News


Soft market will generate disputes I


ll-disciplined underwriting in the soft market is building up a store of problems and potential legal disputes, which will only manifest when


market conditions eventually improve and reinsurers feel they again have the leverage to dispute questionable claims. That is the view of Clive O’Connell, partner at law firm Goldberg


Segalla. In his experience, he said, soft markets always generate many legal disputes as underwriting discipline weakens. But actual disputes usually emerge only when the cycle has turned. “I have observed many cycles during my career and, from a


lawyer’s perspective, as brokers try to maintain commission levels and underwriters seek premium volume, broking and underwriting discipline starts to erode. We are seeing the first cracks emerge now in this market. “The actual disputes will not manifest themselves when the market is


this soft, however. I have seen instances where we have advised a client that a claim is not payable. They communicate this to the client and the next day get a call from the chairman of the broker, effectively saying they will be taken off their security list unless they pay that claim. “In this type of market, where they are worried about premium volume,


they will often back down and pay it. It is only when the market starts to harden a bit that they will have the confidence to stand their ground. So the problems being created now will really emerge when the market improves.” O’Connell notes that the last very soft market—between approximately


1997and 2001—resulted in a plethora of legal disputes, some in niche areas such as film finance, which reinsurers had entered seeking extra premium volume but which they had not fully understood. Others emerged in workers’


Clive O’Connell


compensation and personal accident business in North America, a phenomenon that became known as the ‘PA spiral’. “It remains to be seen what problems this more recent soft market will


throw up,” O’Connell said. “Regulation is perhaps a lot more stringent than it was but, as the banks have proved, there will always be one-off deals that can create problems for companies.” He said there are some signs that the market is more disciplined


than it has been in previous soft markets, however. The fact that many cedants are retaining more on their own balance sheets rather than taking advantage of cheap reinsurance is one good sign. Another is that there seems to be less evidence of opportunistic arbitrage in this market. “It is counterintuitive that cedants are retaining more in this market


but it shows they are comfortable with these risks and thinking long term, which is a good thing. “I recall at the height of the last soft market, someone said the only


way to make money in this market is to write any business at any price, but reinsure it out for less. “That type of arbitrage seems less obvious now, which is clearly a


good thing. We are also seeing companies return capital to shareholders, rather than using it unwisely—another positive for the market.” n


Insurers plan disposals M


21.10.14 TUESDAY


ore insurance companies across the EMEA (Europe, Middle East and Africa) region see themselves as sellers of business units rather


than buyers over the next three years, according to a survey of senior insurance executives conducted by Towers Watson and Mergermarket. More than 60 percent of respondents said they expected to divest


operations before 2017, up from just 20 percent who said the equivalent just a year ago. Meanwhile, the percentage of organisations saying they expect to make an acquisition in the same three-year timeframe has fallen from over two thirds (69 percent) to well under half (42 percent). “The growing focus on disposals fits with a general strategy amongst


major insurers in Europe in recent years of selling non-core units and of consolidating where they have a market-leading position. In addition, we expect more acquisitions of smaller insurers to result from the increased regulatory burden, mainly from Solvency II,” said Fergal O’Shea, EMEA Life Insurance M&A Leader for Towers Watson. Although the number of transactions completed in the EMEA insurance


sector in the first half of 2014 was broadly in line with the same period in 2013, deal value more than halved from €8.1 billion to €3.9 billion. Most respondents put the absence of ‘big ticket’ transactions down to continuing economic volatility and, perhaps surprisingly given recent clarifications on Solvency II in particular, regulatory uncertainty. n


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