The HIH Experience Reinsurance Issues Warts

1
The HIH Experience Reinsurance IssuesWarts
All

• Reinsurance Strategy
• The Special Challenges
• Finality a win/win everybody understands

By Mark Moyes, LLB Managing Director 3red Pty
Limited
2
Reinsurance Strategy

• Open relationships with reinsurers
• Aggressive and rigorous credit control
• Regular contact with major reinsurers
• Actively courting commutations

3
Special Challenges

• Limitation periods
• Drifting away of reinsurance asset
• Contentious issues
• Recalcitrant reinsurers
• Uncertainty on some legal issues
• Collection of small amounts from less prominent
  overseas markets

4
Finality steps to commutation

• Establish whats needed to receive satisfactory
  result
• Agree schedule of contracts
• Liquid balances and outstanding loss reserves
• Attaching IBNR
• Negotiate settlement giving due weight to
  contentious issues
• Draft commutation agreement
• Executing agrement

5
HIH Background

• Largest corporate failure in Australian history
• In 1968 Ray Williams and Michael Payne set up MW
  Payne Underwriting Agency
• Followed by numerous acquisitions up to that of
  FAI in 1998
• Placed in provisional liquidation 15 March 2001
  six and a half years of development
• Total reinsurance recoverables approximately
  A650m plus IBNR

6
Aspects of Reinsurance Law in Australia

• Proper Law
• Insurance Contracts Act
• NSW Insurance Act
• HIH v Wallace s19 Insurance Act
• Trade Practices Act
• Limitation Laws
• HIH v Wallace - Pay as Paid

7
Proper Law

• Treaties usually specify proper law of contract
  generally as domicile of ceding company
• Facultative contracts are usually silent
  requires connection, usually where made or place
  of performance
• English Courts often decide on English law if
  placed in London market on recognised London form

8
Proper Law - HIH

• Many of the reinsurance contracts entered into by
  HIH will be subject to Australian law either
  because
• That is what the parties expressly provided or
• a court will infer that intention to the parties.

9
Insurance Contracts Act

• Insurance Contracts Act 1984 (Cth)
• Codification of the law of insurance in Australia
• s9(1)(a) excludes reinsurance
• Common law and other legislation must be resorted
  to.

10
NSW Insurance Act

• Insurance Act 1902 (NSW)
• s19 excuses insured from obligation to
  arbitrate
• s18A(a) deals with misrepresentation and
  non-disclosure
• s18A(b) deals with omissions that may vitiate
  contract

11
HIH v Wallace s19 Insurance Act

• HIH Casualty General Insurance Limited (in
  liquidation)
• v
• RJ Wallace sued on his own behalf and on behalf
  of all other members of Syndicate No 683 at
  Lloyds of London for the 1993 underwriting
  account Ors

12
HIH v Wallace

• HIH initiated proceedings in NSW Supreme Court to
  recover under treaties.
• Syndicate 683 sought a stay of proceedings in
  favour of arbitration as treaties contained
  arbitration clauses.
• HIH argued, inter alia, under s19 of the NSW
  Insurance Act, it was not bound by the
  arbitration clause.

13
HIH v Wallace

• Held that a contract of insurance included a
  reference to a contract of reinsurance
• Decision and authority relied upon lacks analysis
  and reasoning
• Runs counter to modern approach enforcing
  arbitration clauses
• S19 anachronistic

14
Trade Practices Act

• S52 misleading or deceptive conduct
• ReAC v HIH reinsurer argued it had been induced
  to enter certain contracts by representations
  made in Australia breaching s52
• Relief sought under ss80, 82 87 more
  flexibility for court
• Alleged representations included future matters
  caught by s51A shifts burden of proof

15
Limitation Laws

• HIH ceased underwriting over 6 years ago
• S14(1)(a) Limitation Act 1969 (NSW) action on
  contract not maintainable if brought more than 6
  years after cause of action accrues

16
Limitation Laws when does a cause of action for
a reinsurance debt accrue?

• No direct authority in Australia
• USA Continental case limitation starts to run
  no earlier than date ceding insurer makes
  relevant claim payment but case recognises
  influence of contract terms
• UK Baker case when liability of ceding insurer
  has been ascertained by agreement, award or
  judgment

17
Limitation Laws which jurisdiction?

• Limitation laws in NSW are to be regarded as
  substantive
• Reinsurance treaties generally express proper law
  of contract
• Ceding insurers should adopt conservative approach

18
Limitation Laws starting again

• If a cause of action is confirmed, time can start
  to run again from the date of confirmation
• S54(2)(a) of NSW Act requires acknowledgement to
  person having right of action
• UK similar provision but applies to any debt or
  other liquidated pecuniary claim

19
HIH v Wallace - Pay as Paid

• Is a reinsurer required to indemnify the ceding
  insurer where the ceding insurer is in
  liquidation and cannot itself meet its claims?

20
Pay as Paid

• Issue not yet addressed in Australia
• Resolved in UK by 1995 Charter case and 1892
  Eddystone case
• Both cases decided in favour of ceding insurer

21
Pay as Paid

• Theoretically open to Australian courts to find
  in favour or reinsurers - however, unlikely
• Difficult to envisage arbitration panel allowing
  reinsurers to avoid liabilities

22
Why Arbitration?

• In NSW reinsured may avoid arbitration
• Reinsurance treaties generally contain
  arbitration clause
• Why would a party prefer court proceedings to
  arbitration, and vice versa?
• Choice of ceding insurer may be critical to
  outcome
• Which forum is most likely to produce a
  favourable decision?

23
Why Arbitration?

• Arbitrators generally insurance industry people
• Free to determine disputes according to industry
  custom and practice
• Arbitration proceedings said to be resolved more
  quickly and at lower cost
• Arbitration proceedings are private

24
Commutation

• Commutation is consensual
• Must be attractive to both parties

25
Commutation benefits to ceding insurer

• Immediate cash
• Legal certainty
• Removal of any credit risk
• Reduction in administrative costs
• Major risk not collecting a sufficient amount
  actuarial assessment important

26
Commutation benefits to reinsurer

• Caps liability
• Removes ongoing administrative overhead
• Major risk paying too much

27
Commutation - components

• Unpaid claims (liquid balances)
• Outstanding loss reserves
• IBNR
• IBNER
• Premium and commissions

28
The HIH Experience Reinsurance IssuesWarts
All

• The End