In an interesting form of alternative risk transfer, the Chicago Mercantile Exchange announced that it will commence trading Hurricane index futures and options contracts to hedge hurricane risks. A press release describes the financial instruments generally, while a separate page on the CME’s web site provides more detailed information. At about the same time, the New York Mercantile Exchange announced plans to trade futures contracts based upon the risk of catastrophic property damage from natural disasters. Weather futures are now traded on the Chicago Board of Trade, a NYMEX company. The two exchanges will trade somewhat different types of contracts, based upon different risks. It will be interesting to see what effect, if any, these offerings have on the reinsurance market.
Reinsurance Transactions
American Academy of Actuaries issues risk transfer testing practice note
The American Academy of Actuaries' Committee on Property and Liability Financial Reporting has published a Reinsurance Attestation Supplement 20-1: Risk Transfer Testing Practice Notice. This publication provides advisory, non-binding guidance to property/casualty actuaries regarding testing for risk transfer, in connection with the NAIC's new Supplement 20-1 titled the “Reinsurance Attestation Supplement: Attestation of Chief Executive Officer and Chief Financial Officer Regarding Reinsurance Agreements.”
Court partially dismisses claims arising out of reserve dispute
Converium Holding, a Swiss reinsurance company, issued an IPO in December 2001. Converium's North American unit collapsed in September 2004 after four increases in reserves in a single year. Class action lawsuits followed, alleging that management had grossly misrepresented necessary reserves and failed to disclose reserve disputes with the company's outside auditor. The District Court dismissed claims against the IPO's underwriter and broker and claims against the company and individual defendants relating to the IPO, denying dismissal of certain other claims. In re Converium Holding AG Securities Litigation, Case No. 04-7897 (USDC S.D.N.Y. Dec. 28, 2006). This opinion illustrates the strategic problem of finding a solvent deep pocket in this type of situation, and discusses the “storm warning” doctrine, pursuant to which the Court found that the frequent increases to reserves, in increasing amounts, in a short period of time, put investors on notice of problems despite comfort statements by management.
NAIC Reinsurance Task Force meeting summary
The summary of the meetings of the NAIC's Reinsurance Task Force on December 9, 2006 and December 11, 2006 at the 2006 Winter Meeting has been posted on the NAIC's Internet site. It provides a brief description of the action taken on the proposed creation of the Reinsurance Evaluation Office to rate the financial strength of reinsurers as a basis for a collateral requirement, stating that the proposal should be “further refined” by the NAIC's Financial Condition (E) Committee no later than September 2007.
NAIC reinsurance credit proposal and comments posted on NAIC Internet site
The NAIC's Reinsurance Task Force has posted on its Internet page the proposal to change the present collateral-based reinsurance credit system to one based upon the financial strength of the reinsurer. Proposal to Grant Credit for Ceded Reinsurance, NAIC Reinsurance Evaluation Office (October 31, 2006 draft). Comments on the proposal have already been posted from 17 organizations, including the RAA, Lloyd's and the European Commission. Further comments may be found on the Task Force's Internet page.