COMMUTATION NUTS AND BOLTS

1
COMMUTATION NUTSAND BOLTS

• William M. Popalisky
• 212.335.4665
• william.popalisky_at_dlapiper.com

2
Nut Bolts

• First Things First Lining Up Your
  Retrocessionaires
• Roadshow Preparation Information You Can
  Never Provide Too Much
• Devising Presenting the Commutation Allocation
  Methodology
• Do-it-yourself vs. Hiring the Professional
• Charge to the Professional
• Plan Methodology Review and Comment

3
Nuts Bolts

• Commuting with Cedents
• Auditing Targets
• Professional Determination of Target IBNR
• No Deal without Retro Support
• Obtaining Retro Support
• The Comprehensive Commutation Package
• Review Comment
• Access to Actuaries

4
Nuts Bolts

• Improve Your Collection Through Creative Drafting
  of the Commutation Agreement
• Beyond The Basics the Commutation Agreement as
  An Advance Payment Agreement
• The Advance Payment Component
• WHEREAS, the parties recognize and understand
  that a final fixed advance payment now by the
  REINSURER to fully satisfy its future obligations
  under the CONTRACTS as and when they become due
  will eliminate the uncertainty of contingent
  liabilities for presently unresolved or unknown
  losses and that each party will benefit by the
  REINSURED accepting the aforesaid final fixed
  advanced payment from the REINSURER now and
  hereinafter crediting the REINSURER with full
  payment of all future losses and expenses which
  would otherwise have been payable by the
  REINSURER under the CONTRACTS as and when the
  REINSURERS reimbursement obligation becomes due
  under the CONTRACTS.

5
Nuts Bolts

• A Corollary to the Advance Payment Component
  The Continued Reporting Component
• The REINSURED shall provide to the REINSURER the
  same notice(s) of loss(es)/occurrence(s),
  notice(s) of subsequent developments respecting
  such loss(es)/occurrence(s) or proof(s) of loss
  which it would have been obligated to provide (or
  would in the ordinary course have provided) to
  the REINSURER under the CONTRACTS.
• A Further Corollary The Continued Access to
  Records Clause
• The REINSURED shall give the REINSURER, at all
  reasonable times and upon reasonable notice,
  access to the REINSUREDS books, records and
  papers pertaining to all past, current or future
  balances due or ordinarily due from the REINSURER
  under the CONTRACTS, including but not limited to
  all pertinent claims and accounting documents.

6
Nuts Bolts

• The Advance Payment and Continuing Notice Clauses
• Purpose and Effect
• Retrocessionaire Downside
• Arbitration Advantage
• The Equitable Argument
• Demonstrating the Benefit

7
Nuts Bolts

• Be Prepared to Fight With Any Recalcitrant
  Retrocessionaire
• What the Recalcitrant Retrocessionaire Will Argue
• Your Response
• The Battlegrounds Coverage and Allocation
  Methodology
• Coverage Issues
• No Commutation Coverage Clause, but.
• They Do Exist
• In the event of any commutation between the
  Retrocedent and its original reinsured, the
  Retrocessionaire agrees unconditionally to abide
  by the result of such commutation, such commuted
  amount to be applicable to the limit and
  retention as per Section 1 of Exhibits A-D.

8
Nuts Bolts

• Responses To The No Commutation Coverage Clause
  Argument
• The So What Response
• The Loss Payments Clause Response
• NOTICE OF LOSS AND LOSS SETTLEMENTS
• The Reinsurer agrees to abide by the loss
  settlements of the Reinsured such settlements to
  be considered as satisfactory proofs of loss and
  amounts falling to the share of the Reinsurer
  shall be immediately payable by them upon
  reasonable evidence of the amount paid or to be
  paid by the Reinsured being presented through Guy
  Carpenter Company, Inc. All papers in the
  possession of the Reinsured connected with the
  adjustment of said losses, shall, at all times be
  open to the inspection of a properly authorized
  representative of the Reinsurer.
• LOSSES
• The Retrocessionaire shall pay to the Company
  its proportionate share of all losses paid and
  loss adjustment expenses paid in respect of the
  business covered under this Agreement, less its
  rateable proportion of all recoveries including
  those by subrogation and under retrocessions
  inuring to its benefit. The Company may at its
  sole discretion settle, defend, compromise or
  subrogate all claims under and all payments and
  recoveries shall be binding upon the
  Retrocessionaire for its proportion.

9
Nuts Bolts

• The Honorable Engagement Response
• ARBITRATION
• If any dispute shall arise between the Reinsured
  and the Reinsurer with reference to the
  interpretation of this Agreement or their rights
  with respect to any transactions involved, the
  dispute shall be referred to three arbitrators,
  one to be chosen by each party and the third by
  the two so chosen. If either party refuses or
  neglects to appoint an arbitrator within thirty
  days after the receipt of written notice from the
  other party requesting it to do so, the
  requesting party may nominate two arbitrators,
  who shall choose the third. Each party shall
  submit its case to the arbitrators within thirty
  days of the appointment of the arbitrators. The
  arbitrators shall consider this Agreement an
  honorable engagement rather than merely a legal
  obligation they are relieved of all judicial
  formalities and may abstain from following the
  strict rules of law. The decision of a majority
  of the arbitrators shall be final and binding on
  both the Reinsured and the Reinsurer. The
  expense of the arbitrators and of the arbitration
  shall be equally divided between the Reinsured
  and the Reinsurer. Any such arbitration shall
  take place in Philadelphia, Pennsylvania.
• The Follow-The-Fortunes Response

10
Nuts Bolts

• Allocating The Commutation Special Problems
  With Complex Retro Programs Including Both Quota
  Share and Excess Retrocessionaires
• Why Not Top Down
• How Then Do You Allocate The Commutation To Your
  Retro Program
• Empirical Allocation of Billed But Not Paid
  Losses and Reported Reserves
• Actuarial Allocation of IBNR
• Reduction of Allocated Losses to Present Value
• Application of The Financial Distress Savings
  Factor

11
Recap

• Develop Commutation Strategy
• Retain Top Quality Actuarial Firm To Design
  Implement Allocation Methodology
• Obtain Blessings
• Regulators
• Retrocessionaires
• Establish Good Faith Hardline With Cedents
• Accept No Substitute For Full Payment by
  Retrocessionaires