Reinsurance Interest Group
Reinsurance Encounters
Volume 32 | Number 1 | January 2014
Chairman’s Message
by Wade E. Sheeler, CPCU, CIC, CRM, ARe
Wade E. Sheeler, CPCU, CIC, CRM, ARe,
is corporate risk manager for Grinnell
Mutual Reinsurance, a Midwest-based
reinsurance and direct lines carrier. He has
held various positions with Grinnell Mutual
over the past several years, including
ones in product development, auditing,
reinsurance services, and education. He
has served as an adjunct instructor at
Drake University, Buena Vista University,
Grandview College, and Des Moines Area
Community College.
Sheeler served as president of the CPCU
Society Iowa Chapter from 2006 to
2007. He is a past regional governor and
director for the CPCU Society. Sheeler
also served as a member of the Budget
and Finance Committee from 2002 to
2007 and rejoined the Committee in
2010. Sheeler has served as a member
of the Loman Board of Trustees, currently
serves on the Mentoring Advisory Council
at the Vaughan Insurance Institute at
the University of Iowa, and is a past
president of the Heartland Chapter of
Insurance Compliance Professionals.
Sheeler is a graduate of Drake
University with a bachelor’s of business
administration degree in insurance and
risk management, a bachelor’s degree in
economics, and a master’s of business
administration degree. He earned the
CPCU designation in 1995. In addition to
earning the CPCU and ARe designations,
Sheeler has also earned the AIAF,
ARM, ARP, ARC, AIM, API, AIS, and AIM
designations.
Greetings from the Reinsurance Interest
Group. This edition of Reinsurance Encounters
is somewhat bittersweet and will bring many
nostalgic memories to long-time readers.
This will be our final edition of the newsletter.
Effective as of the end of this year, the CPCU
Society will no longer be publishing individual
interest group newsletters but will be moving
to a technical type of journal. Although
you will still see articles from members of
the Reinsurance Interest Group in the new
publication, we will no longer have our own
separate publication.
This past year has been a busy one for the
Reinsurance Interest Group. In addition to our
annual Philadelphia Reinsurance Symposium,
held in March of this year, we also cohosted
the Dallas Reinsurance Symposium on
September 16. Many, many thanks to Steve
McElhiney and his staff at EWI Risk for all
the work that they did in putting together a
great seminar. It was a pleasure to have so
many great speakers. My favorite was John
Doak, commissioner of insurance in Oklahoma.
Commissioner Doak spoke of the great
collaboration between the Oklahoma Insurance
Department and carriers in Oklahoma after the
devasting tornadoes that hit Moore, Oklahoma,
earlier this year. Our industry should be proud
of the outstanding work that we do in helping
people deal with such horrific losses.
We had great attendance at our panel
discussion, “Emerging Catastrophic Issues
in Reinsurance,” at the CPCU Society Annual
Meeting. We had an overflowing crowd for this
great presentation. Special thanks to Frank
Nutter with the Reinsurance Association of
America for serving as our moderator and to all
of our panelists.
continued on page 3
What’s in This Issue
Chairman’s Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Editor’s Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A Journey Through the Fundamental Requirement of Exhaustion . . . . . . . . . . . . . . . . . . . . . . 4
The Money Needed to Be Paid—Why Isn’t It “Loss” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Mentorship Role for CPCUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Cedent or Cedant: Which Is Proper?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Catastrophe Bond Market Fosters Innovation and Competition With the Traditional
Reinsurance Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
New Member Announcement—John L. Sullivan, CPCU, ARe . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Editor’s Comments
by Richard G. Waterman, CPCU, ARe
Richard G. Waterman, CPCU, ARe, is
president of Northwest Reinsurance, Inc., a
Minnesota-based management consulting
firm specializing in the fields of insurance,
reinsurance, and dispute resolution. He is the
former president and chief executive officer
of American Equity Insurance Company and
GRE-RE of America Corp.
Waterman has earned national recognition
for his leading work in stragic planning
and enterprise risk management tailored
to a broad range of insurers, cedents, and
reinsurers. In addition, he has served as
an arbitrator or umpire on more than 150
arbitration panels to resolve industry disputes
and has served as a neutral mediator,
facilitator, or fact finder, helping parties
settle disputes in a confidential setting.
Waterman has been a member of the CPCU
Society since 1978, is a member of the
Reinsurance Interest Group, and is the editor
of Reinsurance Encounters.
This is the last edition of Reinsurance
Encounters. After conducting internal
and external focus group surveys and
evaluating research on best practices,
the CPCU Society decided to discontinue
publication of interest group newsletters.
In place of newsletters, the Society created
a Technical Journal and a new member
news publication. The quarterly Technical
Journal will merge and streamline the
specialized content of the fourteen interest
group newsletters with the CPCU eJournal
into one comprehensive publication. The
first edition of CPCU Technical Journal is
expected to be published in early 2014. The
member news publication will be an online
offering to Society members to provide
updated Society, chapter, and interest group
information about events, activities, and
related member news when it becomes
available.
The first edition of Reinsurance Encounters
(formerly RISE) was published in September
1982, thirty-one years ago. It was the first
interest group newsletter published by the
CPCU Society. Bruce Evans, a professor
with the University of Dallas, was the first
editor of RISE and served in that capacity
for twenty-three years. At the beginning
of his editorship tenure, Professor Evans
described the mission of this publication
as a communication channel for CPCUs
who have a special interest in reinsurance
to express themselves on significant
industry topics. Among his high standards
for authorship was Professor Evans’s
insistence that published articles should
be challenging, relevant to the reinsurance
industry, and written by distinguished
reinsurance professionals. Professor Evans
encouraged us to share our reinsurance
knowledge with our colleagues, and he
always offered to help us transform our
ideas into a manuscript for publication.
It was a pretty unnerving challenge for
me to take over the editor’s role from
Professor Evans in 2006. “Don’t mess it up”
is a vivid memory that comes to mind. The
challenge presented a valuable opportunity
to build on the foundation that had been
established by reaching out to a broad base
of industry thinkers from all backgrounds
and points of view who were graciously
willing to write articles to be published in
our reinsurance interest group newsletter.
I have enjoyed the experience serving as
your editor of Reinsurance Encounters for
the past seven years and am deeply grateful
for the tremendous support I have received
from many distinguished authors who have
written informative and thought-provoking
articles to broaden and enhance our
reinsurance knowledge.
The featured articles in this final edition are
a fitting capstone to exemplify our mission to
publish insightful articles written by leading
industry professionals that address a wide
range of relevant contemporary topics. First,
Scott Seaman and Jason Schulze explain the
requirement to exhaust underlying layers of
insurance before excess insurance policies
may be called on to respond. Next, Andrew
Boris provides a cogent analysis of a recent
case concerning whether pre-judgment
interest can be considered a “loss” for
purposes of a reinsurance recovery
presentation. Carla D’Andre, a member of
the Reinsurance Interest Group, wrote an
interesting article about the CPCU mentoring
program and her experience serving as a
mentor. And whether you’re just starting to
explore this strange world of reinsurance or
are an old pro, there are always new words
and phrases to learn. To help us with the
vernacular of a word all of us should know,
Gene Wollan, a grand master of reinsurance
terminology, offers his thoughts about the
correctness of the words “cedant” and
“cedent.” The final article illuminates the
continued on page 3
2
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
Chairman’s Message
continued from page 1
rapid expansion of the catastrophe bond
market. Roland Goss walks us through the
significant developments in the catastrophe
bond market, explaining each of its primary
components. The article also contains a
number of endnote references to augment
a better understand of the fast-moving
expansion of the catastrophe bond market in
competition with the traditional reinsurance
industry.
The Reinsurance Interest Group leadership
committee is delighted to introduce and
welcome John Sullivan, CPCU, ARe, who is
the newest member of the committee. John
is a vice president and an account executive
with TransRe in New York. He works in the
National/Specialty Unit, underwriting both
property and casualty business. We look
forward to working with John in our mission
to develop high quality events and activities
for the benefit of the Reinsurance Interest
Group.
It has been a privilege to serve as the editor
of Reinsurance Encounters. I am enormously
proud of the accomplishments we have
achieved in communicating educational
value for our Reinsurance Interest Group
membership. I thank you, my colleagues,
for your encouragement and support and
thank our authors and the CPCU Society
staff for their hard work and dedication.
We look forward with optimism to working
with the Technical Journal task force in its
vital mission to communicate high quality
educational information that is relevant to
interest group members and the industry.
Debra Ballen, CPCU, of the Insurance Institute
for Business and Home Safety (IBHS) was the
speaker at the Reinsurance Interest Group
luncheon following the Reinsurance seminar.
Debra always has some great videos to show
of the amazing work that is being done at the
IBHS.
Please make sure to join us on March 5
and 6, 2014, in Philadelphia for our annual
Reinsurance Symposium. Carla D’ Andre and
Gordon Lahti are hard at work planning a
spectacular seminar.
Now for a little history of Reinsurance
Encounters. This publication was the first
intererest group newsletter from the CPCU
Society. The first edition, then known as
RISE, was published back in 1982. (The
Reinsurance Interest Group is the oldest of
the fourteen CPCU Society interest groups.)
Over the past thirty-one years, we have had
only two editors: Bruce Evans and Richard
Waterman. This is simply an unbelievable
record of service from these two gentlemen.
“Thank you” seems inadequate for a record
like that.
As we move forward, I invite you to attend
the various symposia that are sponsored by
the Reinsurance Interest Group. We will be
periodically publishing articles in the Society’s
new journal. It has been my pleasure to write
articles for Reinsurance Encounters over the
past year. Thanks to each of you for your
support of and loyalty to our newsletter.
Join the CPCU Society Conversation!
“Like” our CPCU Society Facebook fan page and share our
updates at www.facebook.com/cpcusociety.
Follow our Twitter feed and reply to or retweet relevant tweets
to your followers at www.twitter.com/cpcusociety. Use our
hashtags, #cpcu and #cpcu13.
Join our LinkedIn group, add your thoughts to our discussions,
and start a discussion of your own at http://www.linkedin.
com/groups?gid=3270741.
S ign up to be a member of The Institutes Community and read
our spotlights for helpful industry news. Offer your advice,
encouragement, and inspiration to young people pursuing
the CPCU designation, starting their career in the insurance
industry, and/or taking courses with The Institutes at https://
community.theinstitutes.org.
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
3
A Journey Through the Fundamental Requirement of Exhaustion
by Scott M. Seaman, JD, and Jason R. Schulze, JD
Congratulations to Reinsurance Encounters
(and its predecessor RISE) for empowering
members of CPCU’s Reinsurance Interest
Group with timely, informative, and thoughtprovoking content for over 31 years. Special
thanks to Richard Waterman and Bruce
Evans – the only two editors this publication
has ever known. It has been our honor to
contribute an occasional article to this fine
publication over the years.
Scott M. Seaman, JD, is a partner in the
law firm of Meckler Bulger Tilson Marick &
Pearson LLP in Chicago. He is chairman of the
firm’s National Insurance Coverage Litigation
and Counseling Practice. Seaman represents
insurers and reinsurers in a wide range of
insurance and reinsurance litigation and
arbitration matters.
Although selecting authors, enticing them to
submit their articles on time, choosing topics,
editing submissions, and providing quality
content is necessary for a publication to
stand the test of time, we imagine that it can
be tiring. In analyzing insurance claims and
reinsurance cessions the fundamental issue
of exhaustion often is presented. It is called
exhaustion for good reason – it also can be
tiring.
The Role Of Excess Insurance
Jason R. Schulze, JD, is a partner at Meckler
Bulger Tilson Marick & Pearson LLP in
Chicago. He represents insurers in a variety of
matters, including mass tort, environmental,
construction, and professional liability claims.
Editor’s note: Excerpted and reprinted with
permission from Allocation of Losses in
Complex Insurance Coverage Claims by Scott
M. Seaman and Jason R. Schulze (Thomson
Reuters 2012), available at www.west.
thomson.com. © by Thomson Reuters. All
rights reserved.
4
Excess insurance is secondary insurance
coverage that attaches only after a
predetermined amount of primary
insurance or self-insured retentions has
been exhausted. Thus, excess insurance
is comprised of the next layers or levels
of coverage above the primary insurance
contract or the self-insured retention. The
purpose of excess insurance is to protect
the policyholder from catastrophic loss, or
loss in excess of the coverage provided
by the underlying insurance. Traditionally,
premiums for excess insurance contracts
were very low because excess insurers
anticipated no involvement in defending the
policyholder, minimal claims handling activity,
and rarely being called upon to indemnify
the policyholder against a settlement or
judgment.
Most excess liability insurance contracts are
“indemnity” contracts as opposed to “direct
pay” contracts. In other words, under most
excess contracts the insurer promises to
“indemnify” or “reimburse” a policyholder for
sums paid by the policyholder in excess of
the underlying coverage. Generally, indemnity
contracts require that the policyholder’s
liability be fixed by a judgment against it or
by a settlement agreement with the consent
of the policyholder, the insurer, and the
claimant. These requirements are commonly
set forth in the insuring agreement, “loss
payable” provision, or “no-action” clause of
the insurance contract. In contrast, direct
pay contracts obligate the insurer “to pay on
behalf of” the policyholder.
There are a variety of types of excess
insurance, including “umbrella” insurance,
“stand-alone” excess insurance, and
“following form” excess insurance. In many
instances, excess insurance may arise
“by coincidence” where multiple primary
insurance policies apply to the same loss and
reference is made to the contracts “other
insurance’ clauses to prioritize coverage.
Regardless of the type of excess insurance,
the requirement of underlying exhaustion
must be considered.
Horizontal Versus Vertical
Exhaustion
Two major issues concerning exhaustion are
commonly presented. The first is whether only
exhaustion of the limits of insurance contracts
and retentions directly underlying the subject
excess insurance contract must be exhausted
(vertical exhaustion) or whether all underlying
limits and retentions for all periods implicated
by a loss must be exhausted (horizontal
exhaustion) before an excess insurance
contract is obligated to respond.
From the perspective of the excess insurance
contract, the issue is whether phrases such
as “underlying insurance” refers only to the
schedule of underlying insurance listed in the
excess contract or to all underlying layers of
coverage and retentions in years implicated
by the loss. Many times, the issue is resolved
at least to some extent by the jurisdiction’s
rules regarding allocation methodology. In
jurisdictions with the wisdom to require
that a loss be prorated over all of the years
impacted by that loss, horizontal exhaustion
is a universal requirement.
In jurisdictions that follow an “all sums”
allocation approach, the policyholder
generally is permitted to “vertically spike” in
a year of coverage and to avoid exhausting
underlying coverage in other years. However,
policy language matters and even states with
some law supporting an “all sums” allocation
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
may recognize that horizontal exhaustion is
a fundamental principle, reflecting the way
in which excess insurance operates and
the distinction between primary and excess
insurance. See, e.g., Kajima Const. Services,
Inc. v. St. Paul Fire and Marine Ins. Co., 879
N.E.2d 305 (Ill. 2007). To be sure, the answer
to the question of whether the policyholder
is required to horizontally exhaust or may
vertically exhaust is important, but the
issue of what must happen in order for the
applicable underlying coverage (whether
one year or all years implicated by a loss) to
exhaust has been presented with increased
frequency in recent years.
What Does It Take To Exhaust
Underlying Coverage: Actual
Versus Functional Exhaustion
There is general agreement that the
attachment point of the excess contract
must be reached before an excess contract
is required to respond. However, the second
major disputed issue concerns what
constitutes exhaustion. Specifically, the issue
is whether the underlying exhaustion required
to implicate an excess insurance contract
may be satisfied solely by payment of claims
by the underlying insurer or insurers or
whether some type of “functional” exhaustion
will be accepted. Assume for the examples
to follow that the policyholder has a primary
liability insurance policy with $500,000 in per
occurrence limits and an excess policy sitting
above the primary with $1,000,000 in per
occurrence limits in a single year of coverage
implicated by a loss.
Sometimes the alleged functional exhaustion
may take the form of the policyholder
specifically paying the sum representing
the gap between the amount of underlying
limits and the amount paid on a claim by
the underlying insurer. In this example,
if the claim is settled for $800,000, with
the primary insurer paying only $400,000
of its $500,000 in applicable limits, the
policyholder may pay $100,000 representing
the difference between the amount paid by
the primary insurer and the primary insurance
limits. The policyholder then may seek the
remaining $300,000 from the excess insurer
claiming that, by paying the difference,
the primary policy limits were functionally
exhausted. Other times, the policyholder
alleges functional exhaustion by virtue
of the total amount of the loss exceeding
the underlying limits. In our example, the
policyholder might argue that the $800,000
settlement exceeds the primary limits by
$300,000 and seek that amount from the
excess insurers.
Functional exhaustion disputes exist with
respect to both traditional and long tail
claims. Fundamentally, like many coverage
issues, exhaustion requirements are a matter
of interpretation and application of the
contract requirements. Review of the contract
language is required as multiple provisions
may address the issue and, of course, there
are differences in the language employed
from excess contract to excess contract.
Many of the functional exhaustion decisions
purport to turn on whether or not the court
determines the language of the contract
to be clear with respect to exhaustion
requirements. However, the conflicting
decisions cannot always be reconciled by
differences in contract language.
Cases allowing “functional” exhaustion
generally rely upon Zeig v. Massachusetts
Bonding & Insurance Co., 23 F.2d 665 (2d
Cir. 1928). This old decision involved a
burglary loss under a first-party insurance
contact, was predicated upon the court’s
determination that the policy was ambiguous,
and expressly recognized that a different
result would attain where warranted by the
contract language.
Several decisions over the past several
years have not permitted “functional”
exhaustion and have held that exhaustion of
the underlying limit must be accomplished
by the actual payment of the amount of
limits by the underlying insurer. See, e.g.,
Comerica Inc. v. Zurich American Ins. Co., 498
F. Supp. 2d 1019 (E.D. Mich. 2007) (rejecting
functional exhaustion by insured’s payment
of the difference between the amount paid by
primary insurer and policy limit and holding
actual payment of losses by the underlying
insurer is required); Qualcomm, Inc. v. Certain
Underwriters at Lloyd’s, London, 73 Cal. Rptr.
3d 770 (Cal. App. 2008) (finding language
of excess contract, when read in context of
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
function of excess contract, requires actual
payment by underlying insurer of no less than
the underlying limits).
Recently, the United States Court of
Appeals for the Second Circuit held that the
policyholder must establish actual exhaustion
by payment of claims. Ali v. Federal Ins.
Co.,719 F.3d 83, 94 (2d Cir. 2013). The
contract language of one of the excess
insurers policies provided that excess liability
coverage “shall attach only after all . . .
‘Underlying Insurance’ has been exhausted
by payment of claim(s)” and “exhaustion” of
the ‘Underlying insurance occurs “solely as
a result of payment of losses thereunder.”
The other excess insurer’s policy stated the
excess coverage “shall attach only after
all such Underlying Insurance has been
exhausted,” and that exhaustion occurs
“solely as a result of payment of losses
thereunder.” The Second Circuit agreed with
the District Court that the express language
“establishes a clear condition precedent to
the attachment of the Excess Policies” by
expressly stating that coverage does not
attach until payment of the underlying losses.
The Second Circuit noted that the District
Court did not hold that the underlying insurers
must make payments before the obligations
under the excess policies are reached, as
the court did not specify which party was
obligated to make the requisite payments.
The District Court noted that the maintenance
clause did not relieve the insurers from
coverage even if underlying coverage was not
maintained, but rather the insurer shall not be
liable to a greater extent than if the condition
had been complied with. The policyholders
simply sought a declaration that the excess
policies’ coverages are triggered once the
respective attachment points are reached.
The Second Circuit distinguished its earlier
Zeig decision, noting there is nothing errant
about interpreting an exhaustion clause in
an excess liability policy differently than a
similar clause in a first-party property policy,
that the “freestanding federal common law”
Zeig interpreted and applied no longer exists,
and that excess insurers have good reason to
require actual payment up to the attachment
continued on page 6
5
A Journey Through the Fundamental Requirement of Exhaustion
continued from page 5
points of the relevant policies, thus deterring
the possibility of settlement manipulation.
Apart from arguing ambiguity, policyholders
often argue that, where the policyholder
pays the difference between the amount
actually paid by the underlying insurer and
the attachment point of the excess policy,
the excess insurer is no worse off by reason
of functional exhaustion by settlement and
it would be unjust to limit the policyholder’s
ability to settle. The argument, however,
does not fully comport with the realities of
excess insurance. Excess insurers receive
only a small premium relative to the large
limits of liability provided, making excess
insurance available at a reasonable cost.
The excess insurer does not solely rely upon
claims being settled for an amount in excess
of the attachment point of the policy, it relies
upon the claims implicating the excess
contract after being subjected to the claims
adjustment process of the underlying insurers
such that the underlying insurers have
reviewed and analyzed the claim, determined
that there is coverage, and determined
that the settlement is reasonable such that
the underlying insurers agree to pay the
settlement amount.
In the above examples, the policyholder has
been advocating for “functional exhaustion”
often after having resolved any disputes
with the primary insurers. However, another
situation is presented where the primary
insurer attempts to “tender limits” in an effort
to terminate its defense obligation. These
efforts generally are resisted by policyholders
and, in the absent of express policy language
permitting the primary insurer to do so,
courts generally hold that such “cutting and
running” is not permitted.
The Exhausting Examination
In any event, proper exhaustion (whether it
is vertical or horizontal under the controlling
law and whether or not functional exhaustion
is permitted) of underlying coverage is
required. Although insurance and reinsurance
professionals must have an appreciation for
the applicable legal standards and policy
language relative to exhaustion, this often
marks only the beginning of the journey into
evaluating exhaustion.
6
A determination of proper exhaustion, of
course, requires an understanding and
application of the various limits of liability.
Insurance contracts may contain a host of
applicable limits of liability: per occurrence;
per claimant; per accident; per claim; and
aggregate limits. The limits may apply
separately to property damage, bodily injury,
or personal injury. Alternatively, contracts may
contain “combined single limits,” such that
payments made on bodily injury and property
damage combine to reduce the limits of
liability. Some contracts contain aggregate
limits, while others do not. Aggregate limits
may apply to all losses under the contract
or only to some types of losses such as
operations, premises, or products/completed
operations claims. Aggregates may apply on a
policy basis or an annual basis.
One consideration relevant to analyzing
exhaustion is determining whether the claims
and payment are, and historically have
been, applied properly against the limits.
For instance, where the insurance contract
only contains product aggregates, payments
made on ongoing operation claims should not
be applied against the aggregate. Similarly,
payments made on workers’ compensation
claims, for example, should not be charged
against general liability contract limits.
Many times, the determination is straightforward, but that is not always the case.
In recent years, the issue of characterizing
asbestos-related bodily injury claims against
asbestos defendants who installed (as well
as manufactured or distributed) asbestos
containing products as products/completed
operations claims or non-product (ongoing
operations) claims has been vigorously
litigated in several cases.
Where issues of proper impairment or
exhaustion are presented, insurers often
require an audit or review to determine
the proper status of underlying impairment
or exhaustion. Often an examination of
the specific costs allegedly exhausting or
impairing underlying coverage is undertaken
to determine that they are properly applied to
the applicable limits.
Sometimes costs are reviewed to determine
whether the dollars involved are defense
costs or indemnity dollars. Under most
commercial general liability policies defense
costs are payable on a supplementary basis
(i.e., they do not erode or impair the limits
of liability). Thus, treating defense costs as
indemnity costs may result in premature
exhaustion of the primary policies and
adversely impact the timing of impact or
ultimately the extent of impact to excess
policies. Many excess contracts do not
provide coverage for defense costs, in which
case defense costs should not be used to
impair the excess contract limits. When
defense costs are covered under excess
policies, under some policies defense costs
are payable within limits (i.e., erode limits)
and under others policies they are payable in
addition to limits. Usually, it is easy to identify
whether costs are defense costs (e.g., counsel
fees) or indemnity (e.g., settlement payments
or payments made to satisfy a judgment
against the policyholder). Other times, such
as in the case of evaluating environmental
remedial investigative and feasibility study
costs, the answer requires reference to the
law in the controlling jurisdiction as well as
analysis of the costs themselves to determine
whether they are defense costs or indemnity.
In some instances, the application and impact
of deductibles and self-insured retentions also
must be considered.
The review of specific items may establish
that some components of an otherwise
covered claim are improperly included. Many
corporate policyholders are aggressive in the
costs for which they seek recovery from their
insurers and may include items that are not
covered or rely upon highly inflated future
cost estimates to maximize their recovery.
Costs of doing business, maintenance,
regulatory compliance, economic loss, civil
fines, and facility improvements, for example,
may not be covered damages under thirdparty liability contracts.
In some instances, there may be issues
as to whether payment actually has been
made by or on behalf of the policyholder and
underlying insurers. Potential items for review
include invoices, cancelled checks, and loss
runs.
Generally, the policyholder bears the burden
of establishing proper exhaustion in coverage
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
litigation. Insurers understandably may insist
upon verification of underlying exhaustion.
Sophisticated policyholders recognize that, to
reach higher layers of coverage, exhaustion
must be established. They also recognize
that lack of cooperation in providing proof
of exhaustion jeopardizes their insurance
recovery and sends the message to its
insurers that it has concerns as to whether
there has been proper exhaustion.
Practical considerations confronting the
insurer – such as the costs of reviewing
documents and the extent to which
policyholders and courts will permit review
and challenges to exhaustion – also come
into play. Accordingly, there is no one-sizefits-all approach to evaluating underlying
exhaustion.
For more information, please contact Scott
Seaman at [email protected] and
Jason Schulze at jason.schulze@mbtlaw.
com.
The Money Needed to Be Paid—Why Isn’t It “Loss”
by Andrew S. Boris
Andrew S. Boris is a partner in the Chicago
office of Tressler LLP. His practice is focused
on litigation and arbitration of insurance
coverage and reinsurance matters throughout
the country, including general coverage,
first-party property, professional liability,
environmental, and asbestos cases.
Reinsurance claims disputes come in many
forms and teach those involved in the process
that every claim requires close analysis. By
way of example, it is not uncommon for the
characterization of the money that a cedent
paid as part of an underlying judgment or
settlement to be determinative of whether
reinsurance is available (and if so, at what
percentage). More specifically, the question of
whether the cedent is seeking loss, defense
expenses, or indemnity payments can be
difficult to discern in some circumstances.
The recent case of Seneca Insurance Co. v.
Everest Reinsurance Company 1 highlights
this issue.
In the Seneca case, the cedent issued a
direct directors and officers insurance
policy to the Kentucky Lottery Corporation
for, among other things, claims involving
wrongful employment practices with a $10
million limit of liability. Seneca procured
facultative reinsurance from Everest Re with
a $5 million limit of liability, excess of a $5
million self-insured retention in connection
with its direct directors and officers policy.
The reinsurance certificate specifically
stated that the liability of the reinsurer would
follow that of the cedent except as otherwise
provided in the certificate. Importantly, the
certificate obligated the reinsurer to pay its
proportion of any underlying settlements.
In addition, the certificate obligated the
reinsurer to pay its proportion of expenses
in the ratio that the reinsurer’s loss payment
bore to the cedent’s gross loss payment.
Further, the cedent was obligated to pay court
costs and interest on any judgment or award.
The Kentucky Lottery Corporation was sued
by two former employees and there were
allegations of employees being terminated
for refusing to give false testimony at a
workers compensation hearing, of retaliatory
discharge, of civil rights violations, of libel,
of slander, and of violations of the Kentucky
wage statutes and regulations. Following
prolonged and extensive litigation (and a
significant appeal process), the underlying
court judgments resulted in a liability for
the cedent in the amount of $6,949,675.97
(an amount that was insured by the
directors and officers liability policy that was
facultatively reinsured). In turn, the cedent
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
sought $1,949,675.97 from its facultative
reinsurer, representing the reinsurer’s alleged
obligation for the underlying employment
claim after accounting for the $5 million
self-insured retention. The reinsurer refused
to indemnify the cedent and raised a number
of issues to defend its position, ranging from
the insurability of punitive damages to the
purported late notice of the subject claim
to the reinsurer. Importantly, the reinsurer
also raised the question of how certain
components of the judgments entered against
the cedent’s insured should be characterized.
More specifically, the question of whether the
award of interest by the judge overseeing the
underlying employment case (in excess of $2
million) should properly be considered loss
or interest on a judgment for purposes of the
reinsurance presentation.
The cedent argued that the underlying
judgments did not include “interest on any
judgment” as those terms were referenced
in the facultative certificate at issue. In turn,
the cedent argued that that the interest
judgments from the underlying action
should be characterized as prejudgment
interest and were loss for purposes of the
reinsurance presentation. The importance
of the distinction was critical. If the interest
judgments were not characterized as loss,
the reinsurer argued that the $5 million
self-insured retention had not been fully
exhausted—relieving the reinsurer of any
obligation to indemnify the cedent. The court
rejected the cedent’s arguments and ruled
that it would be improper to consider the
continued on page 8
7
The Money Needed to Be Paid—Why Isn’t It “Loss”
continued from page 7
underlying interest judgments as anything
but true interest. In turn, the court ruled
that because the interest judgments totaled
more than $2 million, the reinsurer had no
obligation whatsoever because the $5 million
self-insured retention for loss had not been
satisfied. In so ruling, the court determined
that the reinsurer had no obligation for any
expenses (including interest) absent an
indemnifiable loss under the reinsurance
contract at issue.
The court’s straight-forward approach to the
questions presented will be seen by many as
refreshing and pragmatic. Before the court
addressed significant questions about the
potential insurability of punitive damages
or whether the cedent’s alleged late notice
should be determinative of the cedent’s
ability to recover reinsurance, it addressed
the fundamental question of whether the
cedent’s loss presentation demonstrated that
the applicable self-insured retention was
exhausted. It is not uncommon for cedents to
submit loss presentations to their facultative
reinsurers that do not necessarily include loss
and seek the recovery of expense. Cedents
argue that the expenses were incurred in
the defense of a potentially indemnifiable
claim and that “but for” the defense that was
paid by the cedent, there would have been
a resulting loss within the meaning of the
reinsurance contract. Thus, even in situations
in which the cedent was not required to
make an indemnity or a loss payment,
cedents rely on the “follow the fortunes” and
“follow the settlements” doctrines to argue
that reinsurers should be held responsible
for such expenses. Obviously, every case
stands on its own facts and applicable law,
but this case stands for the proposition that
reinsurers are not so obligated. In the end,
the importance of the Seneca decision may
extend past the court’s specific holding of
whether the underlying interest judgments
should be considered interest or loss for
purposes of potential reinsurance cover for
the certificate at issue and focus more on
the court’s requirement that there must be
an indemnifiable loss before the reinsurer is
required to pay expenses.
For more information, please contact Andrew
Boris at [email protected].
Endnote
1 Seneca Insurance Co. v. Everest Reinsurance
Company, 2013 U.S. Dist. Lexis 151594
(S.D.N.Y. October 17, 2013).
The Mentorship Role for CPCUs
By Carla D’Andre, CPCU
Carla D’Andre, founder and president of
D’Andre Insurance Group, Inc., Miami, Florida.
Carla D’Andre’s career spans thirty-plus years
around the globe, as she has been a member
of senior management for Swiss Reinsurance
Group, XL Capital, and Aon Risk Services
and has served in retail brokerage positions
at firms that now form part of Marsh. Her
insurance brokerage firm launched four years
8
ago and is certified at the federal, state, and
county levels. The client base includes both
public- and private-sector policyholders,
and the firm is focused on developing and
launching new insurance products. D’Andre’s
passion for developing new risk products was
the catalyst for her joining the CPCU Society
Reinsurance Interest Group.
Becoming a Chartered Property Casualty
Underwriter (CPCU®) elevates an insurance
professional to one of the most highly
regarded professional levels within a vast
industry, employing millions worldwide. Does
being a CPCU, then, impute the responsibility
of mentorship of industry talent on us
because we are CPCUs?
D’Andre has earned the CPCU, CLU, and
ARe designations as well as an MBA degree
in finance. Licensed in both the propertycasualty and life and health lines, she is
a writer, a speaker, an award recipient,
and a mentor to those in insurance and
risk management. Additionally, she chairs
the American Management Association’s
Insurance and Risk Management Council, an
educational not-for-profit organization.
I don’t believe it imputes the responsibility
to CPCUs, but I do believe CPCUs are well
positioned to mentor industry talent and
encourage knowledge and professionalism
through the study of the CPCU curriculum.
I have mentored industry colleagues for
over thirty years and find it purposeful,
appreciated, and rewarding. I did so because
l had the benefit of being mentored by
CPCUs in my early career and wanted to
return the value in like kind. I would like to
see mentoring, especially CPCU mentoring,
grow, creating a momentum that benefits our
industry and all involved.
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
CPCUs are well positioned to mentor talent
because they are most often all of these:
1) leaders in their fields of expertise; 2)
managers or part of management, including
senior and executive level management;
3) committed to CPCUs’ professional
ethics, which are often used as the ethical
standard reference within the industry;
and 4) committed to ongoing knowledge
advancement and the sharing of knowledge.
In business today, tighter business margins
and a quicker pace may reduce or eliminate
a firm’s ability to develop talent or provide
a formal training program. Firms that do
formally train talent can invest in only a
small percentage of applicants who line up
to be chosen. Realistically, the incorporation
of technology has changed work habits
and patterns, often dehumanizing the
personal interface and combining what once
was a common in-person business work
environment with a learning session. Thus,
both the formal and informal programs,
previously in place to identify, develop, and
encourage talent are fewer to be found.
However, it is still as necessary as ever for
our industry to attract and develop top talent.
I submit that CPCUs can contribute to the
industry’s professionalism by acting as
informal mentors to our colleagues and
continuing the professional relationship
long past the achievement of the CPCU
designation.
Informal Versus Formal
Mentorship
A lot has been written on mentorship and the
mentor-mentee relationship. Thus, there are
volumes of material available for the reader
to reference and source on the subject. As a
CPCU for thirty-three years, I have witnessed
and participated in both formal and informal
programs. Both types of training programs
add value and can be used simultaneously to
assist, guide, care, and direct a mentee who
looks to the mentor as a source of knowledge
that will refine, define, and accelerate his or
her professional development and career.
It is from this deep well of personal
experience and involvement that I continue
to support the position that CPCUs can and
should bring their exceptional mentorship
value to our industry. CPCUs like me are
committed to industry professionalism. It
is this high standard of commitment that
will be the natural draw for a CPCU to
participate in a mentor-mentee relationship.
Collectively, we can fill some of the training
and development void that exists today.
Interestingly enough, in the mentor-mentee
relationship, roles can change depending
on who holds the expertise and as careers
develop. I have found that individuals I have
mentored at some point may swap roles
and mentor me. Thus, it can work both ways
because we create a culture of professional
sharing and teaching with appreciation and
respect for the value shared.
Below, I capture three recent mentoring
moments in which I had the privilege to
be involved, supporting my contribution to
mentorship as a CPCU.
A 2013 Designee and New Media
Connections
Early in 2013, I received a call by an
individual who said he was contacting all
CPCUs in the area, as he was soon to be a
CPCU and wanted to introduce himself. He
had used LinkedIn to find me, and because
he was reaching out as a CPCU to a fellow
CPCU, I remained interested in knowing
more about this caller. That individual was
Mr. Austin James, CPCU, ARM, of iNPAC, a
surplus lines brokerage firm expanding into
Miami. Following the call, I met with Austin
and encouraged him to attend the annual
conference to receive his designation—and
to work with me to build up the CPCU Society
South Florida/Miami Chapter. He agreed to
do both and honored me by extending an
invitation to share in his celebration dinner
as a newly designated CPCU, Class of
2013, at the CPCU Society Annual Meeting.
Remaining in touch, we are now developing
business opportunities mentoring each
other depending on the skills needed. As
two CPCUs, one just designated and one
long-standing, we switch roles on who is the
mentor or mentee of the moment, and we
both benefit.
A Career Promotion: CPCU Student
and Ten-Year Mentor-Mentee
Relationship
In the New York Daily News October 14
Columbus Day write-up, an article captured
my mentorship of Ms. Christine Caruso, who
now holds the newly appointed position for
Starr Indemnity and Liability Company as
a professional and personal lines claims
manager and CPCU student. Christine is a
bright and talented professional who was
asked about our mentor-mentee relationship
over the past ten years.
In the article, she states:
“It was important to me that I would make the
right, well-informed and carefully thoughtout decisions, as I knew that every decision
would potentially affect my next opportunity.
She has been my professional rock. When
I look back at my career advancement and
where I stand today, I wouldn’t be there if
it wasn’t for Carla guiding me. When I met
Carla over ten years ago while planning the
2003 Columbus Day Parade as volunteers
through the Columbus Citizen’s Foundation
in New York City, she was an executive in the
insurance industry. I expressed my interest in
insurance, and she told me to stay in touch. I
did just that and continue to do so. Carla now
has her namesake brokerage and advisory
firm she heads in Miami, Florida, and has
stayed committed to me as a professional. I
have passed CPCU 2 to date through Carla’s
encouragement.”
College Mentorship to Career
Professional and CPCU Studies
As with Christine, my commitment to
professional mentorship often span years
per mentee. This is the case with Mr.
Justin Rissolo, a professional who qualified
for and worked in a D’Andre Insurance
Group’s company internship position while
earning his degree in risk management and
insurance at St. John’s University–School of
Risk Management, Insurance, and Actuarial
Science. Justin is now an employee in Aon
Risk Services of New York’s Account Executive
Group and has turned to me to seek advice
on pursuing his professional development
and insurance education through the CPCU
curriculum.
continued on page 10
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
9
The Mentorship Role
for CPCUs
Cedent or Cedant: Which Is Proper?
by Eugene Wollan, JD
continued from page 9
in the treaty ending the Franco-Prussian War
of 1870, France ceded Alsace­Lorraine to
Germany). A financial obligation is certainly
something of value, but is it being surrendered or yielded? Not really. It’s simply being
passed along.
As Justin reviews his options for professional
study, he states: “I would also like to mention
how our informal mentorship has been
ongoing since the beginning of my internship
at D’Andre Consulting to show that even after
my internship was completed, I turn to you for
professional direction and advice. To me, it is
now more important than ever to know that
you will take the time to serve as a resource
for me.”
The CPCU Mentorship Privilege
in Service to Our Industry
As CPCUs, we strengthen the professional
level of our industry when we combine the
course curriculum and designation with our
commitment to mentor talent. It is a natural
fit, given all that we stand for, and easy for
us to do! CPCUs can lead in the mentorship
of industry talent. That is why, as a CPCU,
I continue to mentor young professionals
whom I met through my membership in The
Columbus Citizen’s Foundation; my position
on the Executive Advisory Board for St. John’s
University School of Risk Management,
Insurance, and Actuarial Science; past
corporate positions; The Institutes and the
CPCU Society; and the student internship
program underway at D’Andre Insurance
Group.
A CPCU since 1980, I credit the CPCU
achievement as a large part of my success.
I want to see others realize that same
momentum, networking, and knowledge from
their CPCU studies as I have and still do! That
is why I congratulate Austin and encourage
Christine, Justin, and others to become
CPCUs, as well as my fellow CPCUs to mentor
industry talent as a part of our professional
commitment and standing.
10
Gene Wollan, formerly senior partner and now
senior counsel to the firm of Mound Cotton
Wollan & Greengrass, has more than sixty
years of experience in insurance and reinsurance.
Reinsurance Encounters Editor Richard
Waterman asked me to prepare a short
article about the dispute over whether the
proper spelling is “cedent” or “cedant.” Being
naturally rebellious, however, I’ve decided
to exceed the limits of my brief and offer a
few observations on the concept of ceding in
general.
My online dictionary defines cedent (or
cedant, take your choice; as far as I’m
concerned, it makes no difference) as a
party who passes a financial obligation to an
insurer or a reinsurer. Fair enough. But why
that term in that context? Outside the insurance world, “cede” refers to a surrender or
yielding of something of value (for example,
Because the term is common in the world of
reinsurance, I suppose its origin relates to the
international genesis of that world. Hence,
the use of “treaty” instead of “contract” or
“policy.” Reinsurance transactions, to be sure,
are sometimes confined within the limits
of a single country, but almost all of them
cross national boundaries. That makes it only
natural for an international term to be used in
describing those transactions.
Reinsurance, like most fairly arcane subjects,
has acquired a jargon of its own. “Cede” is a
good example. It has little to do with the everyday world around us, but everything to do
with our own special little world. Some folks
seem to think that the use of such specialized
terms represents a deliberate plan to keep
outsiders from understanding the mechanics
and complexities of our world, but I prefer to
think that it’s just one more example of an
industry developing its own language that
gives those within that world quick and easy
access to its workings.
Editor’s note: “Cedent” has historically been
the preferred spelling in articles published in
RISE/Reinsurance Encounters instead of the
alternate spelling “cedant.”
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
Catastrophe Bond Market Fosters Innovation and Competition
With the Traditional Reinsurance Market
by Roland C. Goss
of 2013 from three major reinsurance brokers
active in these markets, Aon Benfield, Guy
Carpenter and Willis Re, along with anecdotal
evidence from specific transactions and
companies, demonstrates that the markets
are having a marked effect on each other,
with increased price competition and new
contract terms which have been beneficial to
cedents.1
I. The Development of the Cat
Bond Market
Roland Goss’ practice focuses on reinsurance
disputes, reinsurance transactional
counseling, and the defense of class actions
and other complex litigation and arbitration
matters. He has been responsible for the
arbitration and litigation of reinsurance issues
relating to many different lines of insurance,
the jury trial of a major insurance market
conduct class action lawsuit, and a thirtyseven-state collaborative market conduct
examination of a life insurance company.
Goss has counseled clients on reinsurance
strategies and represented the ceding insurer
to the largest fully collateralized reinsurance
catastrophe bond ever marketed. He created
and serves as blog master of Reinsurance
Focus, an award-winning blog focusing
on reinsurance and arbitration matters,
and has written and spoken extensively on
reinsurance, insurance coverage and class
action-related issues.
Editor’s note: Effective January 1, 2014,
Roland Goss became a managing
shareholder of the Washington, D.C., office
by Carlton Fields Jorden Burt, PA. This
article first appeared on the firm’s website,
ReinsuranceFocus.com, and was published
by HarrisMartin Publishing. This article does
not constitute legal or other professional
advice or service by Jorden Burt LLP and/or
its attorneys.
The past twelve months have seen significant
development in both the catastrophe bond
and the traditional reinsurance markets. The
cat bond market has matured and developed,
there has been a $35 billion infusion into the
reinsurance market, and price competition
has developed between the markets. The
recently released analyses on the first quarter
The cat bond market continues to be robust.
A large dollar amount of bonds matured
during the first quarter of 2013, and all of
the new issues during that quarter came
from ceding insurers which previously had
participated in the cat bond market. Nine
cat bonds are reported to have been issued
during the first quarter of 2013.2
The new cat bond issues reinsured a variety
of risks, including medical benefit claims
levels, United States hurricane risks, Florida
hurricane risks, Louisiana hurricane risks,
North Carolina hurricane risks, earthquake
risks generally and New Madrid earthquake
risks. Some cat bonds have covered more
than one risk. For example, Nationwide
Mutual had two bond issues in the first
quarter of 2013 that covered both hurricane
and earthquake risks, and The Cincinnati
Insurance Company ceded both New Madrid
earthquake and severe convective storm
or tornado risks to a new cat bond.3 The
conventional wisdom is that bonds which
have a diversity of risks or risk locations tend
to have greater market appeal. However,
even most of the new cat bonds with a
single insured risk and a narrow geographic
territory reportedly have been substantially
oversubscribed.
While part of the increased activity in the
cat bond market no doubt stems from the
increasing understanding and maturity of
this market, the increased demand for these
collateralized securities also likely has been
the result of the persistent low interest rate
environment the United States and the rest of
the world has been living with over the past
five years. Institutions, which are a target
investor market for cat bonds, have been
willing to purchase cat bonds with more risk
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
in order to achieve a much better return than
is available in the investment grade securities
market.4
The vast majority of the new cat bonds
featured indemnity triggers. One cat bond,
reinsuring Turkish earthquake risks, was
issued with a parametric trigger. While
parametric triggers were prevalent in the
early years of the cat bond market, their
use in cat bonds has become increasingly
scarce. A recent cat bond from Allstate
features an industry loss trigger that is based
upon industry losses modeled by Property
Claims Services, adding some diversity to the
market.5
New cat bonds have included new and
interesting features, which may increase the
risk of loss to bond holders but provide added
business flexibility to the ceding insurers.
The fact that issues with such new features
still are oversubscribed is a testament to the
strength of the demand for cat bonds. For
example:
• Expansion of the scope of ceded
risks: The parametric trigger on the Turkish
Catastrophe Insurance Pool multi-year bond,
Bosphorus 1 Re, is based upon data from
selected geographic points in the risk area.
The bond provides the option to increase
the number and geographic dispersion of
such data points during one of the annual
resets, which would effectively expand
the geographic scope of the ceded risks.6
The market’s acceptance of the potential
expansion of the scope of the insured risks
during an annual reset is an interesting
development. Allianz Argos recently
sponsored a cat bond covering multiple perils
over a broad geographic area, including
U. S., Caribbean, Central America, and
Mexican hurricane and U. S. and Canadian
earthquake risks.7 The recent two issues
of the Tradewynd Re Ltd. series of bonds
involving risks ceded by AIG covers a very
broad range of risks, including commercial
property, energy and engineering, aerospace,
marine, residential, high net worth residential,
auto, yacht, fine art, oil refining, chemical
operations, power generation and other
energy-related facilities.8
continued on page 12
11
Catastrophe Bond Market Fosters Innovation and Competition With the Traditional
Reinsurance Market
continued from page 11
• Longer maturity: Previously issued
cat bonds typically have two or three year
maturities. The new cat bond covering
risks ceded by Louisiana Citizens Property
Insurance (Pelican Re Ltd. 2013-1) has a
longer four year term.9 Given the almost
historically low pricing on the new bonds
being issued this year, the business benefit to
a cedent of locking in such low pricing for a
fully collateralized reinsurance cover for four
years is obvious.
• Flexible attachment points: The
attachment points of different cat bonds vary
widely. For example, Pelican Re Ltd. 20121 had a relatively low attachment point of
$200 million, but the new 2013 Pelican Re
bond reportedly attaches at $389 million.10
However, the 2013 bond reportedly includes
a feature which permits Louisiana Citizens
to change the attachment point to facilitate
the overall management of its reinsurance
facilities, potentially moving the attachment
point lower, a feature frequently described
in reinsurance parlance as a drop down
feature.11 Everglades Re 2013-1, covering
risks ceded by Florida Citizen’s Property
Insurance, provides Citizens with unusual
flexibility in the setting of the attachment
point on the second year reset in a narrow
band that is not limited by the modeling of the
risks, providing Citizens with greater flexibility
in constructing its reinsurance layers.12 A
recent cat bond sponsored by The Travelers
Companies, Inc. had a similar feature.13
As reinsurance programs become more
complex for cedents, with a combination of
single and multi-year traditional reinsurance
and cat bond covers, such flexibility is
likely to facilitate the construction of more
cost-efficient programs, and perhaps more
importantly reinsurance structures which do
not have gaps.
Perhaps the biggest news in the cat bond
market in the first quarter of this year has
been the dramatic reduction in the cost of
new bonds to ceding insurers. When a new
cat bond is taken to market, the ceding
insurer or sponsor and the selling brokers
target a desired size and price for the
issue. The new cat bonds issued in the first
quarter of 2013 have “upsized,” or increased
in dollar size from the target size, by an
12
average of 40% over the initial target.14 At
the same time, however, the coupon rate
paid to investors has declined by an average
of 16%.15 This combination, along with
the fact that some new issues have been
oversubscribed by 100% or more, reflects
the high demand that such bonds continue
to have.16 There is no doubt that the cat bond
market has been developing in ways that are
advantageous to ceding insurers, in terms of
the size of the risk transfers, pricing, bond
features and the number and diversity of
bond purchasers.
Commentators have pointed to two potential
developments in this market, which are
already starting to occur, as significant
breakthroughs in the further development
of the cat bond market. First, it has been
suggested that risks other than traditional
property and casualty risks (i.e., earthquake
and windstorm risks) may be securitized.17
The securitization of medical benefit claims
by Aetna Life is a step in this direction.
Second, while the ceding insurers in cat
bonds have to date mostly been large
insurers, some commentators have
suggested that due to the reduction of
the pricing and the transaction costs of
such bonds, this market may begin to see
participation by smaller ceding insurers.18
Two recent cat bonds illustrate the expansion
of cat bonds into previously unserved
market segments. First, American Coastal
Insurance Company, a relatively small
specialty insurer, recently was the ceding
company for the Armor Re Ltd. (Series
2013-1) catastrophe bond, which covers both
hurricanes and tropical storms.19 Second,
the Florida Municipal Insurance Trust, which
is the insurer to the Florida League of Cities,
recently sponsored its first cat bond providing
reinsurance cover for Florida named storms.20
These types of developments may portend a
marked change in the cat bond market.
In its “Reinsurance Market Outlook” after the
end of the first quarter of 2013, reinsurance
broker Aon Benfield stated that “it is
now clear that the ILS and collateralized
markets can be competitive with traditional
reinsurance in peak zones.”21
Ceding insurers which have participated in
both the cat bond market and the traditional
reinsurance market are finding that the
markets are increasingly competitive, which
may be one reason that the effective rate on
line being paid by ceding insurers in both
markets has been declining significantly.
One broker has concluded that the cat
bond market has consistently offered
more aggressive rates than the traditional
reinsurance market.22 Anecdotal evidence
has been seen of ceding insurers shifting
risk transfers from one market to the other,
while at the same time participating in both to
maintain relationships and market access and
foster competition between the two markets.
II. The Development of the
Traditional Reinsurance Market
Some traditional reinsurers are viewing
the development of the cat bond market
as a threat to their operations,23 which is
understandable as an increasing number of
insurers of cat risks use the capital markets
to cover some of their most volatile risks.
This area of risk transfer has, for a long time,
been dominated by the traditional reinsurers,
with occasional forays into the market by
hedge funds and other sources of capital that
frequently have been limited to short term
participations or specialized involvement
through side cars or specialty start up
reinsurers.
The cat bond market provides ceding insurers
with fully collateralized, multi-year risk
transfer facilities, which of course is a highly
desirable type of cover for a ceding insurer,
especially at the same time that revisions
to the Credit for Reinsurance Model Act and
Regulations likely will result in a decline in the
ability of cedents to require fully collateralized
traditional reinsurance facilities. Given the
very restrictive investments permitted for
the funds associated with cat bonds and
restrictive reinsurance trust agreements,
most, if not all, cat bonds permit the ceding
insurer to take full financial statement
credit for cessions to the capital markets.
The unease of some traditional reinsurers
probably is increased by the increased
flexibility of cat bonds, the high demand
for such bonds, and the example of Allstate
Insurance stating that it was reducing its
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
traditional reinsurance in favor of increased
participation in the cat bond market.24
The traditional reinsurance market has
not been static, however. Analyses by
reinsurance brokers report that there has
been an infusion of approximately $35 billion
into the traditional reinsurance market.25 Total
capital of reinsurers was reported to be $505
billion as of December 31, 2012, the highest
level ever reported.26 With substantial risks
being shifted to the capital markets, however,
reinsurers face questions of how to put their
capital to effective use.
There have been at least two important
changes in the reinsurance market as a
result of the competition of the cat bond
market and the influx of capital. First, a soft
reinsurance market has developed, at least in
the United States, with significant downward
pressure on reinsurance rates for some types
of risks.27
Second, a number of reinsurers have altered
their business model, providing services
as fund managers, deploying third-party
capital through side cars and other vehicles
or sponsoring cat bonds themselves.28 For
example, Munich Re offers “risk trading”
services through insurance linked securities
issuance and trading consulting services
to compliment its traditional reinsurance
solutions.29 Other reinsurance companies
launching divisions to manage third-party
investor capital include Aspen Insurance
Holdings Limited,30 Lancashire Holdings31 and
Sirius International Group, Ltd. (the Bermuda
based reinsurance group of White Mountains
Insurance Group, Ltd.).32
Other reinsurers have developed and sell
shares of “reinsurance funds,” which may
be unregistered investment funds composed
of a variety of catastrophe risks. These
funds have started to attract substantial
institutional investors. For example, Blue
Capital Global Reinsurance Fund, Ltd., which
is wholly owned by Montpelier Re Holdings
Ltd., recent came to market with its second
cat reinsurance fund, Blue Capital Global
Reinsurance Fund. The most recent issue
of this reinsurance fund encompasses the
following perils: United States earthquake
and windstorm; Japanese earthquake
and windstorm; and European windstorm.
Institutional asset managers such as
Baillie Gifford, F&C Asset Management and
Prudential plc reportedly have purchased
shares of the Blue Capital fund, with
Prudential reportedly buying approximately
twenty percent of the most recent issue of
this fund.33
Finally, Munich Re, Swiss Re and Zurich
American sponsored at least six cat bonds
between July 2012 and December 2012.34
This is not a new development. In the early
years of the cat bond market reinsurers
sponsored many of the issues to obtain
retrocessional coverage. It is ironic that a
capital market that some reinsurers helped
to develop has become a source of serious
competition for them.
Conclusion
The cat bond market has undergone
substantial development over the past couple
of years, and there is no longer any doubt
that it is having an impact on the traditional
reinsurance market. At the same time, the
traditional reinsurance market is undergoing
significant development. The most recent
developments of the cat bond market have
occurred during years in which there has
been a relatively low level of losses from
hurricanes and other events covered by cat
bonds, few cat bonds have experienced
losses from catastrophes which have
occurred, and low returns for investment
grade investments have encouraged
investments in cat bonds. It remains to be
seen how the cat bond and reinsurance
markets will fare when catastrophes
result in significant losses for cat bonds
and the new reinsurance structures or
returns on investment grade investments
increase. Endnotes 1 See Aon Benfield’s, Executive Summary –
Alternative Market Capital Flows and Record
Reinsurance Capital Drive Materially Better
Terms for Reinsurance Buyers, available at
http://thoughtleadership.aonbenfield.com/
Documents/20130402_re_market_outlook_
april_1_external.pdf (April 1, 2013), Guy
Carpenter, April 1 Renewals See Reinsurance
Pricing Stabilize Amid Dynamic Capital Growth,
available at http://www.gccapitalideas.
com/2013/04/09/april-1-renewals-seereinsurance-pricing-stabilize-amid-dynamiccapital-growth/ (April 9, 2013), and Willis Re,
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
1st View available at http://www.willisre.com/
documents/publications/Reinsurance/Willis_
Re_1st_View_April_Renewals_report442013.
pdf (April 1, 2013).
2 See http://www.artemis.bm/deal_directory/.
The Artemis alternative risk transfer blog
has detailed stories concerning new and
outstanding cat bonds, other alternative
risk transfer vehicles, their relationship with
traditional reinsurance and a comprehensive
deal directory.
3 See Cincinnati Financial reveal details of
trigger point for Skyline Re cat bond, available
at http://www.artemis.bm/blog/2013/02/12/
cincinnati-financial-reveal-details-of-triggerpoints-for-skyline-re-cat-bond/ (Feb. 12, 2013)
and Artemis deal directory at http://www.
artemis.bm/deal_directory/skyline-re-ltdseries-20131/, http://www.artemis.bm/deal_
directory/caelus-re-2013-ltd-series-20131/,
and http://www.artemis.bm/deal_directory/
caelus-re-2013-ltd-series-20132/.
4 Cat bonds frequently are rated by Standard &
Poor’s. Although such ratings are not always
made public, the two tranches of the medical
benefit claim bond sponsored by Aetna Life
reportedly were rated BB+ and BBB+ (which
might be considered a low investment grade),
while the hurricane and earthquake risk bonds
reportedly were rated at below investment
grade, from B to BB+. The Artemis blog’s deal
directory may include a reference to the bond’s
rating if the rating is available. See http://www.
artemis.bm/deal_directory/.
5 See With Sanders Re catastrophe bond Allstate
brings a new trigger to market, available at
http://www.artemis.bm/blog/2013/05/03/withsanders-re-catastrophe-bond-allstate-bringsa-new-trigger-to-market/ (May 3, 2013). This
bond was issued in two tranches, covering
United States earthquake and hurricane risk,
with following fire risks. One tranche, rated
BB+ by Standard & Poor’s, doubled in size
from $100 to $200 million, while the BB
rated second tranche finalized at the target
$150 million level, with a coupon rate lower
than anticipated. See Allstate’s Sanders Re
catastrophe bond completes and lists in
Bermuda, available at http://www.artemis.
bm/blog/2013/05/07/allstates-sanders-recatastrophe-bond-completes-and-lists-inbermuda/ (May 7, 2013).
6 See Bosporus 1 Re cat bond upsizes to 250m,
price guidance drops, available at http://www.
artemis.bm/blog/2013/04/11/bosphorus1-re-cat-bond-upsizes-to-250m-priceguidance-drops/ (April 11, 2013) and Artemis
deal directory at http://www.artemis.bm/
deal_directory/bosphorus-1-re-ltd/.
continued on page 14
13
Catastrophe Bond Market Fosters Innovation and Competition With the Traditional
Reinsurance Market
continued from page 13
7 See Artemis deal directory at http://www.
artemis.bm/deal_directory/blue-danube-ii-ltdseries-20131/.
8 See Artemis deal directory at http://www.
artemis.bm/deal_directory/tradewynd-reltd-series-2013-1/ and http://www.artemis.
bm/deal_directory/tradewynd-re-ltdseries-2013-2/.
9 See Artemis deal directory at http://www.
artemis.bm/deal_directory/pelican-re-ltdseries-20131/.
10 See Pricing tempts Louisiana Citizens into
Pelican Re 2013 cat bond, available at http://
www.artemis.bm/blog/2013/04/05/pricingtempts-louisiana-citizens-into-pelican-re2013-cat-bond/ (April 5, 2013).
11 See Pelican Re 2013 cat bond features novel
on-request drop-down, available at http://
www.artemis.bm/blog/2013/04/11/pelicanre-2013-cat-bond-features-novel-on-requestdrop-down/ (April 11, 2013).
12 See Citizens hails 40% cost-savings made
with Everglades Re 2013 cat bond, available
at http://www.artemis.bm/blog/2013/04/02/
citizens-hails-40-cost-saving-made-witheverglades-re-2013-cat-bond/ (April 2, 2013)
and Artemis deal directory at http://www.
artemis.bm/deal_directory/everglades-re-ltdseries-20131/.
13See Travelers achieves greater flexibility
with Long Point Re III 2013-1 catastrophe
bond, available at http://www.artemis.bm/
blog/2013/05/20/travelers-achieves-greaterflexibility-with-long-point-re-iii-2013-1catastrophe-bond/ (May 20, 2013).
14 See Catastrophe bonds upsize by 40%
on average so far in 2013, available at
http://www.artemis.bm/blog/2013/04/09/
catastrophe-bonds-upsize-by-40-on-averageso-far-in-2013/ (April 9, 2013).
15 See Catastrophe bond coupons drop by
average 16% during marketing in 2013,
available at http://www.artemis.bm/
blog/2013/04/10/catastrophe-bond-couponsdrop-by-average-16-during-marketingin-2013/ (April 10, 2013).
16 Ceding insurers renewing their participation in
the cat bond market in the first quarter of this
year generally experienced risk adjusted price
decreases of 20% to 70% for U.S. hurricane
and earthquake risks. See ILS pricing drops
by up to 70% as reinsurance capital rises: Aon
Benfield, available at http://www.artemis.bm/
blog/2013/04/03/ils-pricing-drops-by-up-to70-as-reinsurance-capital-rises-aon-benfield/
(April 3, 2013). For example, Florida Citizens’
14
2013 Everglades Re cat bond reportedly came
in at a final cost to the ceding insurer of 40%
less than the prior year’s Everglades Re 2012
cat bond, and was two times oversubscribed.
See Citizens hails 40% cost-savings made
with Everglades Re 2013 cat bond, available
at http://www.artemis.bm/blog/2013/04/02/
citizens-hails-40-cost-saving-made-witheverglades-re-2013-cat-bond/ (April 2, 2013).
17 See Aon Benfield, Reinsurance Market Outlook
at 1, available at http://www.aon.com/
reinsurance/ (April 1, 2013).
18 See ILS pricing drops by up to 70% as
reinsurance capital rises: Aon Benfield,
available at http://www.artemis.bm/
blog/2013/04/03/ils-pricing-drops-by-up-to70-as-reinsurance-capital-rises-aon-benfield/
(April 3, 2013).
19 See Armor Re catastrophe bond rated by
S&P, more details emerge, available at http://
www.artemis.bm/blog/2013/05/02/armor-recatastrophe-bond-rated-by-sp-more-detailsemerge/ (May 2, 2013). American Coastal is an
admitted Florida specialty company “targeting
garden-style condominiums.” See http://www.
amcoastal.com/. American Coastal had total
admitted assets of $286,679,202 as of March
31, 2013. See http://www.amcoastal.com/
pdf/ACIC%20Balance%20Sheet.pdf. This is a
$183 million one year bond rated by Standard
& Poor’s at BB+, with a coupon of 4.25%. See
Artemis deal directory at http://www.artemis.
bm/deal_directory/armor-re-ltd-series-20131/.
20 See $20m Sunshine Re Ltd. catastrophe bond
privately placed by Towers Watson, available at
http://www.artemis.bm/blog/2013/05/13/20msunshine-re-ltd-catastrophe-bond-privatelyplaced-by-towers-watson/ (May 13, 2013).
This is a very small $20 million three year
bond. There is no rating reported and a coupon
rate of 9.25%. See the Artemis deal directory
at http://www.artemis.bm/deal_directory/
sunshine-re-ltd-series-20131/.
21 Aon Benfield, Reinsurance Market Outlook, at 1
available at http://www.aon.com/reinsurance/
(April 1, 2013).
22 Aon Benfield, Reinsurance Market Outlook at 6,
available at http://www.aon.com/reinsurance/
(April 1, 2013).
23 See Emerging model of “fast capital” threatens
traditional reinsurers: Willis Re, available at
http://www.artemis.bm/blog/2013/04/02/
emerging-model-of-fast-capital-threatenstraditional-reinsurers-willis-re/ (April 2, 2013).
24 See Emerging model of “fast capital” threatens
traditional reinsurers: Willis Re, available at
http://www.artemis.bm/blog/2013/04/02/
emerging-model-of-fast-capital-threatenstraditional-reinsurers-willis-re/ (April 2, 2013).
25 See Willis Re, 1st View at 3 available at http://
www.willisre.com/documents/Media_Room/
Publication/Willis_Re_1st_View_April_
Renewals_report442013.pdf (April 1, 2013)
and Emerging model of “fast capital” threatens
traditional reinsurers: Willis Re, available at
http://www.artemis.bm/blog/2013/04/02/
emerging-model-of-fast-capital-threatenstraditional-reinsurers-willis-re/ (April 2, 2013).
26 Aon Benfield, Reinsurance Market Outlook at 2
available at http://www.aon.com/reinsurance/
(April 1, 2013).
27 See broker Guy Carpenter’s analysis of the
market, available at http://www.gccapitalideas.
com/2013/04/09/april-1-renewals-seereinsurance-pricing-stabilize-amid-dynamiccapital-growth/.
28 See Willis Re, 1st View at 3, available at http://
www.willisre.com/documents/Media_Room/
Publication/Willis_Re_1st_View_April_
Renewals_report442013.pdf (April 1, 2013)
and Ability to attract, deploy third-party capital
important for reinsurers: Aon Benfield, available
at http://www.artemis.bm/blog/2013/04/09/
ability-to-attract-deploy-third-party-capitalimportant-for-reinsurers-aon-benfield/ (April 9,
2013).
29 See http://www.munichre.com/en/reinsurance/
business/non-life/risk_trading/default.aspx.
30 See Offer third-party backed alternative
reinsurance capacity or lose out: Aspen
CEO, available at http://www.artemis.bm/
blog/2013/05/01/offer-third-party-backedalternative-reinsurance-capacity-or-lose-outaspen-ceo/ (May 1, 2013).
31 See Lancashire reacts creatively to thirdparty reinsurance capital, settled Sandy
ILW, available at http://www.artemis.bm/
blog/2013/05/02/lancashire-reacts-creativelyto-third-party-reinsurance-capital-settlessandy-ilw/ (May 2, 2013).
32 See Sirius Group launches reinsurance capital
markets and ILS efforts, available at http://
www.artemis.bm/blog/2013/05/15/siriusgroup-launches-reinsurance-capital-marketsand-ils-efforts/ (May 15, 2013).
33 Prudential grows its allocation to Blue Capital
Global Reinsurance Fund, available at http://
www.artemis.bm/blog/2013/05/13/prudentialgrows-its-allocation-to-blue-capital-globalreinsurance-fund/ (May 13, 2013).
34 See http://www.artemis.bm/deal_directory/.
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
New Member Announcement—John L. Sullivan, CPCU, ARe
by Richard G. Waterman, CPCU, ARe
We are pleased to welcome John Sullivan
as the newest member of the Reinsurance
Interest Group Leadership Committee.
Sullivan has spent more than twenty years in
the insurance and reinsurance industry. He
started his career at Industrial Risk Insurers
in San Francisco as a property underwriter,
learning highly protected risk insurance. While
there, he worked on accounts ranging from
aircraft and semiconductor manufacturing to
casinos and real estate.
He moved to Employers Re as a property
treaty underwriter, working in the National
Accounts Unit and serving an extensive client
base.
Sullivan is now a vice president with TransRe
in New York City, where he is an account
executive in the National/Specialty Unit,
underwriting both property and casualty
business.
He holds the CPCU, ARe, and ALCM
designations as well as a bachelor’s degree in
business administration.
He is looking forward to representing TransRe
as a member of the Reinsurance Interest
Group.
CPCU Society Reinsurance Interest Group | Reinsurance Encounters | January 2014
John L. Sullivan, CPCU, ARe
15
CPCU Society
720 Providence Road, Suite 100
Malvern, PA 19355-3433
Reinsurance Interest Group
Reinsurance Encounters
Address Service Requested
The Reinsurance Interest Group newsletter is published by
the CPCU Society Reinsurance Interest Group.
Reinsurance Interest Group
http://reinsurance.CPCUSociety.org
Chairman
Wade E. Sheeler, CPCU, CIC, CRM, ARe
Grinnell Mutual Reinsurance Company
Email: [email protected]
Editor
Richard G. Waterman, CPCU, ARe
Northwest Reinsurance Inc.
Email: [email protected]
CPCU Society
720 Providence Road, Suite 100
Malvern, PA 19355-3433
(800) 932-CPCU (2728)
www.CPCUSociety.org
Statements of fact and opinion are the responsibility of the
authors alone and do not imply an opinion on the part of
officers, individual members, or staff of the CPCU Society.
© 2013, Society of Chartered Property and Casualty Underwriters
All rights reserved.
CPCU is a registered trademark of The Institutes.
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