Graham Jackson describes the origins of the International Alliance of Asbestos and Pollution Reinsurers and the expansion of its work through a new London subsidiary.
“Putting the toothpaste back into the tube” would be a very good way to describe the difficulties that now face members of old reinsurance pools.Natural run off can be a slow and expensive process. Uncertain, too, if there is exposure to asbestos and pollution claims. Most reinsurers, including pool members, recognise that a long tail run-off cannot be sustained indefinitely and cutting off the tail is now a priority, with commutation the preferred tool.We should not forget that pools were a very popular way of participating in London market business 20 to 30 years ago. A wide spread of business could be obtained without any one large individual exposure and the bulk accounting was easy to handle. For some companies, operating at a distance from London, it would no doubt have seemed a better prospect than dealing with each reinsurance offering piecemeal.
Unfortunately, piecemeal is often the only way to unwind a pool. Leaving aside the “fronting”, internal reinsurances or joint liability arrangements which are often an added complication, the contractual liabilities are between each pool member on the stamp and each of the cedants. Severance of that relationship through commutation is, therefore, also an individual and independent process.
Writing out a cheque would appear the most practical pool member response to a commutation offer, if the numbers are small. But sometimes this approach is just not palatable, nor would it be acceptable if there are retrocessionaires involved. At the other extreme, a ground-up analysis of a commutation proposal, verifying open balances, outstanding loss reserves, IBNRs and payout curves, may provide some comfort but can hardly be cost effective for each member individually. The obvious solution is for the pool members to combine to consider jointly the level of analysis required, to arrange and apply the appropriate resources and spread the expenses between themselves, as indeed the liabilities were spread originally.
Sadly, the life span of many pool managers does not extend to such long term care of their members. Often, once the commissions disappear, the managers soon follow. Others may say that commutation initiatives are beyond the scope of the routine claims handling that they originally agreed to perform. Pool members often have to take such matters into their own hands, which is one of the latest roles assumed by the member companies of the International Alliance of Asbestos and Pollution Reinsurers (IntAP).
How IntAP started
IntAP originated with the idea of reinsurers combining their skills and resources to analyse and process asbestos claims. Once the format for the London asbestos reinsurance information (LARI) was agreed with the London asbestos working party after three years of effort, Cologne Re took the initiative and in December 1991, founded the alliance with the support of 41 other companies. Although not the first time that reinsurers had grouped together in this way, it was nevertheless quite an achievement, considering the wide geographical spread of its membership.
IntAP e.V. is an association formed under German law. It operates on a non-profit basis and is democratically controlled by the membership, presently 43 strong. An elected, six member Vorstand, or steering committee forms the executive. Presently, the steering committee is drawn from member companies in Germany, the Netherlands, France, Denmark and United Kingdom.
IntAP established the principle of working together to reach the commutation objective at an early stage without losing site of its original raison d'être, the incoming LARI analyses. The pool initiative was, therefore, a natural development through recognising a need and striving to provide the solution. With most of IntAP's member companies coming from outside London, it was not surprising that London reinsurance pools were a common theme.
In one London market excess of loss pool managed by a large reinsurance broker, one third of IntAP's entire membership was involved. In this case, IntAP was fortunate in having a pool manager that was still alive and also supportive of a joint commutation initiative. With its assistance and a critical mass of pool members behind the programme, IntAP is targeting those large cedants to the pool who have likewise expressed an interest in ending the relationship.
Common problems, joint solutions
In parallel with the pool initiatives, IntAP continues to seek out common problems to which joint solutions can be applied. One recent success has been the IntAP pro-forma legal agreement. This agreement, developed with the assistance of a London firm of solicitors, provides the structure for an amicable solution to the issue of old, potentially time-barred asbestos claims, which remain unsettled through not meeting the LARI standard. As a result, the parties who have signed up to this agreement have avoided the legal route and established firm ground for commutation discussions.
Another current project is the presentation format for pollution claims, which have been compromised through negotiated settlement. These will be particularly difficult when presented through London market excess of loss coverage, considering the different legal environments which may determine what is an “event”.We should remember that nobody anticipated these types of claims when drafting the contracts. Consequently, there is always going to be scope for disagreement. Rather than allow entrenched positions to develop, it is much better to openly discuss what the difficulties are on both sides. A major London source has raised the subject with IntAP and initial views have been aired. In this respect, IntAP represents a useful forum where reinsurers' views can be sounded out at an early stage.
When IntAP was set up, it was a case of the stronger, more experienced companies helping the less well endowed to deal with complex claims issues. It had and continues to have a strong educational and self-help theme. Where possible, IntAP draws upon its internal resources to inform and assist its members, whether on commutation initiatives or claims specific projects. Where those resources do not adequately match the needs, it acts as the co-ordinator and monitor for legal, actuarial and other consultative services, which might assist members along the path to commutation or dispute resolution.
The education of its members, on developments in long-tail claims generally, is funded through membership fees and organised through regular technical meetings and ad-hoc claims workshops, to which guest speakers from the legal, actuarial or claims management professions are invited. For specific projects, such as commutation initiatives, the interested members share in the costs incurred, normally in proportion to their perceived liabilities.
As a result of the pool initiative, several non-members approached IntAP, to see how they might obtain some benefit through joint co-operation. To meet this need and to achieve even greater economies of scale, the intention is to widen the availability of the pool and other IntAP initiatives to include non-members. Therefore, IntAP Limited, a 100% subsidiary of the German association, was incorporated in May 1999 as a UK limited liability company. Non-members can now, if they wish, share in the benefits of commutation initiatives on the same basis as the members, with no profit gearing.
Widening the net
At the very beginning, there was a deliberate limitation on IntAP e.V.'s activity, in that no US reinsurer could become a member. Also, unless the claim arrived through London reinsurance, it fell outside of the mandate. It was felt that the confidentiality of the claims information being provided as the basis for the LARI would otherwise be at risk. Now, through IntAP Ltd, interested US reinsurers can participate jointly in analyses or commutation initiatives. In the other direction, IntAP members can now call upon its subsidiary to assist them with problems emanating from US cedants.
Obviously, the wider the IntAP net, the more potential for conflicts of interests between its members and clients. Also, the claims handling philosophies will vary widely, from those in run-off to those still active in the market. IntAP Limited's mandates are project specific and as wide or as narrow as may be required. Sometimes initiatives are progressed jointly, from analysis through negotiation, other times in convoy. Each client can use the IntAP Limited work product to negotiate independently, if they wish. On conflicts of interest, it is fundamental that IntAP's focus is only on incoming claims and protecting the interests of the reinsurer, rather than the cedant, even if both happen to be in the IntAP fold.
Although the pool problem was the catalyst that brought about IntAP Limited and also forms its brief for the moment, the future for the company is not limited in this way. The motivating force is the further dilution of members' costs on member-sponsored projects, rather than creating another run-off and associated services provider for the market at large. IntAP Limited, therefore, still expects its major client base to be from within the IntAP e.V. membership. Nevertheless, where appropriate, the clients of IntAP Limited would be welcome to consider full membership of the German association. IntAP e.V. still remains the core of the association's infrastructure and is still the principal organiser, educator and information provider but with IntAP Limited now fulfilling its practical operational and member assistance mandate.Graham Jackson is managing director of IntAP Limited and a member of the IntAP e.V. steering committee. Tel: +44 (0) 171 488 0755; fax: +44 (0) 171 867 0880; e-mail: firstname.lastname@example.org.