Cats Strain Reinsurance Ties: GE

Record catastrophe losses can strain not only insurers' bottom lines but relations with reinsurers as well, according to an analysis by one company's experts.

A white paper written by professionals in the claims and legal departments of GE Insurance Solutions, Kansas City, Mo., finds that the insurer-reinsurer relationship needs special attention in the event of a natural catastrophe.

What tends to complicate matters, the authors said, is that primary insurers and reinsurers have sometimes common and sometimes competing interests.

In the wake of a hurricane, for example, a primary company's first objective is to investigate and pay claims.

"The sheer number of claims and inquiries can be overwhelming--tremendous energy is required just to get your arms around the problem," said Chris Carpenter, a claims consultant at GE Insurance Solutions.

That inclination by the primary insurer, Mr. Carpenter said, is often driven by political pressure or lawsuits to expand coverage beyond what was intended by the policy. He pointed out that post-Katrina, insurers were often cast as insensitive for their reluctance to ignore flood exclusions contained in the policies.

A reinsurer by necessity takes a much different view of events following a catastrophe.

New York attorney Perry Kriedman agrees such situations are ripe for conflict, asserting that the so-called "follow the fortunes" doctrine in which the reinsurer covers good faith claim payments of its primary customer only goes so far.

"Whatever the outcome of these weighty disputes, the most practical approach would be for the cedants and their insurers to keep one another informed about the status of cases and claims to reach a mutual consensus," he said.

Tracy Laws, general counsel for the Reinsurance Association of America, Washington, D.C., said there really is no way to track the number of primary-secondary disputes since such arbitrations are confidential.

"I have seen a lot of stories in the trade press that these disputes center on 'follow the fortunes' issues, but we will just have to see how it plays out," she said.

Mr. Carpenter said a reinsurer wants to make sure it isn't placed in a tenuous position due to substandard claims handling by its cedant, or worse, jeopardized by deliberate efforts to pass on losses that could have been avoided.