‘Imperfect’ actuarial models assist in practical justice, says judge

R&Q’s share price fell after a court ruled against it in the case of Equitas v Brandywine. The case concerned claims made by Warren Buffet-owned Equitas, which took on the rights of various Lloyd’s syndicates, under excess of loss reinsurance contracts written within the LMX spiral.

Most of the claims relate to the Kuwait Airways losses from the invasion of Kuwait in August 1990, and the oil pollution losses from the Exxon Valdez disaster in 1989.

The complexities of the LMX spiral mean it is now impossible for Equitas to disentangle its claim from wrongly aggregated and irrecoverable elements. Equitas therefore used actuarial modelling to prove its claim: the models use discounts to strip out the wrongly aggregated and irrecoverable elements.

R&Q maintained that it did not have to pay Equitas’s claims because they relied on estimation and guesswork.

The judge, Peter Gross, found in favour of Equitas. He accepted that “actuarial modelling is complex, expensive, imperfect, and, for my part, not ideal in the context of this litigation”, but he said that the models “do provide a reasonable representation of reality”. The models “assist in doing practical justice in this case”, he said.

Lawyers are reflecting on the significance of the judgment. Peter Taylor, a partner in the insurance and reinsurance practice at Lovells, said: “The judge has held that there was no rule of law that prevented the reinsureds from making out their claims. It was all a matter of evidence.

“If the reinsureds could show, on a balance of probability, that they had suffered losses of a magnitude that breached the excess points of the 26 XOL contracts under review, it did not matter that they were unable to unpick the tangled thousands of claims transactions that went to make up the aggregate claim. The financial effect on the reinsurers and their fellow market players, as those numbers begin to turn through the rusty mechanisms of the LMX spiral, may need yet another round of actuarial modelling to evaluate.”

Law firm Weightmans’ Ling Ong, from the London market team, said: “It is clear is that the full ramifications of the decision need to be analysed carefully, not just in terms of losses within the LMX spiral, but also for any potential impact on reinsurance claims generally.”