Most of the arbitrators, lawyers, reinsurance executives and insurance executives interviewed for this article agree that reinsurance disputes are on the rise. But there is a belief that the number of disputes is not terribly out of the ordinary for an industry coming out of a prolonged soft market with companies in runoff or withdrawing from certain lines.

Its fair to say that there are, in absolute numbers, more arbitrations today than there were three or five years ago, said a U.S. reinsurer who didnt want to be identified. What I wouldnt translate that into is that reinsurers now are looking harder at all reinsurance arrangements [or that] theyre less likely to pay promptly, he added.

The level of disputes increases proportionately with loss ratio, said a reinsurance buyer. If the combined ratio on a ceded book of business is 92, it is rare, if ever, that a reinsurer hires an independent forensic auditor to go in and look at placing information, premium flows and claim handling, he said.

When the loss ratio gets a comma in it, all of a sudden the cash dries up and the auditors come in and the claim people scour the books, he said.

Nobody disputes when they make money, agreed Larry Schiffer, partner with Le Boeuf, Lamb, Green & MacRae in New York City. When everyone is making money, even if your cedent lied to you as a reinsurer, if youre making money on the treaty, why would you dispute? Mr. Schiffer questioned.

The reinsurance industry has lost billions of dollars over the last few years, and when you are losing numbers like that, youre going to look at the business you assumed very carefully. And if you see that it smells, youre going to go after it to cut it off, he said. A lot of this is just purely economically driven.

One key driver for disputes between a reinsurer and its customers is the ending of an ongoing business relationship, said all those interviewed.

The severing of relationships can lead to a more careful examination of claims; a more careful examination of placing information; a more careful examination of premium payments and flows; and of the brokers role and who knew what and when, the reinsurance buyer said.

The reinsurer agreed that disputes tend to occur in areas where the ceding company has gone out of a long-time line of business and the only line the reinsurer covered them for was that discontinued line of business.

Because the insurer is not going to get any future premium out of that line of business, the only source of money for them with respect to their liabilities is the reinsurer, and theyre going to try to pass as much stuff to us as they can, he said. The usual utmost good faith that you would anticipate in a reinsurance relationship breaks down under those circumstances, and thats what will tend to lead to disputes.

There has been continuing consolidation among both primary insurers and reinsurers, said the reinsurer. Youve got companies that are changing their business plans and therefore their reinsurance partners, and so, in a lot of instances, where you would normally have that kind of commercial accommodation, the reasons for it simply arent there, he said.

Disputes are common under those circumstances because the cedent just looks at the reinsurer as a deep pocket and the reinsurer just looks at the ceding company as a source of liability, not as a source of potential profit, he said.

Further, he added, when a reinsurer goes out of business, it has no other source of funds and no continuing commercial incentive to resolve disputes outside of arbitration.

However, the rule of thumb is that if an insurer or reinsurer has a continuing commercial relationship, or the probability of one, then most folks go out of their way to not engage in arbitrations because they want to go on to the next deal and make money together, said the reinsurer.

If youve got a dispute, youll find another way to work the dispute out. So the probability that there will be lots of arbitrations between active reinsurance contract parties is very small, the reinsurer affirmed.

Many of us talk about reinsurance as a partnership. You find a partner who is willing to share a percentage of your risk. You are going to exchange information. You are going to work with them closely, and you are going to do this over a long period of time, said Mr. Schiffer.

Disputes among those kinds of companies with those kinds of relationships dont hit the press, he said. If they do have disputes, theyre done quickly, and theyre done quietly.

The big disputes are with people who arent doing business with each other any more, for the most part, he said. When youre talkingabout a multimillion-dollar hit to your balance sheet, its can be a make or break situation, he added.

The reinsurer said his company has re-underwritten its entire book over the last three years. We have intentionally canceled a number of reinsurance arrangements that we had that are now in runoff, he said. We dont have a current relationship with some of those cedents.

He conceded that its reasonably possible that his company will end up in disputes with some of them. However, the great bulk of the books of all reinsurers are continuing client relationships, and there is incentive to make those relationships work, he affirmed.

Cedents have pared down their security lists dramatically in the last couple of years, so instead of doing business with 30 or 40 reinsurers, theyre doing business with ten, Mr. Schiffer said. The other 20 may decide [that because] theyre not doing business with [these cedents] anymore and [because] this book of business has done very poorly, Why dont we find out if we have a basis to avoid liability?

He emphasized, however, that this is not the habit of professional reinsurers in the industry, but it does happen. Most people, however, act professionally and perform in accordance with industry standards.

Mr. Schiffer said, when reinsurers lose a lot of money theyll ask: Wait a minute, what kind of business was this that I agreed to take? Did they give me something else? Is there a difference in the volume that I understood I was going to get? Are they trying to load in expenses that we never agreed to pay? Are they allocating settlements to the wrong years, which is an issue particularly in asbestos and environmental.

If your cedent is a major client, but you have a treaty that youve now come off of because its a loser, its unlikely that youll go into dispute with that cedentcertainly not a publicly contentious dispute over that book of business, unless theres something truly inappropriate about it where you really deserve relief, Mr. Schiffer affirmed.

While the lack of proper documentation issued in a timely fashion has been highlighted given the recent dispute over the World Trade Center, most disputes are not related to problems with the documentation, said an arbitrator who did not want to be identified.

You cant cover every transaction with paper, he said.

For instance, he said, he has talked to lawyers in a company that is now in runoff. All their programs are blowing up. Ive looked at their documents and the documents they used were really good. But the business deals were bad, the arbitrator said.

Although better documentation certainly helps, its not a panacea, he said.

Normally people dont even look at shoddy paperwork unless something goes wrong, said another arbitrator, Charles Havens. Mr. Havens thought that customer relationships dont matter as much as they used to. Now, if enough money is at stake, theyll fight, he said.

Some sources in the industry suggest that reinsurers are delaying on payment of claims, or disputing them, in the hopes that the equities markets will bounce back.

The reinsurer admitted that a lengthy soft market, poor economy and old-year liabilities have added together to create a reinsurance business with a lot less capital than they had five years ago.

But youre in business to stay in business, and it isnt commercially reasonable for a reinsurer to willy nilly slow payment and question the integrity of his clients, he said.

First Mr. Murray noted that an underlying assumption of Ms. Dill Barkleys question is that a recoverable is an obviously valid entitlement that isnt subject to potential misunderstandings or other complications.

As far as valid claims, our position is clear and unequivocal. There is absolutely no change in our position regarding payment, he said. In 2002, Swiss Re paid 20 billion Swiss francs (or $15 billion) in non-life claims.

He said Swiss Re is currently involved in disputes on, at last count, 91 claims out of 34,000, noting that the ratio is less than one-tenth of 1 percent.

In between those figures, there's probably half-of-one percent of matters where it is not clear to anybody at the outset whether the claims have validity, he said.

While admitting he didnt have data from other periods for the purposes of comparison, he said, I don't believe there is anything you can call a change in behavior. On the other hand, the potential for real disputes over legitimacy is growing, he added.

Reinsurers certainly see contentious claims being submitted. That's a by-product of the marketplace, said Mr. Furby. There are claims out there that have come out of new products [in] the marketplace, he said, noting that the language of contracts must be looked at. In the context of any contractual agreement, on occasion, you get disputes between parties, he continued.

Mr. Murray noted that some particular, high visibility disputes have been classified, sometimes inappropriately, as reinsurance disputes, such as the World Trade Center dispute. So it tends to get blown out of proportion, he said.

Laline Carvalho, an S&P director, took a different view. Our position is that willingness is an issue [and] it is going to become a bigger issue for a number of reasons, she said.

First, she said a number of reinsurers have had their financial positions weakened by large amounts of losses. A recoverable is subject to credit default of the reinsurer, and there are a number of reinsurers that have failed in the last few years, she said. Others, in weakened financial positions, have had negative outlooks tagged on their ratings by S&P.

Further, she said, there's been a move toward transaction-oriented relationships between cedents and the reinsurers. The old idea that you have a 20-year relationship in which you make money a few years and lose money a few years is not necessarily there anymore, she added.

In addition, she noted that the litigious environment in the United States is starting to generate more and more unpredictable results. It is fair to conclude that reinsurers will look closer at what was in the language of the contract and what was really intended to be paid, she said.

She also noted that there are greater potential issues going forward in areas like asbestos, where huge ceding company liabilities are sitting on their balance sheets as incurred-but-not-reported claims. When the IBNR turns into actual claims in future years, that's when you might see more potential disagreements, she said.

For cedents, when a recoverable becomes the subject of arbitration, the cedent might see a delayed payment, she said, raising another concern. Delayed payments can cause a cash flow crunch for companies with high levels of recoverables, she said, noting this was one factor leading to the demise of Mutual Risk Management.

Beyond the ability and willingness of reinsurers to pay, there is a third category that gets lost in the debate about recoverables, Mr. Murray said. That is the increasing complexity of claims in which its not at all simple to figure out what the right and fair answer is, he affirmed.

It would be impossible to say that [such complex] claims are going to get matured, processed and paid in 30 days, he said.

Commenting on Ms. Carvalhos remarks about changes in relationships between insurers and reinsurers, Mr. Murray noted that some unique drivers of this change exist in continental Europe. In Europe, he said, large direct writers and large-scale reinsurers, historically, had shareholders in common. There was real family And in the family, you would tend to say, Whats mine is yours, he said.

Now, the entire governance and ownership structures in continental European companies are undergoing change at a dramatic rate, he said. There is a conversion from family, and its understandable dynamics, to commerce, and its understandable dynamics in some cases.

Taking issue with one of Ms. Carvalhos commentsthat some cedents realize they may not be able to rely on payments from reinsurers when times are bad–Mr. Murray asserted, The factors that are driving change today are quite independent of the underwriting cycle. Instead, the factors are ownership changes, the dynamics of timely settlement and the litigation environment, he said.

Whats really driving the insurance market, at least in the United States and increasingly in Europe, is the claimant community, Mr. Murray said.

The claimant community is rapidly becoming more expertised, he said, explaining that well-funded claimants are leaning on insureds to structure settlements and resolve complex litigations in ways that optimize insurance claims. There is a new alignment between insureds and claimants, in which direct and reinsurance communities as a whole become the deep pocket, he said.

We have yet to begin figuring out how to build bridges between the direct and reinsurance components against claimant-insured alliances, he said.

During the session, the panel was asked whether the forays of primary markets into areas such as taking credit risk on various surety bonds, where they may not have had the sophistication to understand the risks involved, has led to a greater level of reinsurance disputes.

Mr. Furby said the answer depends on the reinsurance structures, noting that where contracts are of a sharing nature, reinsurers do have an implied obligation to follow the fortunes of the cedents.

In an excess-of-loss contract, he said, the terms of the contract are negotiated. So when youre talking about risk that was taken on by the ceding company that was never intended to be covered, or was never disclosed as a potential risk, then the reinsurer isnt simply in the position where [it is] obliged to follow the fortunes.

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 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.