Mediation Initiative Seeks to Take the Acrimony Out of Reinsurance (Best's Insurance News)
February 20, 2007
Tuesday, February 20, 2007Robert O'Connor
LONDON (BestWire) - To the outsider, the word "reinsurance" might be a synonym for "dispute."
Acrimonious and expensive, fallings-out between underwriters and their reinsurers seem to be an ever-present backdrop to the reinsurance market. If parties are not doing battle in the courtroom, they may find themselves mired in expensive arbitration.
Paul Moss hopes to change this. Moss is the London-based head of claims for the European operations of Australia’s QBE Insurance Group Ltd. He is also deeply involved in the International Reinsurance Industry Dispute Resolution Protocol, which he hopes will replace conflict with mediation.
The initiative is supported by the New York-based International Institute for Conflict Prevention and Resolution. The CPR Institute, as the group is known, describes itself on its Web site as "a membership-based nonprofit organization that promotes excellence and innovation in public and private dispute resolution."
Moss traces the increase in the level of disputes between ceding companies and their reinsurers to the mid-1970s, when the demand for reinsurance was proliferating, notably in the huge subscription markets of the United Kingdom and the European continent. The reinsurance market was benefiting from such factors as the growth of national economies, the creation of new products and the introduction of information technology, Moss said.
With the increase of complexity within reinsurance contracts, "it was inevitable that differences would arise between the contracting parties. And these differences would lend themselves to disputes," said Moss.
Arbitration clauses became a common method of resolving these disputes. Such clauses were based on the assumption that reinsurance contracts were entered into in good faith and that parties would seek to resolve their disagreements in a similar fashion. But arbitration costs grew, and when arbitration was not used, a heavy reliance on lawyers often propelled disputes into very expensive court action. Even the enactment in the United Kingdom of the Arbitration Act of 1996 was followed by a wave of litigation about the interpretation of the act itself, Moss said.
Moss pays tribute to his fellow claims specialists, who, he said, are showing more assertive attitudes after laboring for too long in the shadow of underwriters. While the underwriters got the glory, Moss said, the claims people were seen as the goalkeepers.
"It’s only been probably in the last 10 years that companies have recognized that good claims people are actually key to the operation," Moss said. "They are the guardians of the bottom line."
Instead of calling in the lawyers, for instance, claims departments are now writing their own reservation rights letters. "We’ve become more sophisticated," Moss said of claims departments. "We understand more about the dispute-resolution mechanisms."
Moss was asked by the CPR Institute to organize a debate across the London market on the issue of disputes. The idea was to discuss whether there was a need for mediation and if mediation would be better than an increasingly expensive arbitration process.
The problem had become particularly acute in North America. Not only were the legal processes of depositions and discovery very expensive, but there was a feeling that the arbitration process was tilted against non-Americans. Arbitration has the added disadvantage of not allowing the loser the chance to appeal, Moss said.
"We shared our experiences with each other," he said. "And we all concluded that arbitration really had become such a litigious process that, given the option, we would much rather be in court."
The timing of the mediation initiative is right, given what Moss described as the commendable performance of the industry in meeting its obligations after the terrorist attacks on the World Trade Center on Sept. 11, 2001, and again after Hurricane Katrina in 2005.
The changing nature of the industry also demands a better way of dealing with disputes. The emergence, through consolidation, of bigger organizations with much larger capital bases has created incentives for the creation of long-term partnerships, he said.
"We don’t want to be pulled apart and have that relationship destroyed by lawyers who feel that the parties should litigate to the nth degree," Moss said.
Mediation has broad support on both sides of the Atlantic, as "there are a lot of pressure points there now pushing this," he said.
Moss does not foresee an end to litigation. In some cases, he suggested, the market as a whole will need the legal precedent that only a court can provide.
Basing his assessment on QBE’s perspective, Moss believes an industrywide adoption of mediation could save both parties 35% of their legal costs over the next five years.
It would be premature, Moss believes, to call for the removal of the arbitration clause from reinsurance contracts. But he does endorse the overlaying of these conditions with dispute resolution clauses that would encourage the parties to move disagreements into nonbinding, noncontroversial mediation. Each party would retain the right to trigger the arbitration clause, he said.
Such mediation clauses began to appear in reinsurance contracts at the start of the current renewal season, Moss said. He argued they underpin the traditional good-faith nature of the parties.
"Inevitably there will be disagreements," Moss said. "So we need to find a mechanism that can resolve them amicably, cheaply and swiftly."
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