Swiss Re Comments On Central Fund Dispute International Editor
London
Reinsurance coverage disputes are common in the insurance marketplace, but the Lloyds Central Fund dispute with Swiss Re and its five co-insurers has received more attention than most.
Although Swiss Re, until recently, has been publicly silent on the issue, Rick Murray, chief claims strategist, in response to press criticisms, is commenting about his companys take on events and his perception of what the 500 million ($803.5 million) policy covers. (See NU, May 5, 2003, page 6, for related story.)
In an interview with the National Underwriter, Mr. Murray said the first two claims of 123 million ($197.7 million) were submitted by Lloyds in May and June of 2002.
"We looked at the claims and couldnt understand why they were being made and couldnt understand what events justified the claims," he said.
As a result, all six insurers did what they should do in such circumstances, he said. "We asked Lloyds for explanations that would help us understand if the claims were legitimate," he said.
Nevertheless, he added, the insurers made timely payment under a full reservation-of-rights statement in writing.
"We said in effect: Heres your money. Were waiting for information to find out if these claims are legitimate. If theyre not, we expect to get our money back," Mr. Murray affirmed.
"We paid under reservation of rights," he said, explaining that this means when a payment is made, the reinsurer may not be obligated for it. This is "a responsible way to deal with uncertainty and make timely payments, which we are in the business of doing."
From the press reports about the dispute, Mr. Murray said, the impression one gets is that Lloyds insurers started paying on the policy as they should have and then suddenly stopped paying.
He acknowledged when the third claim came in August, Swiss Re and the five insurers on the contract decided not to pay any more money. At the time, the insurers made further requests for information from Lloyds, he contended.
"We wanted Lloyds to help us understand if we owed them this money," he added.
"By mid-November, we had been able to do an evaluation of the information available to us, which took us to a position that we didnt think these claims fit under the terms of the policy," he said.
Lloyds was offered two choices–to provide Swiss Re and the other insurers with more information or to take the insurers to arbitration, Mr. Murray said.
"It is our understanding, based on what weve learned, that were being asked to reimburse the Central Fund to replace monies they have used to assist members in meeting the very high cash demands of U.S. situs trust funds after Sept. 11," he affirmed.
The 500 million policy comes into play when Lloyds cant meet policyholder obligations, "and we are unaware that any such condition has occurred," he said.
Mr. Murray said the arbitration tools were inserted in the contract to resolve such disputes, "and we are playing exactly by legal rules, market rules and responsible commercial behavior," he said.
Julian James, director of worldwide markets at Lloyds, said the policy becomes effective when cash calls "in any one year exceed 100 million [$160.7 million]," which is the deductible.
"Cash calls did exceed 100 million, and thats why the claims were filed in accordance with the policy language," Mr. James said in an interview.
Within Lloyds global annual report and accounts, Mr. James explained, it states that the Central Fund is supported by a five-year insurance program whereby its insurers will meet "unrecovered losses to the Central Fund where it has been applied to meet members cash calls up to a ceiling of 350 million [$562.4 million] per annum where such calls exceed 100 million [$160.7 million] in any one calendar year." The aggregate maximum payout over the lifetime of the policy is 500 million, he said, quoting the report and accounts.
He would not comment further on a matter now in arbitration. "However," he emphasized, the policy language "is crystal clear."
Lloyds announced the matter was in arbitration on the morning of the markets April press conference to discuss their financial results. Mr. Murray said that was the first time Swiss Re knew that an arbitration notice was issued.
"I dont suggest that I can guarantee the outcome of the arbitration," he said. "I do assure you that the issues to be resolved in arbitration and defenses we will put up as to why we have not paid under the policy are very formidable, and that we anticipate that they will be accepted by the arbitrators."
The financial impact on Lloyds if the policy is unwound is approximately 290 million [$466.0 million], said Mr. James. He explained that this is the 500 million policy, minus the premium of 78 million [$125.3 million], less the tax implications for Lloyds.
Reproduced from National Underwriter Edition, May 12, 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.
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