Legal - Food for thought.

(From Reinsurance)

Byline: Nicola Reid, a solicitor in the insurance and reinsurance department

In Part 1 of this article we described the factual background to the judgement of Mr Justice Thomas and, in this part, we make a few observations and raise areas for further thought as to duties of disclosure. We do not seek to provide answers, but rather to highlight some of the questions that the market may wish to consider. As discussed in the April article, much of the issue arising from the judgement is around the duty to disclose.

Clearly, all business must be considered on its own facts. Reinsurance is conventionally the spreading of the risk of a loss, and it is part and parcel of the market that there is an exposure to losses. What must be stressed is that in Sphere Drake Insurance Ltd v Euro International Underwriting Ltd and others it was held that gross losses were inevitable, not potential, and that the level of premium would inevitably lead to reinsurers further up the chain suffering catastrophic losses for negligible premium. There are two elements to this: (1) writing gross loss-making business; and (2) writing to make a net profit against your reinsurers.

Gross loss-making business

Does the fact that the business itself would produce a gross loss, in the sense of losses that are greater than the amount of premium received, automatically condemn those losses to be un-reinsurable? The answer is probably, but not necessarily. It remains a matter of degree and underwriting judgement. In the Mr Justice Thomas judgement, loss ratios were on any account extreme - examples were given of 20,000%. Would the judge have been concerned if the loss ratio was 110% (a gross loss)? Where do you reasonably draw the line?

Would there be anything wrong in an underwriter writing a loss-making cession as a loss leader, in order to generate further business (no, according to Mr Justice Thomas) if he is obtaining or has obtained full treaty reinsurance?