Everyone Into the Pool/You Be the Judge

Panel Summary Authored by Randi Ellias, Butler Rubin Saltarelli & Boyd

The morning started with an introduction to the characteristics of pools, the complexities of managing a pool, and various strategies for exiting a pool. The session was moderated by John West of Devonshire and included panel members Richard Dupree of Travelers, Edward Gibney of R&Q Solutions, Dea Rocano of Riverstone Resources, and Anna Wszalek of R&Q Solutions. There are three types of pools: (1) involuntary pools, which provide coverage to otherwise uninsurable risks and in which participation is state-mandated; (2) voluntary pools, in which the participant’s main motivation for participation is likely to increase capacity; and (3) intercompany pools, in which all the participants are affiliated entities. All pool members share the costs associated with participation and bear the risk of insolvency of other pool members, with each pool member becoming responsible for its share of otherwise unrecoverable expenses. The NAIC currently recognizes 500 existing pools.

Ms. Rocano and Ms. Wszalek discussed the complexities of managing a pool, which can be affected by the type of business insured or reinsured, the types of claims at issue, the age of the pool, which affects the availability of historical records, and the diversity of the pool members. Tracking and collecting retrocessional coverage also adds to the complexity. Pool managers also must cope with two different levels of reporting requirements being: to the pool members and to the retrocessionaires. Finally, the pool managers must be mindful of any audit provisions in the pool’s constitution and must be prepared for pool members to request audits on a regular basis. Ms. Rocano and Ms. Wszalek stressed the need for pool managers to proactively provide information to both pool members and retrocessionaires, particularly with respect to large claims, reserves, and denied claims.

There are a number of methods for exiting a pool, including (1) commutation of particular pool years: (2) commutation of pool shares; (3) sale of pool shares. All pools are not created equal, and the best method for winding up the affairs of one pool may not be the same as the best method for winding up the affairs of a different pool. In order to effectively wind up a pool, pool members must be aligned in their respective desires to do so and must buy into the process. Indeed, the importance of pool member buy-in is underscored by the fact that 64% of the audience attending the session preferred an exit plan developed by a committee of pool members, rather than an exit plan developed by a third party or the pool manager. The panel noted that an exit plan managed by a third party or a pool manager ultimately may allow for better project management. Finally, pool members should be prepared for the fact the process of exiting a pool can be a lengthy one – Messrs. Dupree and Gibney noted that the recent wrap-up of the WCRB took approximately eighteen years.

Robin Dusek of Freeborn & Peters then emceed a mock arbitration. The hypothetical involved a reinsurance pool in which a financially-distressed pool member, who held a 2% share in the pool and fronted a large number of risks for the pool, entered into a commutation with one of its cedents to whom it had provided quota share reinsurance. The financially-distressed pool member had retroceded 100% of that reinsurance into the pool and assigned its rights to collect from the pool to its cedent. The pool had been invited to participate in commutation discussions, but declined to do so, although the pool advised the financially-distressed member that it would support a $20M commutation value, as the pool believed there was $10 million in offset available. The financially-distressed member ultimately commuted for $30M – $5M in excess of the cedent’s $25M reserves and $10M in excess of the amount recommended by the pool. The ceding company, who purported to step into the shoes of the financially-distressed pool member by virtue of the assignment, then sought to collect from the other pool members. The other pool members refused to pay, arguing that a commutation, which included IBNR, was not a settlement as contemplated in the follow-the-settlements provision of the quota share treaty governing the pool. The dispute involved issues of assignment, follow-the-settlements, and bad faith, alleged by both the cedent (standing in the shoes of the financially-distressed pool member) and the pool.

The financially-distressed pool member, played by Marianne Petillo of Rom Re, was represented by Nick DiGiovanni of Locke Lord, LLP. Diane Myers of Munich Re played the role of the spokesperson for the other pool members with John O’Bryan of Freeborn and Peters as her counsel. The audience witnessed the pre-mediation meetings between the clients and their lawyers and the parties’ respective presentations at an ultimately-unsuccessful mediation. After deliberations by party-appointed arbitrators Sylvia Kaminsky on behalf of the cedent and Susan Mack on behalf of the pool, the audience served as umpire for the dispute.

The audience was polled after recitation of the hypothetical and before any argument, after listening to the meetings between the clients and their attorneys, after the mediation presentations, and after deliberations by the party-appointed arbitrators. The poll consisted of the same question each time: “Do you think the [ ] Pool should be obligated to pay their 98% share of the $30 million commutation between [the cedent and the financially-distressed pool member]?” The audience was presented with four choices: (1) Yes; (2) No, but the [] Pool should pay some amount between $20 million and $30 million; (3) No, but the [] Pool should pay some amount $20M or less; (4) No.” At the outset, prior to any argument or deliberation, the audience was just about evenly-divided among those four responses. At the conclusion of the exercise, only 2% of the audience felt that the cedent should make no recovery from the pool, with 45% of the audience ruling that the pool should pay some amount $20 million or less.