Thursday, December 4, 2014

The Long Tail

It's been nearly 22 years since "open rating" was brought to California, supplanting Department of Insurance mandated minimum rates.

SB 30 dramatically changed the landscape in California. Oodles of small, specialty carriers writing very niche industries disappeared almost overnight.

Bigger carriers with national footprints used their financial clout to compete on price, creating a relatively short term boon for employers as premiums plummeted.

Underlying a big part of this pricing bonanza for employers was the reinsurance scheme brokered by Unicover Partners, which I and the national business press have written extensively about.

While employers enjoyed unprecedented savings, the trouble brewing within the carrier markets was starting to cause indigestion. Ultimately, around 1997 or so, the carriers that relied on the Unicover brokered reinsurance started coming up short on cash because the reinsurance companies weren't paying claims.

It seems that as these reinsurance treaties were sold up the chain until ultimately someone figured out what the liability was going to be. Those companies returned premium and denied the risk.

One of the biggest primary carrier participants in the scandal was work comp stalwart, Reliance Insurance Company, which had been in business for a 184 years. Unicover ultimately took down that great company.

It's said that workers' compensation is a long tail beast, but this is generally in reference to claims.

But the aftermath of Unicover on the industry shows that the long tail follows the business side of comp too.

Reliance didn't just write workers' compensation insurance, so its demise meant the disintegration and restructuring of several lines of insurance.

To say that work comp disrupted an entire property & casualty business is an understatement - in the case of Reliance, it was devastating.

The Pennsylvania Insurance Commissioner, tasked with the liquidation of Reliance (since Reliance was domiciled in that state) is still working towards settling the estate.

Reliance owed $10 billion in claims and was insolvent by $1.1 billion when it went under.

At the time there were about 144,000 claims pending with various reinsurers, most of which undertook those obligations under the Unicover treaties.

Part of the effort the commissioner's office has undertaken is to get settlement agreements with the reinsurers involving commutation of future claims to liquidate those debts and finalize the estate of Reliance, and to bring in cash needed for administrative expenses as the firm is wound down.

Last month, Insurance Commissioner Michael F. Consedine reached two settlements with Swiss Re, which had provided reinsurance for several Reliance coverage obligations, to commute its reinsurance obligations.

The first settlement covers a group of workers' compensation policies that Reliance had issued between 1996 and 2000 for a payment of $6,590,080. The second settlement commutes Swiss Re's reinsurance obligations for a group of Reliance workers' compensation, general liability and auto policies issued between 1988 through 2000 in exchange for payment of $7 million.

These deals are pending court approval.

The court overseeing the Reliance liquidation has approved multiple commutation agreements submitted by Consedine and his predecessors over the years. It has been taking the court an average of about 30 days to rule on each application for approval.

Two years ago, Swiss Re agreed to settle its reinsurance obligations for policies Reliance had issued to Administaff, Catholic Health East, Labor Ready, Lowe's, the May Department Store and Waste Management for $23 million.

It paid another $19.858 million in January 2012 as a commutation of its obligations for a group of Reliance health care liability policies, and last year, it shelled out $7.750 million to free itself from future obligation for 98 reinsurance policies covering workers' compensation policies that Reliance wrote between 1993 and 2001.

The insurance commissioner has also reached commutation agreements with Munich Reinsurance America, the SCOR Reinsurance Co., Centre Reinsurance (U.S.) Limited,Hannover Rueckversicherung AG, the Connecticut General Life Insurance Co., the Phoenix Life Insurance Co., C.S.C. Assurance, Swiss Re Life & Health America, the Finial Reinsurance Co., and the General Security National Insurance Co., in the past three years.

In 2000, Forbes business writer Robert Lenzer wrote of Unicover as it unraveled, "The potential fallout is huge: the possible disintegration of Saul Steinberg’s Reliance Group, the potential bankruptcy of several California insurers, numerous credit downgrades and the likelihood of big charges to earnings in several widely held insurance companies."

Lenzer was dead on. What he didn't count on, however, was just how long this mess was going to take to clean up.

14 years, and still counting.

Long tail indeed.

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