Who’s Who Legal has brought together Francesco Cerasi of DLA Piper, David Attisani of Choate Hall & Stewart, Pablo Cereijido of Marval O'Farrell & Mairal and Christopher Foster of Herbert Smith Freehills to discuss levels and types of activity, the impact of current economic conditions and non-traditional capital, and developments in the legal market.
Who’s Who Legal: In which areas have you noticed significant activity this year? Has the increase in D&O work observed last year continued?
Francesco Cerasi: 2013 in Italy will be remembered for the reorganisation of the supervisory authority for the insurance sector and its substantial merger with the bank supervisory authority (Bank of Italy).
Decree-law n. 95 of 6 July 2012, converted into law n. 135 of 7 August 2012, had set up the new Supervisory Authority for Insurance Undertakings (IVASS), which inherited the competences and powers previously held by the Supervisory Authority for Private Insurance Undertakings and Insurance Undertakings of Public Interest (ISVAP) as regards the supervision of the insurance industry.
The formal winding-up of ISVAP coincided with the entry into force of the new body’s statute on 1 January 2013.
The legislative solution, explicitly meant to pursue the full integration of insurance supervisory activity through a closer connection with banking supervisory activity, has enhanced efficiency and homogeneity in inspections.
On the D&O side and as an implication of the economic crisis, business executives businesses have faced extensive exposure to civil and criminal liability in relation to their professional activities. This exposure has increasingly arisen through a combination of regulatory and commercial law issues, with proceedings being initiated by regulators, disgruntled investors and/or former employees (eg, the Fondiaria Sai and the Sopaf cases).
David Attisani: Reinsurance cases involving “claims protocols” have become increasingly prevalent. Essentially, these are reinsurance claims in which one or both parties ask the trier of fact to interpret contract provisions governing the submission and handling of claims that have resulted in recurring disagreements between cedents and their reinsurers. Rather than arbitrate the same issues over and over, the parties may ask a single arbitration panel to construe the relevant reinsurance contract language and establish “rules of the road” that will apply to future claims between them. The reinsurance contract language is effectively supplemented by these rulings. The resulting award is a set of procedures or protocols governing the timing of claims determinations and their parameters. We’re also seeing contract formation cases stemming from errors in automated underwriting templates. Ironically, technology has amplified certain problems in insurance contract drafting with disastrous results for insurers, and potentially their reinsurers.
D&O claims were down in 2013, but they remain elevated compared to the years preceding the financial crisis. We saw a decrease in new filings of securities individual actions (by 26 per cent), capital regulatory actions (by 24 per cent), shareholder derivative actions (by 30 per cent), breach of fiduciary duties actions (by 29 per cent) and merger objection suits (by 11 per cent). Securities class actions filings increased, but only nominally - new filings rose, from 178 in 2012 to 180 in 2013.
Pablo Cereijido: Following a trend started a few years ago, the Argentine Superintendence of Insurance introduced changes to the insurance and reinsurance regulations to increase the involvement of the insurance business in the Argentine economy, while also protecting consumers.
The Superintendence has introduced significant changes to the way insurance is being sold through agents. Agents have been put on a more level playing field with insurance brokers, and this has especially affected the banc assurance business.
Insurance and reinsurance undertakings have been subject to more in-depth scrutiny by the regulator. This has led to an increased number of administrative proceedings against companies for alleged violations of the applicable regulations.
There have not been significant changes in the D&O area. Former employees and third parties continue to address their claims against companies and their directors.
Christopher Foster: As a firm, our busiest areas in the past year have been in the corporate investigations and regulatory arena, insolvency and (to a lesser extent) international arbitration. Our insurance and reinsurance group itself has been as busy as ever, with particular hotspots being energy claims, PPI, Bermuda Form, political risk and Bankers Blanket Bond work.
D&O data in the London market has always been notoriously difficult to acquire. One has to look at the occasional report by leading members of the market or updates from brokers, or else rely on anecdotal evidence. The current general perception appears to be that D&O notifications have remained broadly at the elevated level of the 2008/2009 credit crisis years, with many notifications being regulatory or enforcement related along with some more recent cyber concerns.
Who’s Who Legal: How have current economic conditions impacted on the insurance market? What is the balance between advisory and contentious work in your jurisdiction?
Francesco Cerasi: In the Italian insurance market, austerity measures have had an impact on the disposable income of households and therefore led to a drop in consumption, resulting in an overall reduction in premium incomes, mostly in non-life insurance, but life insurance premium incomes have performed better than in 2012. In terms of financial stability of the industry, 2013 showed signs of improvement. A clear demonstration of this is the improved performance of investment management, the increased level of capitalisation, the general improvement in the solvency index and the widespread decrease in the use of anti-crisis measures to cover both the required solvency margin and the technical commitments underwritten.
Although we are unable to provide figures on the balance between advisory and contentious work at general market level, our firm’s experience shows that contentious work has increased since the beginning of the crisis, to the detriment of transactional work. In the last year we have seen some recovery of regulatory and transactional work, although approximately 40 to 50 per cent of our new instructions are still in the contentious field.
David Attisani: As of September 2013, a sample of CFOs from leading North American property/casualty insurers believed that property and casualty insurance rates were reliably hardening across a spectrum of markets, according to one survey I’ve reviewed. However, more recent reports (issued in December 2013 and March 2014) have predicted that overall insurance rate increases will moderate into 2015, indicating that returns are not poor enough to sustain the recent pace of price improvement, nor are they rich enough to stimulate meaningful softness outside of certain lines. Most commercial lines, aside from auto, have loss ratios within a few points of the peak results of the last hard market, and their rate increases seem likely to drift downward during the latter part of 2014.
In my practice, the proportion of contentious and advisory work at the moment is approximately 70/30 in favour of contentious work. In my experience, the proportions are driven less by jurisdiction, and more by practice area and client need. Within the realm of contentious work, the federal courts in which we practice are generally less active than the state courts.
Pablo Cereijido: The Argentine insurance market has continued to grow, outpacing the growth of the economy in general. Much of the growth has been based on consumer insurance.
The Argentine economy is going through an important inflationary process. Insurers have had to find ways to adjust policy conditions in a way that both complies with applicable regulations and meets clients’ expectations (especially when a loss occurs).
We have seen an increase in contentious work, especially in big claims (some of them probably due to an ageing infrastructure) and in class actions.
Christopher Foster: Slow economic growth and the continued low interest rate environment has continued to place pressure on insurers’ investment income. We have as a consequence seen insurers focusing on underwriting quality, with less tolerance of unprofitable lines, and on the reduction in costs. We have also seen insurers search for new and more profitable lines of business – one only has to look at the number of attempts to increase excitement in a cyber market in London over the past few years. The economic conditions have naturally produced a rise in contentious work generally. The number of suspicious fire losses we are handling reminds me of when I started as an insurance lawyer in the middle of a recession in the early 1990s.
The split in our practice between contentious and non-contentious work is broadly 70/30 at the moment. We have experienced a quieter M&A market in recent times, although our life practice has been particularly active, as has our involvement in pension-related insurance.
Who’s Who Legal: Have you noticed an increase in the amount of non-traditional capital entering the market? How has this affected the market in your jurisdiction?
Francesco Cerasi: We have not noticed such increase as far as the insurance market is concerned. Conversely, there have been attempts since 2012 to remove some of the regulatory obstacles which hinder the insurance companies’ participation to the debt market, eg, by softening the requirements under which insurance undertakings may invest their technical provisions in certain asset classes (eg, the new regulations on project bonds or “mini-bonds”). However, Italian insurance companies still cannot be regarded as significant players in the debt market. The granting of loans in Italy is still a restricted business, reserved to banks and financial institutions.
David Attisani: After the significant catastrophe years of 2004 and 2005, hedge funds and private equity firms famously invested heavily in the insurance industry. With short-term investments in 2006 and 2007, and with the benefit of mild catastrophe years, many of them profited handsomely. In the current market, the inflow of third-party capital is again increasing. In addition, 2013 was a banner year for cat bond issuance, sidecars and collateralised reinsurance, despite the softening market. In 2013 we saw $7.1 billion of cat bond issuance, which is just below the 2007 record figure of $7.2 billion.
Traditional reinsurers have had taken various measures to compete – offering aggressive price reductions, broadening terms and conditions, and enhancing the flexibility of their offerings. They are competing not only with non-traditional capital investors, but also with a mini-trend favouring self-insurance. Insurers have already received the benefit of lower reinsurance pricing at 1 January renewals, reflecting the competitive pressure I mentioned above.
Pablo Cereijido: In the past year there have been some transactions where non-insurance groups have acquired small local operations. A few insurance companies have also been created or are in the process of being created, mainly to benefit from consumer insurance. In general shareholders behind these new undertakings belong to industries other than the insurance business.
Christopher Foster: There is no doubt that there has been a very significant rise in non-traditional capital entering the market, or more specifically the cat market, in search of higher returns. Benign cat conditions in 2013 and increased reinsurance capacity available have resulted in a reinsurance buyer’s market.
While many of the alternative structures are situated offshore for tax or other reasons, we have handled a considerable number of disputes in London and, in particular, arising out of industry loss warranties.
Who’s Who Legal: How have clients and lawyers in your jurisdiction continued to prepare for Solvency II? Has the delayed implementation affected your practice in any way? Are there any other regulatory changes anticipated that will impact on your practice?
Francesco Cerasi: Clients are preparing for Solvency II following the indications coming both from the Regulator and from their industry association, ANIA. IVASS is monitoring compliance with the EIOPA guidelines, with particular reference to the undertakings’ governance and the actuarial function, and has recently issued a draft bill of regulation, amending Regulation n. 20 to align it to the EIOPA guidelines. ANIA has set up a working group and met IVASS to discuss the evolution of the actuarial and risk management functions and changes to the roles of the “auditor-actuary” and “entrusted actuary” already provided for by the Italian Insurance Code. The delayed implementation has indirectly affected our practice, as the Solvency II regime enhances the culture of internal controls and risk assessment and this as an implication also in terms of control of the legal risk.
David Attisani: US firms are considering how the standards imposed by Solvency II may indirectly lead to greater demands on them. As insurers and reinsurers operating in the EU raise their standards to comply with Solvency II, US firms will face increased competition in the marketplace. Those US companies that quickly and efficiently integrate the heightened standards for capitalisation, risk assessment and disclosure will have the best chance of keeping pace or maintaining their advantages. Because ratings agencies are moving toward using Solvency II as the standard for corporate governance and risk management, US companies will likely be under additional pressure to conform.
In the US, we’ve been subjected to seemingly interminable discussion regarding federalisation of insurance regulation, which would – if it came fruition – have an impact on my practice. The Federal Insurance Office recently submitted a report to Congress focusing on the shortcomings of our state-based insurance regulatory system. The report does not advocate federalisation, but it does recommend federal involvement in areas that, according to the report, could benefit from greater uniformity or from a “federal voice” in interactions with international authorities. The report was met with criticism during its Congressional hearing and from players in the industry, who argue that the state system in fact worked well to mitigate, among other challenges, the effects of the recent financial crises.
Pablo Cereijido: Conforming to Solvency II is not within the aims pursued by the Argentine insurance regulator. Nevertheless some of the principles of Solvency II are present in our local regulations (e.g., internal controls, internal audits), mainly as a result of the implementation of principles approved by international organisations such as the International Association of Insurance Supervisors (IAIS).
Argentine subsidiaries of European insurers are in the process of adapting their local practices to Solvency II as a consequence of the requirements imposed by their headquarters. As outside counsels we have seen more serious interest from these insurers in the way loss reserves are calculated and in ascertaining risks associated to court proceedings.
Significant new regulatory changes are anticipated. The authorities are working on an omnibus piece of legislation that will revamp and organise in a single body the insurance contract law, the insurance undertakings law, and the insurance brokers’ law, while also introducing new rules for reinsurance contracts. It is anticipated that a new unified civil and commercial code will also be introduced, changing rules that have been in force in Argentina for more than a century.
Christopher Foster: Our perception has been that UK clients and lawyers have been relatively well prepared for Solvency II. Much of our initial work has related to consolidating European businesses into a single legal entity to obtain capital requirement benefits under Solvency II. As greater certainty has emerged both over Solvency II proceeding and the rules themselves, we are seeing increasing amounts of reinsurance, restructuring and M&A activity driven principally by Solvency II itself.
On the regulatory side more generally, and following the reform of the UK regulatory framework in April 2003, we have seen an increasing use of thematic reviews by the Financial Conduct Authority as a regulatory tool in relation to conduct of business issues. At the time of writing, reviews are ongoing into motor and home renewal pricing, sales of annuities, price comparison websites, insurance broker conflicts, the treatment of longstanding life insurance customers, coverholders, premium finance and commercial claims handling. The latter in particular, when coupled with the Law Commission’s proposals for law reform of commercial insurance, may result in a significant rebalancing of the English legal playing field in favour of the commercial insured.
Who’s Who Legal: What trends are you likely to see in the legal market over the next few years? Is the competitive atmosphere increasing given the growth in in-house legal teams? How will you have to adapt your practice to meet any potential changes?
Francesco Cerasi: The Italian legal market has suffered one of its most negative periods in 30 years. The number of lawyers in Italy exceeds current demand and serious restructuring has been required, with the added effect of the growing client in-house legal capacity. We expect that consolidation in the legal market will continue, with some large firms getting bigger and bigger as they absorb medium-size firms; certain medium-size practices merging to become larger; and other medium-size firms scaling down to niche boutiques. We have to adapt to legal changes by leveraging on quality, specialisation and the notoriously versatility of Italian lawyers. Italian practitioners start off as litigators and, even if they later specialise in M&A, they can switch to dispute resolution, restructuring or insolvency work in dark times. We need to turn change into opportunity by being ready to capture the legal implications of the opening of new economic and social frontiers.
David Attisani: We’re likely to see an extension of the pattern of law firm consolidations over the next few years, although I would expect those combinations to be considered with greater circumspection going forward. As a corollary, we’re also likely to see increased competition among firms, together with creative approaches to dispute management, pricing, and talent development.
Over the past decade, in-house teams in many companies were enlarged dramatically, in an effort to cut outside vendor costs. In-house teams are no longer growing at such a rapid rate, and law firms have adjusted to working with large in-house teams, which sometimes enhance the performance of the entire in-house and outside counsel team. In the course of this adjustment, law firms have found ways to add value – developing creative ways to address client needs. In my practice, we have increasingly sought declaratory judgments to address recurring disputes between clients and certain of their business partners. We have also used various forms of summary process to good effect.
Pablo Cereijido: It is expected that the Argentine economy will show a sluggish growth this year, although it is set to pick up from 2015 onwards. The legal market will most likely follow the same trend.
Big in-house teams, increasingly headed by lawyers raised in big law firms, are doing work that in the past was outsourced. The type of work that is outsourced now is much more complex and sophisticated, generally requiring the interaction between different areas within the firm.
Marval has had an insurance and reinsurance practice for over 20 years. During this time, we have seen many ups and downs and have been able to adapt to the changing Argentine market. We have managed to maintain our position as a market leader by participating in the biggest and most complex insurance matters.
Our focus in recent years has been handling some of the most serious claims affecting the insurance market, in lines as varied as D&O, property, energy, infrastructure and marine insurance and reinsurance.
The next few years will also require a qualified group of lawyers experienced in transactional and regulatory work in the insurance field who are able to cope with the regulatory changes that the Argentine governments will soon introduce and who can deal with the foreign investments that will flow back to Argentina from 2015.
Christopher Foster: The English insurance legal market contains firms with a variety of business models: those which focus on bulk panel-type work and those which seek to handle the larger or more significant matters; those which focus predominantly on insurance work; and those for which insurance is just one of a number of practice areas. Following cost-cutting – leading to the loss of more experienced claims staff – as well as the use of procurement teams and electronic bidding processes, one trend in recent years has been a greater weight being placed on lower hourly rates than on quality in the selection of lawyers. This leads to firms more associated with lower-value work handling more mid-range work and other firms needing to reduce rates and profitability if they wish to maintain their foothold in that market. We have not seen any widespread increase in in-house legal teams recently.
The reinsurance legal market, at least on the contentious side, remains quiet. There have been some matters involving a large part of the market (9/11 and Californian wildfires, for example), but generally reinsurance lawyers find themselves working on one-off disputes. Certainly, there is no reinsurance lawyer in the London market who is surviving on a diet purely of reinsurance work. With the competitive pressures of alternative capital sources and reinsurers deciding to use excess capital for alternative purposes (such as share buybacks) rather than accepting additional risk or on relaxed terms, that position is unlikely to change significantly in the short term.
Our own practice is focussed on matters of high value or significance. The quality of our work product and outcome is critical for our business model. To ensure we can compete on hourly rates for the work we seek, and produce sufficient profitability to attract lawyers of the calibre we need, we have set up an office in Belfast to handle more routine document processing and thus reduce overall costs to our clients. We have also set up an in-house advocacy unit (presently including three QCs), which allows us in appropriate cases to save costs that otherwise would have been incurred through the instruction of the independent Bar.