AILA 2013 – Sydney
September 2013
WP Distribution of Insurance
Products
Intermediaries and Conflicts of
Interest – The Paradigm of
Fronting Insurance
Dr. Kyriaki Noussia
[email protected]
Introductory Thoughts - Setting
the Scene



Fronting  special cases of risks
 large risks
Fronting risk occurs
 fee owed to local insurer.
Local insurer intermediary  acts for
insurer and places risk entirely with
reinsurer
Introductory Thoughts Setting the Scene

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Insurance intermediary  acts in dual
capacity
Broker towards insurer (first insurer’s
broker /intermediary eg. bank)
Serves interests of reinsurer towards first
insurer = > Apparent conflict of interest
broker serving both first insurer and
reinsurer
Clear cut case - direct conflict of interest
Introductory Thoughts - Setting
the Scene
Representing dual interests
 not good practice
 should be prohibited - high risk entailed

In addition  double intermediary fee
 fee from the first insured (materialized
and collected via the premium owed by
the first insured to the first insurer)
 commission/ fee owed by the reinsurer
The Problem

In essence  real insurer is the reinsurer

Reinsurer  bears the risk
Direct conflict of interest
 reinsurer is in fact the real insurer

Understanding Whom The
Broker Represents

Issue  whose agent broker or
intermediary is.

General rule  intermediary is agent of
ceding company but facts may show
otherwise
Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F.
Supp. 2d 789, 799-800 (S.D. Tex. 1999)
Banco Ficohsa v. Aseguradora Hondurena, S.A., 937 So. 2d 161,
165 (Fla. Dist. Ct. App. 2006)
Understanding Whom The
Broker Represents
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USA  specific conduct and relationship
of parties
determines nature and extent of agency
status
most critical factor is control
St. Paul Fire and Marine Ins. Co. v. Eliahu Ins. Co., 1997 U.S. Dist.
LEXIS 8916, at *18-19 (S.D.N.Y. 1997)
Understanding Whom The
Broker Represents
Where intermediary is agent of cedent
 cedent may be responsible for agent’s
actions, including misrepresentations

Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F.
Supp. 2d 789, 802-05 (S.D. Tex. 1999)
Reliance Ins. Co. v. Certain Member Companies, 886 F. Supp.
1147, 1152-55 (S.D.N.Y. 1995)
Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 63839 (D. Neb. 1980)
Understanding Whom The
Broker Represents

Reinsurance intermediary  integral role
in reinsurance transactions

placing risk on behalf of ceding company

participating in negotiation of reinsurance
contract

serving as a conduit between cedent and
reinsurer
Understanding Whom The
Broker Represents

Depending upon relationship of reinsurer
and intermediary

possible that intermediary is deemed a
dual agent

this entails conflicts of interest
Understanding Whom The
Broker Represents
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Conflicts of interest
circumstances where some / all of
interests
of persons to which reinsurance broker
provides a service
are inconsistent with, or diverge from,
some or all of the reinsurance broker's
interests.
In cases of dual agency  intermediary
bound by principles of agency
Understanding Whom The
Broker Represents

Agency status

determined by factual enquiry

may be governed by statute, regulation or
contract

absent statute, regulation or express
contract, the question is a question of fact
Understanding Whom The
Broker Represents

In Re Pritchards & Baird Inc. 8 B.R. 265
(D. N.J. 1980) aff’d 673 F2d 1299 (3d Cir.
1981)

Pritchard and Baird (P&B) 
intermediaries prior to filing for
bankruptcy

acted regularly for a group of companies
named the Hartford
Understanding Whom The
Broker Represents

In Re Pritchards & Baird Inc. 8 B.R. 265
(D. N.J. 1980) aff’d 673 F2d 1299 (3d Cir.
1981)

Issue - whether P&B served as Hartford’s
agent or as agents of the reinsurers

Court  agency relationship existed
between P&B and Hartford ( insurer) only
Understanding Whom The
Broker Represents

Since In Re Pritchards & Baird Inc.

intermediary clause of reinsurance
contracts

expanded to stipulate that reinsurance
intermediary (for payment and receipt of
premium) acts as agent of reinsurer.
Understanding Whom The
Broker Represents
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Still  no good solution

We argue  no permission for dual
representation

Direct conflict of interest 
unsurpassable and insurmountable
The European Response – IMD
I & Proposal for IMD II

European Commission

began review of IMD I
so that
 insurance intermediaries
 comply with new rules (disclosure,
conflicts of interest)

The European Response – IMD
I & Proposal for IMD II

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Article 12 of IMD I
touches on conflict of interest issues
intermediary has to provide information
but no specific rules about managing
conflicts of interest
CEIOPS advice to Commission on IMD2
both intermediaries and insurers comply
with high level principles on conflicts of
interest
The Law in Australia
In Australia  Conflicts of interest
 depend on precise circumstances affected
by:
- agreement of parties
- relevant legislation
- general law obligations
- relevant circumstances of parties &
transaction

The Law in Australia
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No legislation specifically governing the
conduct of reinsurance brokers
There is general consumer protection
legislation
In Australia  nothing prevents broker
from entering agreement
which allows the relevant conflicted entity
to act in conflict with obligations
otherwise owed to principal.
Great care  needs be taken in drafting
contract and obtaining such agreement
Leeways – The Way Forward
Choices
 once a conflict of interest is identified
 avoid it OR
 seek to manage it
Most reinsurance brokers
 would seek to manage it by way of
disclosure to the client.
Leeways – The Way Forward

Above solution  doubtful

Since real insurer = the reinsurer
he bears the risk
hence direct conflict of interest exists
as the reinsurer is in fact the real insurer
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Intermediaries and Conflicts of
Interest – The Paradigm of
Fronting Insurance
THANK YOU FOR YOUR
ATTENTION !
Dr. Kyriaki Noussia
[email protected]