Carlton Fields

IAIS MID-YEAR REPORT ADDRESSES MACROPRUDENTIAL SURVEILLANCE OF REINSURANCE COMPANIES AND THE REINSURANCE MARKET

September 8, 2010 by Carlton Fields

The Global Reinsurance Market Mid-Year Report recently released by the International Association of Insurance Supervisors (“IAIS”) focuses on the extent to which regulators of insurance and reinsurance companies are gathering data and engaging in macroprudential analysis of the reinsurance sector. The report contains three parts: (1) a discussion of what a macroprudential surveillance approach means in this context; (2) examples of such activities in the United States (through the NAIC), India, Europe and globally through the World Bank and the International Monetary Fund; and (3) a “case study” of such surveillance efforts. It is interesting that the fragmentation of regulation in the United States among the states is viewed as beneficial to this analysis, because it illustrates a possible global model in which one entity (the NAIC in the U.S. model) would gather data and provide stress testing on a broad scale across multiple jurisdictional lines. To some, this may overstate the NAIC’s activities in the reinsurance sector. The unspoken assumption is that the IAIS would serve that global role, and the report touts its data gathering activities as a first step along this path.

Highlights from the report:

While the meaning of macroprudential surveillance in insurance and reinsurance varies by jurisdiction, such activities are geared towards identifying, assessing and monitoring risks to the financial system. These activities include gathering and analysis of macroeconomic and financial market information, and of how these data interact with each other.
The current global financial crisis has highlighted the complexities inherent in capturing and making sense of risks that evolve rapidly in time, and cut across geographical boundaries and financial sectors.
Although most supervisory authorities do not have a formalized definition of macroprudential surveillance, nearly all of them carry out some such activities.
The two most prevalent macroprudential surveillance activities are insurance market analysis and analysis of the impact of macroeconomic variables on the insurance market. In both instances, the focus tends to be on the analysis of domestic data, with international data analysis receiving comparatively less attention.
Under 50% of regulators carry out insurance market-wide stress testing; however, approximately 20% of those who do not stress test their markets have plans in place do so within the next 12 months.
Macroprudential surveillance activities appear to assist regulators in: (1) identifying and assessing relevant changes in insurance markets as well as macroeconomic factors affecting these markets; (2) providing early warning signals of emerging risks, and enabling prompt action; (3) providing value-adding information for forward-looking monitoring; and (4) identifying futures issues that may affect the insurance market.
There is limited information available on insurance-specific macroprudential surveillance activities at the global level collected and compiled by insurance regulators.

This post written by Rollie Goss.

COURT PUNTS TO ARBITRATOR ON EFFECT OF VOLUNTARY DISMISSAL ON CLAIM AGAINST REINSURER

September 7, 2010 by Carlton Fields

A third-party complaint disputing the nature and extent of an obligation to reinsure an insurance company with respect to losses arising from assumed reinsurance risks has been dismissed without prejudice, to allow an arbitrator to decide the scope of a settlement agreement. Through a settlement agreement, the insurance company resolved its dispute with the defendant named in the original complaint. The original complaint was dismissed with prejudice. Thereafter, the insurance company contended that its claims against the third-party defendant reinsurer should be voluntarily dismissed without prejudice to allow arbitration of those parties’ claims. The reinsurer argued the voluntary dismissal should be with prejudice, as the insurance company’s claims in the third-party complaint were derivative of the claims in the original complaint. The court declined to dismiss with prejudice, finding that the question of whether the claims were, in fact, derivative was a question better left for the arbitrator. Eagle Star Insurance Co. v. Highland Insurance Co., Case No. 02-2165 (USDC S.D. Cal. July 22, 2010).

This post written by Brian Perryman.

ARBITRATION AWARD VACATED FOR ARBITRATOR BIAS AND MISCONDUCT

September 2, 2010 by Carlton Fields

In a labor dispute governed by the Labor-Management Relations Act, the U.S. District Court for the Eastern District of Louisiana has vacated a labor arbitration award due to bias and misconduct on the part of the arbitrator. The arbitrator had admitted that he had a prior business relationship with a party affiliated with the plaintiff. The arbitrator also made a request of plaintiffs’ counsel to assist him in recovering money connected with the prior business relationship and implied that plaintiff’s counsel’s compliance would effect the result of the arbitration. The Federal Mediation and Conciliation Service Arbitration Review Board had found that the arbitrator violated the Code of Professional Conduct for this behavior. The court held that “it is crucial that arbitrators remain, and appear, completely unbiased” and the arbitrator’s failure to do so required that the arbitration award be vacated. United Steel Workers AFL CIO v. Murphy Oil USA, Inc., No. 09-7191 (U.S.D.C. E.D. La. Aug. 3, 2010).

This post written by Michael Wolgin.

LET IT SNOW: ARBITRATION COMPELLED IN VAIL RESORT PARKING KERFUFFLE

September 1, 2010 by Carlton Fields

A Colorado district court granted a Vail resort condominium developer’s motion to compel arbitration under a condominium purchase agreement. Residents brought suit alleging that they were denied promised parking rights at the resort-side condominium they purchased, and were instead secretly substituted with valet parking rights instead, which rights were of lesser value. The residents sued the developer. The developer demanded arbitration under the purchase agreement, which the residents resisted. The developer brought a separate action to compel arbitration. The court found for the developer, rejecting the residents’ arguments that (1) they were not bound by the arbitration provision because they were not parties to the original purchase agreement, but instead were assignees; (2) the claims do not arise out of interpretation of the agreement; (3) the developer waived its right to arbitrate by failing to assert that right as an affirmative defense to the lawsuit brought by the residents, and (4) the residents’ claims under the Colorado Consumer Protection Act were not arbitrable. Stone v. Vail Resorts Development Co., No. 1:09-CV-02081 (USDC D. Col. July 1, 2010)

This post written by John Pitblado.

AON BENFIELD SECURITIES AND SWISS RE ISSUE REPORTS ON THE INSURANCE-LINKED SECURITIES MARKET

August 31, 2010 by Carlton Fields

Aon Benfield Securities has issued its third-annual review of the insurance-linked securities (ILS) market. The review describes the growth that has occurred in the ILS market for the year ending June 30, 2010, including 20 new transactions representing a volume of $4.6 billion. The review also provides a positive outlook for the upcoming year.

Also included in the Aon Benfield review are Aon Benfield’s newly-created indices for its All Bond, BB-rated Bond, U.S. Earthquake Bond, and U.S. Hurricane Bond categories of the ILS market. The indices reflect strong investment returns for 2010, including returns of nearly 13% for both the All Bond and the BB-rated Bond indices, over 15% for the U.S. Hurricane Bond index, and over 7% return for the U.S. Earthquake Bond index. Aon Benfield also provides analyses of the catastrophe bond market and the non-U.S. ILS market, as well as a panel discussion of the ILS market with five active investors.

A report was also issued by Swiss Re that focuses on the ILS market for the first half of 2010. The report provides an overview of new issuance for the first half of the year – which had a volume of $2.5 billion and was comprised of 85% exposure to U.S. Wind risk. Swiss Re’s report also provides analysis of catastrophe bond maturities, trading in the secondary market, and a breakdown of the 3.3% return of its Swiss Re Global Cat Bond Index. Swiss Re’s report also spotlights its recent placement of notes covering U.S. hurricane and earthquake risk for Allianz, and a breakdown of various ILS sector data. Similar to the market review of Aon Benfield Securities, Swiss Re provides a positive outlook for the ILS market.

This post written by Michael Wolgin.