Lucent Fronting Deal: A Matter Of Trust?

Burlington, Vt.

Some captive insurers who conferred in Vermont recentlyexpressed serious concerns over their ability to maintain trust intrading partners.

The issue of trust was spotlighted Aug. 9 when Paul Buckley,treasury director, risk management at Lucent Technologies Inc. ofMorristown, N.J., made comments at the Vermont Captive InsuranceAssociation's annual conference about what he believed was a“non-cancelable” contract that was cancelled July 27 by ACEAmerican Insurance Companies.

“I thought fronting problems were only for small captives,” hesaid. “My friends at ACE issued me a cancellation notice on athree-year non-cancelable policy. I dont think any of us are immuneto fronting issues.”

Fronting is a reinsurance relationship with a licensed primaryinsurance carrier in which the insurer agrees to reinsure a largepart, if not all, of the risk with the client's captive.

On Aug. 16, ACE declined comment to NationalUnderwriter for an article containing Mr. Buckleys meetingremarks that was to be posted by NUs Online News Serviceon our Web site.

On Aug. 22, Mr. Buckley told National Underwriter thathe received a fax from ACE withdrawing the prior cancellation. “Asa follow-up to our letter of July 27, please be advised that weinstructed our local offices today to immediately withdraw anyprovisional notices of cancellation they issued on the Lucentforeign casualty program,” he said, reading from the fax.

“I think what happened was that the top people finally realizedthey had a three-year non-cancelable deal,” he said. “I think theyrealized all of a sudden that I was going to replace them. Then Ithink [the issue] got some attention and then along comes thisfax.”

Lisa Fleishman-Hicks, vice president of communications for ACEINA in Philadelphia said, “ACE is aware of Lucents concerns. We arelooking into the questions that have been raised by the riskmanager and are taking steps to address their issues.”

“When we were an A-plus everybody wanted to be our partner,” Mr.Buckley said during the conference general session. “But when youbecome a triple-B they say, We really dont want to do business withyou,” suggesting a relationship between recent ratings downgradesand the policy cancellation.

In December 2000, Standard & Poors in New York placedLucents senior debt ratings on CreditWatch, lowering them to“tripleB-plus” from an “A-plus,” citing “inconsistent operatingperformance in fiscal 2000.”

William Passannante, partner and co-chair of insurance coveragefor Anderson Kill & Olick, P.C., in New York, a law firm thatregularly represents policyholders and their interests in captives,expressed concern over what he sees as a growing trend.

Speaking to National Underwriter before ACE withdrewits cancellation, Mr. Passannante said: “This is something we hadntseen at all previously. Id say, in the last year, we have seen it anumber of times. If you want to look at it from a jaded point ofview, its a little suspicious that in this market youd seemulti-year non-cancelable programs being cancelled.”

Lucents captive, First Beacon Insurance Company, was set up inVermont in 1996. The captive insures various property-casualtyrisks for Lucent, and also writes credit guarantees for third-partyfinancial institutions, according to A.M. Best of Oldwick, N.J.,which assigned an initial insurer financial strength rating of“B-double-plus” to First Beacon in May.

Len Crouse, director of captive insurance for VermontsDepartment of Insurance and Banking, expressed concern about theerosion of trust in todays business dealings.

“I go back to the old school,” he said. “With any businessrelationship, especially insurance, I think you have to trustpeople in this business. I think their word has to be good and Ithink you have to give people the benefit of the doubt that theirword is good.”

Now, he said, “whats happening is that you meet somebody and itsalmost like you have to earn that persons trust, instead ofassuming the person is an honest business man.”

Lucents Mr. Buckley said that “People want to partner with youand youre surprised when all of a sudden [trust] becomes an issue.We have good long-term relationships with all our businesspartners. Somego back 100 years through the AT&T and WesternElectric days.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 3, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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