 AIRROC Chicago Regional Education Day – June 13, 2013The Chicago Regional Education Day, co-hosted by Sidley Austin LLP and PwC, focused on emerging and current issues faced by the industry. A panel moderated by Barbara Murray, Chris Walker of PwC and Ken Wylie of Sidley Austin LLP discussed new approaches to actuarial models used for long-tail business, including the use of pension models to set reserves for workers’ compensation claims. Significant issues relating to adequate reserving for long-tail business include selecting an appropriate interest rate, where the practice of selecting a rate to match the tail of the subject business may not accurately capture potential investment return given the current interest rate environment. The panel also touched upon the importance of understanding and, where appropriate, challenging the actuarial assumptions made by a trading partner in connection with commutation discussions and/or by an opponent in a dispute. Predictive Modeling Mo Masud of PwC examined the emerging discipline of predictive analytics, and the reasons why the use of predictive analytics has become a strategic differentiator among insurance carriers. Particular applications discussed included the identification of target customers and development of a marketing strategy to attract those customers, segmentation within classes of business to exploit gaps in traditional ratings plans, and the determination of customer lifetime value. Mr. Masud also noted that because the predictive modeling cycle totals approximately five years, as distinguished from the six-month to one-year renewal cycle for CGL policies, certain carriers were increasing the terms of their CGL policies to better employ predictive analytics. Regulatory: Current Issues and Trends Kevin Madigan of PwC, Steve Kinion of the Delaware Department of Insurance, and Andrew Holland of Sidley Austin participated on a panel that led a spirited discussion of practically up-to-the-minute developments in regulatory law. Speaking first, Mr. Kinion focused his presentation on the regulation of captive insurers in Delaware. He noted that Delaware has been active in the discussions and drafting of the NAIC Model Law on Medical Stop Loss Captives and that, regardless of what happens with the Model Law, Delaware seeks and will continue to license such captives. Mr. Kinion expressed Delaware’s disagreement with the recent negative comments concerning captive insurance companies set forth in the white paper released by the New York Department of Financial Services. Mr. Holland then provided an update concerning the issues to which the New York Department has recently turned its attention, emphasizing the prosecutorial bent of the Department and the broad power granted to the Department under New York’s Insurance Law. The Department is currently focusing on: (1) alleged abuses with respect to force-placed insurance; (2) certain insurers’ efforts to avoid the payment of annuities – and the consequent escheat of unclaimed life insurance benefits to the state -- by searching the Death Master File to identify deceased annuitants; (3) management of cyber risk by insurance companies; (4) the use of affiliated captives, which the Department has characterized as “shadow insurance” and “financial alchemy”; and (5) private equity involvement with annuity companies. Finally, Mr. Madigan outlined the parameters for the U.S. Own Risk and Solvency Act (“ORSA”) as currently contemplated by the National Association of Insurance Commissioners (“NAIC”). The NAIC has identified three principal objectives for the ORSA. First, the ORSA is intended as a tool to help supervisors understand the risks to which insurers are exposed and how insurers are managing those risks. Regulators plan to assess Enterprise Risk Management (“ERM”) capability and use it to guide their supervisory strategy. Second, the ORSA will be used to assess groups’ own assessment and management of their capital at a group level. Lastly, the NAIC intends that the ORSA will help foster effective ERM strategies at all insurers. The ORSA will be implemented in 2015, and there is no one-size-fits-all filing requirement. Rather, each insurer is expected to tailor its filing to its own operation. Keynote Address As the keynote speaker, Keith Buckley, Managing Director and Head of Global Insurance Ratingsat Fitch Ratings, described the process employed by Fitch in arriving at ratings for insurance companies. He emphasized that Fitch sought transparency in the process and advised that while Fitch is not receptive to arguments that its ratings criteria are flawed, Fitch appreciates that certain situations require a nuanced application of the criteria. Mr. Buckley further advised that the appeals process for companies seeking to challenge ratings was recently revised to allow companies additional time to formulate their appeals. The View: Today’s Insurance/Reinsurance Headlines Bill Barbagallo of PwC led a program in which Tim Corley of Inpoint, William Sneed of Sidley Austin, James Sporleder of Allstate, and Chris Walker of PwC debated hot topics in insurance and reinsurance. Among the topics discussed was the tension between the universal desire to control the costs of arbitration and the universal hesitancy toward using less experienced, and potentially less costly, arbitrators. In addition, the panel discussed the potential implications of the recent United States Fidelity & Guaranty Co. v. American Re-Insurance Co. case, in which the Court of Appeals of New York held that the “follow the fortunes” doctrine applied to allocation decisions, and ruled that the applicable standard was whether the allocation was “objectively reasonable.” 20 N.Y.3d 407, 420. Finally, the Panel discussed how the recent M&A activity in the industry has resulted in companies doing business with trading partners with whom they never intended to do business and whether, and if so how, that fact has impacted disputes. Reinsurance and Loss Portfolio Transfers, Issues of Assignment and Workshop As background for the afternoon workshop, Thomas Cunningham and Sean Keyvan, both of Sidley Austin LLP, elucidated the differences among assignments, loss portfolio transfers, and assumption agreements, describing the benefits and pitfalls inherent in each structure. The topics discussed included whether a reinsurance agreement is analogous to a personal services contract, precluding assignment even where no anti-assignment provision exists, and that an assumption agreement must be tri-partite, including the cedent, the original reinsurer, and the assuming reinsurer, in order to ensure enforceability. |