUTHERFORD, N.J.—Unrealistic expectations, misunderstandings and other issues tend to prolong disputes involving runoff insurance companies, according to legal experts.

In a panel discussion at the Assn. of Insurance & Reinsurance Run-off Cos./Cavell 2007 Commutations & Networking Event held in the fall in East Rutherford, N.J., attorneys remarked on some of the challenges they're seeing in arbitrations with runoff entities.

"Normally, there is a cause for a company to go into runoff," such as inability to handle a difficult risk, said Clive O'Connell, a partner at Barlow Lyde & Gilbert L.L.P. in London. "There is almost always a desire to achieve a swift resolution."

But the loss of a commercial relationship between a ceding insurer and a reinsurer in runoff can lead to problems, said Marvin Mohn, general counsel at runoff services company Tawa P.L.C. in London. "There can be a hardening of positions, with the runoff person taking a tougher position" than might have been the case if the business relationship were ongoing, he said.

Mr. Mohn said he has observed lengthy runoff cases in which "the lack of corporate memory liberated parties to advance ridiculous positions."

"One change I've seen in arbitration is there isn't the same stigma there was even five years ago," in runoff said Kevin Walsh, a partner at Locke Lord Bissell & Liddell L.L.P. in New York. As a result, disputes may last longer as each side clings to its respective position.

Janet Kloenhamer, president and chief executive officer of discontinued business operations at Fireman's Fund Insurance Co. in Novato, Calif., suggested that mediation might be an alternative.

"If arbitration is not so attractive, what about mediation? Mediation has long been regarded as an effective tool by litigators, particularly on the direct side of the (insurance) business. Mediation takes less time and is less formal than adversarial proceedings, whether that's litigation or arbitration," she said. "Arbitration has become neither quick nor efficient."

Another point raised by the panel was that the industry would be better served by quicker resolution of disputes, particularly in cases that establish precedents.

"The cases that don't go away quickly are the hard cases, those that arise from egregious behavior," said Mr. O'Connell.

"These are the cases that make up precedent and set the law for the future. There is an old legal maxim in England: Hard cases make bad law. The problem is multiplied in the runoff market as people seek short-term solutions," Mr. O'Connell said.

"Look carefully at bad arguments that you raise and the bad cases" cedents bring, he advised. "Judges that look at those cases only see the bad cases. We don't need that as an industry."

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Growing professionalism in runoff operations benefits all

By REGIS COCCIA

Published Dec. 24, 2007

EAST RUTHERFORD, N.J.—As the runoff of insurance operations becomes a bigger and more professional business, policyholders stand to reap benefits, according to the head of the Assn. of Insurance & Reinsurance Run-off Cos.

In addition to promoting faster resolution of claims through its annual Commutations & Networking Event, in partnership with Cavell America Inc., AIRROC is helping enhance the reputation of runoff specialists, said Trish Getty, executive director of the Atlanta-based association.

“Every healthy, sizable company has discontinued lines. What do you do with them? Runoff takes a separate skill set,” she said.

“Runoff has become less adversarial. People understand the benefits of saving legal expenses. It’s bringing more professionalism” to the process, Ms. Getty said. As a result, “I truly believe we’ll see fewer liquidations in the United States.” State insurance departments “are getting smarter” at handling runoffs, she said.

Runoff Person of the Year

One of the highlights of the AIRROC/Cavell Commutations & Networking Event is the honoring of the Runoff Person of the Year. This year’s award went to Brian Snover, vp and general counsel of Berkshire Hathaway Reinsurance Group in Stamford, Conn.

Mr. Snover led an historic multibillion-dollar deal in which Berkshire Hathaway agreed to reinsure and then assume the runoff liabilities of Equitas Ltd., which took on the pre-1993 liabilities of Lloyd’s of London syndicates (BI, Oct. 23, 2006). The deal was widely acclaimed in the market, and some rating agencies cited it in raising Lloyd’s financial strength rating to A+.

While running off Equitas is a complex undertaking, Berkshire’s strategy is similar to other, smaller runoffs: derive enough investment return on the assets to offset any increase in liabilities.

Record attendance

In only its third year, the AIRROC/Cavell Commutations & Networking Event earlier this fall drew more than 400 attendees to the Sheraton Meadowlands Hotel in East Rutherford, N.J. That is a record so far, and up from about 320 in 2006, according to Ms. Getty.

She estimated the size of the global runoff market at between $350 billion and $500 billion but noted “it’s almost impossible” to get a precise figure. Ms. Getty said she believes AIRROC’s members account for perhaps 25% of that overall market. The association is looking to grow and further enhance education and networking opportunities in 2008, she said.

The 2008 meeting is scheduled to take place Oct. 20-22 at a location to be announced. For more information, visit www.airroc.org.

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