Settlement was announced in the civil action by the State of Pennsylvania against former directors of Reliance Insurance Company who were charged with responsibility for the company's failure in 2001. The State of Pennsylvania took control of Reliance in that year, beginning a sequence of precedent-setting legal proceedings involving the largest insurance company insolvency in history. In the process, the activities contributing to Reliance's troubles became part of the public record and a valuable source of study for insurance regulatory law and practice professionals.
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At the time the state's Insurance Commissioner stepped in, Reliance wrote a large volume of workers compensation, general liability, commercial auto and personal auto insurance all over the U.S. Much of its business had been written through Managing General Agents (MGAs) and many of its claims were being handled by Third Party Administrators (TPAs).
Efforts to rehabilitate Reliance were frustrated by negative surplus of $1 billion and the events of September 11, 2001, following which the state declared Reliance insolvent and ordered it liquidated. That order triggered statutory obligations of insurance guaranty funds all over the United States. Due to the widespread "outsourcing" of the claim handling to multiple TPAs, the transition to guaranty fund management was challenging as files were retrieved from multiple sites and reviewed by guaranty fund claim units.
It was found at the time that a great deal of Reliance's commercial business was written on a "large deductible" basis, with insured companies bearing up to $250,000 (and sometimes more) of each individual loss. Under a large deductible program for workers compensation, the insurer pays the claim within the deductible then gets reimbursed from the insured employer. To secure that right, a well-advised insurance company gets financial security in the form of cash, letters of credit or surety bonds. For a portfolio of commercial policies, the insurance company can hold hundreds of millions of dollars of financial security for those deductible reimbursement obligations. Reliance was in just such a circumstance.
A controversy arose between the insurance liquidator and the guaranty funds over which was entitled to the benefit of those security deposits, and when. The dispute was resolved and details are in the Commissioner's Petition to Approve Agreement between Pennsylvania Ins. Commissioner and various state guaranty funds regarding large deductible programs of Reliance Ins. Co. (April 2002)
The Commissioner filed a civil action in June 2002 against various officers and directors of Reliance, alleging breach of fiduciary duties, professional negligence and the recovery of preferential transfers. The settlement announced last week resolves that action.
The Commissioner's press release reported that this settlement brings to approximately $100 million the amount recovered for policyholders of Reliance Insurance Company as a result of regulatory action in the case. Another $31 million goes to benefit the creditors of the parent corporation of Reliance Insurance.
A copy of the full text of the Settlement Agreement and the Petition to Approve Settlement Agreement (162 pages in PDF) are now online and together detail the case and controversy and the financial terms of its resolution.
Other materials regarding the Reliance case are available at the Reliance Documents website maintained by the State of Pennsylvania Insurance Commissioner. The legal challenges of large deductible programs have been a subject of study and private reports by the NAIC and other insurance industry organizations.
Thanks to Insurance Journal's online newsletter for the source of this information: Pa. Officials Reach $85 Million Settlement with Former Reliance Insurance Directors
Citizens Property Ins. Co. was created in 2002 as a stop-gap insurer for property owners unable to get insurance in the "voluntary" marketplace. During the four-hurricane onslaught of 2004, it was severely tested, and may now be short of capital. In the event of need, Citizens has power to assess all Florida property owners, but does not have access to the Florida Hurricane Catastrophe Fund (FHCF). Questions have been raised about the quality of its claim handling and payments during the 2004 season. A state senator has now called for an audit by Florida authorities. Senator Klein Asks Fla. Auditor General to Review Citizens Books
See also: Unintended Consequences: Andrew Remembered After Charley
and: Unintended Consequences: FL Hurricane CAT Fund Tapped
A task force of the International Association of Insurance Supervisors released in December its first "Global Reinsurance Market Report 2003" (IAIS Dec. 2004). It discusses aggregated data from 43 "significant reinsurance entities" from 7 major jurisdictions. It is based on fiscal year 2003 data, and appraises industry ability to absorb the results of 2004, including controversial impacts on the Florida windstorm residual market system. It examines the degree of market concentration and diversification of risk in the global reinsurance marketplace, and makes recommendations regarding global standardization of accounting and regulation.
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In addition to 2003 data, the report includes information about events in 2004, including the impact of the series of hurricanes that struck Florida in the summer and fall of 2004. It cites current estimates of total losses from Hurricanes Charley, Frances, Ivan and Jeanne to range from US$15 bn to US$25 bn. According to the report, much of the loss in Florida will be absorbed by State Farm and Allstate (together writing 35% of the homeowners risk in Florida), and by the residual market mechanisms created after Hurricane Andrew, the Florida Hurricane Catastrophe Fund (FHCF) and Citizens Property Insurance Corporation (Citizens).
The report's tables of estimated hurricane losses for 2004 indicate that Citizen's loss is approximately 99% of its surplus, and that assessments of policyholders will be necessary. Except for one regional insurer concentrated in southeast Florida, most of those insurers impacted by the 2004 hurricanes had surplus hits in the single digit percentages. Despite their significant share of the Florida market and substantial retention, the losses for Allstate (US$1.1 bn) and State Farm (US$1.3 bn) are below 5% of surplus .
The report includes discussion of aggregate statistics of the size of the reinsurance market, the structure and profile of risk assumed, use and impact of derivatives and credit risk transfer activity, counterparty risks, capital adequacy and other areas of potential interest.
The need to tap the FHCF due to the 2004 hurricanes has already raised substantial controversy in Florida over the impact on FHCF, as has the impact upon Citizens.
The International Association of Insurance Supervisors (IAIS) offers for public comment a draft proposal "Towards a common structure and common standards for the assessment of insurer solvency," (IAIS 2005). It builds upon existing IAIS papers on solvency, in particular "A New Framework for Insurance Supervision," (IAIS 2004).
The February draft "outlines a more precise view on a number of key elements or ‘cornerstones’ for the formulation of regulatory financial requirements for insurers worldwide," according to an IAIS press release on 2/15/05.
Both papers are now available on the IAIS website at www.iaisweb.org. The IAIS invites comments to to the IAIS Secretariat by 15 April 2005, via e-mail to: iais "at" bis.org, or by fax to: +41 61 280 9151, or by post to: IAIS Secretariat, c/o Bank for International Settlements, CH-4002 Basel, Switzerland.
Thanks to Risk Center Risk Alert for word of this paper and organization.
Electronic Frontier Foundation is representing StreamCast Networks in the case to be heard before the Supreme Court in March. EFF maintains a page of links to source documents involved in the case, including briefs of Petitioners (entertainment companies), briefs of Amici neutral as to the result, briefs of Respondents (StreamCast and Grokster - to be filed 3/1/05) and of their Amici supporters. It also includes links to a wealth of material from the record below in the Court of Appeals for the Ninth Circuit and the District Court. EFF: MGM v. Grokster