Welcome to the second special Asia section of Global Reinsurance. In the following pages writers from three continents examine, in an Asian context, various risk and reinsurance topics. It is interesting to see in their work how the conventional concept of `developed' and `developing' markets does not always play out as one might anticipate.

For example, in his article Bruce Ferguson, head of Australia's risk management association ARIMA, makes a forthright call for increased corporate governance measures in his home country. Australia has had its share of insurance-related corporate disasters in recent years, an experience which proves that the term `developed' can be relative.

Inevitably, insurance companies fail - in any environment. However, as Taiwan asks certain insurers to raise capital, as Singapore tells others to cease accepting new business, while Indonesia pledges to crack down on insurers with poor capital ratios, and Malaysia follows up its tough new minimum capital thresholds, the highest profile collapse in Asian markets has come from an unlikely quarter: Japan.

Taisei Fire & Marine Insurance Co Ltd was neither Japan's largest nor its highest profile re/insurer, but in the arena of international aviation reinsurance, it was a much bigger and more important player than perhaps it had realised. It had underwritten a 26% share of the aviation reinsurance pool managed by Fortress Re, a Burlington, North Carolina managing agency. Fortress was alone in writing reinsurance layers such as $400m excess of $100m of original loss. This was low-level territory where most other reinsurers refused to play. Yet, remarkably, Fortress had about two-thirds of that entire stratum of aviation risk. It was also notoriously inexpensive: cedants would have paid 10% more for better security, one broker said, but there were scant markets even at that price, which would still have been below burning cost.

When four passenger jets were destroyed in the September 11 attacks on America, and another crash-landed weeks afterwards in an unconnected loss in Queens, NY, Fortress Re's time was up. The events strained the resources of the agency beyond their limits, and revealed the reality: Maurica (Chico) Sabbah and Kenneth (Kenny) Kornfeld had been siphoning off Fortress Re's income to the Bermuda reinsurer Carolina Re, which was paying the pair a small fortune in dividends.

They owned Carolina Re, which had a 25% quota-share treaty covering all Fortress Re's business. Court documents show that Carolina Re owes Fortress more than $200m for recent claims alone, but the company has capital of just $62m, and was declared bankrupt last year. Fortress is now in run-off, and the Japanese insurers that backed the venture are left with a bill of around $2.5bn.

After the merger that created it, new Japanese giant Aioi had 48% of Fortress Re. Nissan had 26%, and Taisei the rest. Dai Tokyo had been on the stamp, but pulled out a few years ago. Many aviation market watchers predicted that the merger of Nissan and Taisei with Yasuda to form Sompo Japan would jeopardise the pool, because Sompo would emerge with 52%. However, events ended the speculation when Taisei was forced into bankruptcy under the weight of its share of Fortress Re's liabilities.

Meanwhile Nissan (now Sompo) has sued the agency, and alleges that Mr Sabbah and Mr Kornfeld extracted about $408m from the business through commissions and dividends. Sompo attorney Elizabeth Sandza said in court: "This is not an ordinary commercial dispute. A few individuals skimmed off hundreds of millions of dollars from the pool." Fortress Re's lawyer countered with the claim that Fortress Re had paid profits of nearly $2bn to the Japanese pool backers over the years, but now that losses were due, they were crying foul.

Both parties appear to have been at fault. While the documents which Fortress Re sent to its pool members were incomplete, non-standard and arguably misleading, the Japanese backers of the pool were naïve in failing to demand better disclosure, and should have realised that the business Fortress Re was writing could only be uneconomic in the long run. It seems that the regular profits the North Carolina agency remitted to the underwriters were sufficient to prevent these questions being asked until it was too late.

Taisei is now under-protected from its creditors by an insurance-specific bankruptcy law. Corporate policyholders are now expected to be paid 77.03% of valid claims, while individual insureds will be paid in full through policyholders' protection measures. The industry-backed Non-Life Insurance Policy-Holders Protection Corp of Japan is to inject ¥5.3bn ($43m) into Taisei, in advance of the division of the company into two separate units, ring-fencing overseas reinsurance liabilities. The local business is then to be merged with Sompo Japan, as originally intended, which will pay ¥28bn for it.

  • Adrian Leonard is editor of Global Re's special three-part report on Asia.

  • Topics