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Last Word: The need for speed in collections

Last Word: The need for speed in collections

Given the amount of uncollected reinsurance proceeds throughout the industry, the speed of reinsurance collections is clearly a constant concern. This is not merely a cedent problem--the costs and uncertainties caused by the slowness of collections affect reinsurers as well; and, of course, reinsurers very frequently have to collect from their own retrocessionaires.

Part of the problem is structural and, thus, difficult to resolve. The sheer number of transactions and losses, the complexity of many reinsurance programs, the need in many cases to act through an intermediary and the staggering amount of paper produced in the process--which, presumably, someone must review in detail and then make a decision--necessarily slows the process significantly. At least, in the short run, these conditions can best be addressed at the individual company level by constantly striving to improve efficiency and by diligent follow-up.

An area in which strategies to speed the process can be effective is disputes. As is well-known, reinsurance disputes have increased exponentially in the last 15 to 20 years, and arbitration, long favored by the industry, has come increasingly close to litigation in terms of delay, cost and contentiousness.

So what strategies can companies employ to reduce the delays and costs endemic to reinsurance disputes?

First is increased use of mediation. Mediation is particularly effective in cases in which both sides really want to enter into a reasonable commercial settlement but need some outside help to guide them there.

While mediation is often overlooked in cases in which it should work well, there are disputes for which it is unsuitable. Specifically, when the parties are far apart, view the dispute as a matter of principle or are otherwise not serious about settlement, mediation is unlikely to achieve speedy resolution. In fact, mediation in such cases can actually delay resolution since arbitration or litigation usually will be put on hold during the proceedings.

Once the parties have resorted to arbitration, there are at least two bottlenecks that--if eliminated or at least diminished--can significantly speed the process and diminish costs.

Under the typical reinsurance arbitration clause, each party appoints an arbitrator. Then the two arbitrators (in consultation with the parties that appointed them) attempt to agree on a neutral umpire. If there is no agreement, lists of three candidates are exchanged, each side eliminates two and the umpire is chosen by lot.

This process is often extremely protracted, as parties may object to the other side's proposed umpire and may attempt to "game" the system to end up with an umpire sympathetic to their position.

However, a number of procedures have been developed to rationalize this process. Perhaps the most widely used is the AIDA Reinsurance and Insurance Arbitration Society umpire selection procedure, which eliminates most of the gamesmanship and reduces the time involved to a few weeks instead of (often many) months.

A second major bottleneck is discovery. Once rare and limited in reinsurance arbitration, it has grown to litigation-like proportions. Some cases do indeed merit extensive discovery; many do not. One way to streamline the process is to restrict the number and duration of depositions.

A third way to speed and simplify the process would be for arbitration panels to issue reasoned decisions setting forth the basis of the panel's award. This is rarely done, and many arbitration awards fail to provide guidance for the future.

Reasoned decisions need not be lengthy and should not constitute binding precedent, but they should educate the parties on how the panel viewed the issues. If this practice becomes widespread, it may speed up the collection process by actually forestalling disputes, as parties become better educated as to which positions are likely to succeed.

The best way to implement these measures is to provide for them in the arbitration clauses of a company's reinsurance contracts. In the absence of such provisions, it is sometimes possible to obtain agreement in the context of a particular dispute.

James A. Shanman is a Stamford, Conn.- and New York-based partner in the Insurance & Reinsurance Practice Group of law firm Edwards Angell Palmer & Dodge L.L.P.