“There's almost a presumption that when the going gets tough, the tough get stupid,” said Rick Murray, chief claims strategist for Swiss Re, noting that a reinsurer would risk jeopardizing its future if it were somehow disinclined to pay valid claims.

I dont think the industry is stupid, he said.

David Furby, president of ACE Reinsurance, agreed. Fundamentally, the tenet of the insurance and reinsurance business is to pay claims. That's what we sell, Mr. Furby said.

We sell a promise to pay. Failure to do so can severely damage your reputation, can lead to disputes, can lead to allegations of bad faith, he said.

The two men were responding to a question posed by Karole Dill Barkley, a director for Standard & Poors in New York, during the rating agencys annual insurance conference last month. Is the willingness of reinsurers to pay claims changing? Ms. Dill Barkley asked, after providing a rundown of some statistics that she said are causing S&P analysts concern. Among the market statistics gathered by S&P and presented by Ms. Dill Barkley were these:

Since 1997, recoverables have grown by 73 percent, well outpacing the growth of premium and the 8 percent decline in surplus.

Reinsurance recoverables to U.S. insurers totaled $171.4 billion at year-end 2002.

Unsecured recoverables exceeded $100 billion at year-end 2002.

She also said that insurers are becoming more wary of reinsurer security, even in instances where regulators give them full credit for reinsurance. She noted that the use of collateral has increased and is approaching one-fifth of authorized recoverables.

The question is whether one-fifth of recoverables is enoughand whether the right one-fifth[is] collateralized, Ms. Dill Barkley said.

The two reinsurer executives took the information in stride, calmly presenting their own numbers and views to explain why $100 billion in unsecured recoverables may be a non-issue. After all, they suggested there isnt any evidence that reinsurers are unwilling to pay claims–hard market or not.

First Mr. Murray noted that an underlying assumption of Ms. Dill Barkleys question is that a recoverable is an obviously valid entitlement that isnt subject to potential misunderstandings or other complications.

As far as valid claims, our position is clear and unequivocal. There is absolutely no change in our position regarding payment, he said. In 2002, Swiss Re paid 20 billion Swiss francs (or $15 billion) in non-life claims.

He said Swiss Re is currently involved in disputes on, at last count, 91 claims out of 34,000, noting that the ratio is less than one-tenth of 1 percent.

In between those figures, there's probably half-of-one percent of matters where it is not clear to anybody at the outset whether the claims have validity, he said.

While admitting he didnt have data from other periods for the purposes of comparison, he said, I don't believe there is anything you can call a change in behavior. On the other hand, the potential for real disputes over legitimacy is growing, he added.

Reinsurers certainly see contentious claims being submitted. That's a by-product of the marketplace, said Mr. Furby. There are claims out there that have come out of new products [in] the marketplace, he said, noting that the language of contracts must be looked at. In the context of any contractual agreement, on occasion, you get disputes between parties, he continued.

Mr. Murray noted that some particular, high visibility disputes have been classified, sometimes inappropriately, as reinsurance disputes, such as the World Trade Center dispute. So it tends to get blown out of proportion, he said.

Laline Carvalho, an S&P director, took a different view. Our position is that willingness is an issue [and] it is going to become a bigger issue for a number of reasons, she said.

First, she said a number of reinsurers have had their financial positions weakened by large amounts of losses. A recoverable is subject to credit default of the reinsurer, and there are a number of reinsurers that have failed in the last few years, she said. Others, in weakened financial positions, have had negative outlooks tagged on their ratings by S&P.

Further, she said, there's been a move toward transaction-oriented relationships between cedents and the reinsurers. The old idea that you have a 20-year relationship in which you make money a few years and lose money a few years is not necessarily there anymore, she added.

In addition, she noted that the litigious environment in the United States is starting to generate more and more unpredictable results. It is fair to conclude that reinsurers will look closer at what was in the language of the contract and what was really intended to be paid, she said.

She also noted that there are greater potential issues going forward in areas like asbestos, where huge ceding company liabilities are sitting on their balance sheets as incurred-but-not-reported claims. When the IBNR turns into actual claims in future years, that's when you might see more potential disagreements, she said.

For cedents, when a recoverable becomes the subject of arbitration, the cedent might see a delayed payment, she said, raising another concern. Delayed payments can cause a cash flow crunch for companies with high levels of recoverables, she said, noting this was one factor leading to the demise of Mutual Risk Management.

Beyond the ability and willingness of reinsurers to pay, there is a third category that gets lost in the debate about recoverables, Mr. Murray said. That is the increasing complexity of claims in which its not at all simple to figure out what the right and fair answer is, he affirmed.

It would be impossible to say that [such complex] claims are going to get matured, processed and paid in 30 days, he said.

Commenting on Ms. Carvalhos remarks about changes in relationships between insurers and reinsurers, Mr. Murray noted that some unique drivers of this change exist in continental Europe. In Europe, he said, large direct writers and large-scale reinsurers, historically, had shareholders in common. There was real family And in the family, you would tend to say, Whats mine is yours, he said.

Now, the entire governance and ownership structures in continental European companies are undergoing change at a dramatic rate, he said. There is a conversion from family, and its understandable dynamics, to commerce, and its understandable dynamics in some cases.

Taking issue with one of Ms. Carvalhos commentsthat some cedents realize they may not be able to rely on payments from reinsurers when times are bad–Mr. Murray asserted, The factors that are driving change today are quite independent of the underwriting cycle. Instead, the factors are ownership changes, the dynamics of timely settlement and the litigation environment, he said.

Whats really driving the insurance market, at least in the United States and increasingly in Europe, is the claimant community, Mr. Murray said.

The claimant community is rapidly becoming more expertised, he said, explaining that well-funded claimants are leaning on insureds to structure settlements and resolve complex litigations in ways that optimize insurance claims. There is a new alignment between insureds and claimants, in which direct and reinsurance communities as a whole become the deep pocket, he said.

We have yet to begin figuring out how to build bridges between the direct and reinsurance components against claimant-insured alliances, he said.

During the session, the panel was asked whether the forays of primary markets into areas such as taking credit risk on various surety bonds, where they may not have had the sophistication to understand the risks involved, has led to a greater level of reinsurance disputes.

Mr. Furby said the answer depends on the reinsurance structures, noting that where contracts are of a sharing nature, reinsurers do have an implied obligation to follow the fortunes of the cedents.

In an excess-of-loss contract, he said, the terms of the contract are negotiated. So when youre talking about risk that was taken on by the ceding company that was never intended to be covered, or was never disclosed as a potential risk, then the reinsurer isnt simply in the position where [it is] obliged to follow the fortunes.

Reproduced from National Underwriter Edition, July 7, 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.