Lucent Fronting Deal: A Matter Of Trust?

Burlington, Vt.

Some captive insurers who conferred in Vermont recently expressed serious concerns over their ability to maintain trust in trading partners.

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

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

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

On Aug. 16, ACE declined comment to National Underwriter for an article containing Mr. Buckleys meeting remarks that was to be posted by NUs Online News Service on our Web site.

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

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

Lisa Fleishman-Hicks, vice president of communications for ACE INA in Philadelphia said, “ACE is aware of Lucents concerns. We are looking into the questions that have been raised by the risk manager 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 you become a triple-B they say, We really dont want to do business with you,” suggesting a relationship between recent ratings downgrades and the policy cancellation.

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

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

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

Lucents captive, First Beacon Insurance Company, was set up in Vermont in 1996. The captive insures various property-casualty risks for Lucent, and also writes credit guarantees for third-party financial 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 Vermonts Department of Insurance and Banking, expressed concern about the erosion of trust in todays business dealings.

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

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

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

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

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