Who's Who Legal has brought together five of the world’s leading insurance and reinsurance practitioners to discuss the current key issues in this practice area. James Grennan of A&L Goodbody, Pablo Cereijido at Marval O'Farrell & Mairal, Matthew Jacobs of Jenner & Block, Charles Scibetta at Chaffetz Lindsey and Mark Goodman of Freeborn & Peters talk about their insurance and reinsurance practices, competition in the legal marketplace in their jurisdictions and recent regulatory developments.
Who’s Who Legal: Lawyers we spoke to have mentioned a continued increase in D&O work. Is this the case in your jurisdiction? How much of this rise can be attributed to the impact of the global financial crisis? What other areas have you noticed an increased volume of work from?
James Grennan: There has been a marked increase in D&O activity in Ireland. Over recent years, Irish D&O insurers have paid out very significant amounts in defence and investigation costs under D&O policies. Some of this increase relates to Irish companies listed in the US. These companies operate in an environment where shareholder actions are much more prevalent than in Ireland or the UK. The number of Irish companies with a US listing has increased in recent years as a result of US-listed companies migrating to Ireland from places like Bermuda and the Cayman Islands.
In the domestic market, we have seen an increase in more traditional D&O actions. These have tended to involve actions alleging, for example, oppression of minority shareholders, failure to list the company to provide an exit mechanism for investors and the like.
However, the most significant increase has resulted from Irish investigatory authorities who have become much more active. This is particularly the case with the director of corporate enforcement, who enforces the Irish Companies Acts. A good example of this is the extensive investigations that followed the collapse of Anglo Irish Bank. These investigations gave rise to significant insured costs. There may be further enquiries into the banking crisis. If so, these are likely to involve high legal costs for directors and officers.
The increase in insolvencies has also led to an increase in actions against directors. Where a company has become insolvent, creditors and shareholders often have no option but to take an action against directors in an attempt to recover compensation.
With regard to other areas, we have seen a significant shift in the type of insurance work we have been doing over the last year or two. Notably, there has been an increase in financial services enforcement actions taken by the financial services regulator, the Central Bank of Ireland. Last year, there were a total of 16 enforcement actions, including a number of complex actions that we advised on involving multimillion-euro fines. The increase in enforcement activity has increased insurers’ focus on the need to avoid regulatory breaches in the first place. As a result, we are also seeing growth in demand for regulatory advice.
The need to make more efficient use of capital in insurance groups is leading to a significant increase in portfolio transfers, cross border and domestic company mergers and some M&A activity.
We are also seeing an increased demand for innovation. For example, we have just completed a scheme of arrangement to transfer a portfolio of insurance policies from Ireland to Bermuda. The traditional portfolio transfer mechanism is not available for transfers outside the European Economic Area. However, we have just persuaded the Irish Courts that a scheme of arrangement under our companies’ legislation is an acceptable alternative.
Pablo Cereijido: In general the scope of directors’ liability has been gradually expanding in recent decades. There is more widespread awareness of directors’ liability and, these days, it is frequent that directors are sued along with their companies. Directors are more reluctant to accept a position if they do not have adequate insurance coverage or some other form of protection (such as a parent company indemnity). This has obviously increased the amount of D&O work. We do not find a strict correlation of this increase with the global financial crisis.
There has been an increasing volume of work in regulatory matters, in matters related to the selling of insurance through non-traditional channels, such as banks and major retailers, and in defensive work derived from the increased government intervention in the economy. The ageing infrastructure of some energy and utilities companies is resulting in significant property losses.
Matthew Jacobs: Yes, there are an increasing number of securities, derivative and other claims directed at companies and their directors and officers, which results in more D&O claims. Some of these claims might also include “non-traditional” D&O claims – those outside of the securities markets. Insurers are more and more often seeking to deny D&O claims based upon the so-called “interrelated wrongful acts” provisions in policies, which lead the insurers to argue that the current claim arose out of, or was “related to” a prior set of facts or circumstances that took place prior to inception of the current D&O policies. These insurers insist that such a claim should have been submitted to the carrier preceding the present policy period – and then the preceding insurer often responds that the claim must be denied for lack of proper notice during the prior policy period. The effect of these two denials of coverage, of course, is that the policyholder “falls between the stools”, which is not what was intended by the coverage and is certainly inconsistent with the policyholder’s reasonable expectations of coverage.
The are many claims arising from the Thai floods of October 2011 – I have two eight-figure claims for Fortune 500 companies right now – and there are more claims being made arising out of data breaches and cyber losses. Also, policyholders are retaining us to help them with the initial placement of policies in terms of comparing policy forms prior to renewal, at which time we compare coverage provisions, exclusions and conditions to make certain that our clients are buying the best available insurance coverage for their premium dollars (or hundreds of thousands of dollars).
Charles Scibetta: Initially, the financial crisis was accompanied by a general decrease in litigation. Companies focused on controlling costs and were reluctant to spend money on litigation; plus it took time for parties to sort through the myriad of potential claims and suits arising from the financial crisis. Once the dust settled and the immediate financial impact of the crises eased, significant litigation followed as investors tried to recover some portion of their losses.
Work then increased in a wide variety of categories, including Madoff-related cases; suits against banks, insurance companies, and investment groups relating to failed subprime, ABS and RMBS; failed bank litigation; and securities litigation. Each of these areas had (and has) potential for D&O claims and litigation.
Financial crisis litigation now appears to be running off (although the tail remains long), and it is not clear that another “big issue” will fall in behind it to drive such substantial litigation. Nevertheless, we continue to see high volume of work across our general insurance and reinsurance disputes practice, as well as our general commercial litigation and arbitration practice areas. In all areas, we see a continuing increase in focus on alternative dispute resolution/arbitration.
Who’s Who Legal: Due to mergers and consolidations between insurance companies, increased reliance on in-house teams and the financial losses experienced by several reinsurance and insurance companies, many of the practitioners we spoke to indicated that the legal market in their jurisdiction has become much more competitive. In this the case in your jurisdiction? If so, what impact has this had and how has your firm adapted to meet this challenge?
Mark Goodman: The competition has definitely become more intense over the past few years. Clients both large and small require deep experience with their specific problem and are increasingly focused on value. We have responded by making sure we provide our clients with partner level attention, rather than relying on heavily leveraging the work to junior lawyers. Our clients want and get the direct, hands on attention of partners with literally decades of experience in their matters. We also continue to focus on keeping our costs lower than our competitors’, so that we can offer more reasonable rates than those firms who bill their lawyers at $800, $900 or even $1,000 an hour.
James Grennan: There is no doubt that the legal market has become extremely competitive. As in the case in most countries, our clients (particularly larger clients) have begun to ask for discounts on standard hourly rates, particularly where they deliver significant volumes of business. They are also very interested in fixed and capped fees for certain types of work. Like everyone else, we seem to be working harder for less these days!
That said, there has also been a noticeable flight to quality. Clients are more likely to take or defend legal actions than was the case when capital was freely available. Success in legal actions is also more important than would have been the case in the past. We have also noticed that clients are demanding more innovation and high quality, business focused, advice on regulatory issues and contracts. For all of these reasons, they are turning to firms with the resources and experience needed to help them. In this sense, we have been very lucky and have seen an increase in our work volumes in the last few years.
It sounds like a cliché but our principal strategy for dealing with the challenge of the competitive environment has been to focus on how we can add some value. Like Mark, I find that clients value technical knowledge but really appreciate dealing with lawyers who have more than 20 years of experience, who understand their industry and their issues, and have a good working relationship with the regulator.
Pablo Cereijido: In-house teams are much larger these days, allowing companies to do much more work in-house. Matters which in the past had been regularly outsourced (for example, attending pre-court mediation proceedings, handling court cases, handling proceedings at consumer protection agencies) are sometimes handled in-house.
We have sought to accommodate: first by understanding our clients’ needs and concerns and, depending on the type of matter, by agreeing on competitive alternative fee structures or other type of strategic partnerships (for example, secondments or outplacement of some of our lawyers with our clients). We are positive that this will enable us to be more efficient and that we will gain an even better understanding of our clients’ business.
On a general point, Marval has had a dedicated insurance and reinsurance practice for over 20 years, during which time it has grown and constantly adapted to the ever-changing Argentine market. In this way, it has maintained its position as a market leader in Argentina, consistently participating in the biggest and most complex insurance matters. Today the department comprises 15 lawyers with a range of backgrounds and insurance expertise, led by two insurance specialists who both have experience of the London market, having been seconded to leading UK law firms. The firm has the resources to react quickly (with a 15-strong insurance department backed up by a full-service structure numbering some 300 lawyers) and the depth and range of expertise within the department to expertly handle any type of matter, from highly complex regulatory issues and insurance-related corporate transactions; to disputes on D&O, property, energy, infrastructure and marine insurance and reinsurance; on sophisticated and mass life insurance products, including unit-linked products, to administrative and court challenges to government measures affecting our insurance and reinsurance clients.
Charles Scibetta: The legal market in the US has become significantly more competitive as buyers of legal services have consolidated and increased their in-house capabilities. Mergers have reduced the number of buyers, consolidating buying power in fewer clients. Fewer market participants have also made the conflict thicket harder to navigate. In addition, the legal teams at most major corporates and financial services firms are under significant pressure to contain, and in some cases significantly reduce, their legal spend.
We formed Chaffetz Lindsey LLP in May 2009 in direct response to these market changes. Our partners were all previously in a large firm, where conflicts and cost pressures were substantial. Practising now from a litigation and arbitration boutique, we have fewer client conflicts and a more streamlined cost structure that is specifically tailored to serve our disputes clients. We have more flexibility to meet our clients’ developing needs.
Who’s Who Legal: Overall it seems that there is greater scrutiny by regulatory authorities around the globe. What impact is this having on the insurance and reinsurance market where you are?
Mark Goodman: We see companies feeling pressure to get larger, through acquisitions or other means, in order to be better able to absorb the extraordinary cost of new and additional regulations. We also see some companies thinking about getting out of business sectors that are going to be particularly troublesome or expensive from a regulatory standpoint. For example, we are aware of insurers that are looking to sell off their banking units and looking to sell or close down certain consumer lending units. The trend toward building up larger and more sophisticated in-house compliance departments is continuing. At the same time, we see more insurers and reinsurers looking to add specialised compliance advice from outside consultants, since the downside of getting regulatory compliance wrong has increased both in terms of fines and levies and in terms of reputational risk.
James Grennan: The Central Bank of Ireland has stepped up its scrutiny of insurers and reinsurers. This is partly as a result of the banking crisis. However, it is also as a result of an increased awareness of the importance of financial regulation and the additional resources provided by the Irish government in the wake of the crisis to ensure that Ireland has a world-class regulatory system. This is part of a trend apparent in many developed countries.
The principal regulatory developments in Ireland involve increased consumer protection, enhanced corporate governance requirements and an intensification of regulatory reporting, inspections, stress testing and challenge.
The Central Bank of Ireland is applying a risk-based approach to regulation that involves very significant scrutiny of high-risk operations and less scrutiny of lower-risk operations. An interesting aspect of this is a new analytical system introduced by the Central Bank of Ireland to assess the risk associated with insurance and reinsurance operations. This involves a fairly sophisticated series of inputs to a model that then assigns a risk rating to the insurer/reinsurer. Different aspects of the insurer/reinsurer’s operations can be assigned a different risk rating.
Regulation in Ireland is backed up by a very credible threat of enforcement, and low-risk operations found not to be complying are likely to face both penalties and increased scrutiny in the future.
The most obvious impact of increased regulatory scrutiny is increased regulatory and compliance costs for insurers. The effect of this has been to put financial pressure on some smaller insurance operations. For example, we have seen the exit of a number of captive insurance operations to lower cost centres. However, where these centres are within the EU, it is unlikely that compliance costs will remain low in those centres for long. Some smaller, niche insurers have gone into run-off and others have been sold.
Another impact has been a scarcity of good compliance officers available in the market and upward pressure on their salaries.
Pablo Cereijido: The Argentine Superintendence of Insurance is increasing its workforce and opening offices around the country, to be closer to insurance consumers and provide faster and more effective solutions to disputes between consumers and insurers. It has also created a special office in charge of handling these disputes and keeping track of the responses insurers provide when such disputes occur. Many insurers had to take in more staff to be able to provide answers to the authorities in a timely manner.
The Superintendence is also taking a closer look at policy wordings and rates. In the case of some mandatory insurance protections, the Superintendence has come up with uniform texts. The authorities also require that online information must be provided by insurers to the Superintendence on some mandatory covers (policies issued, applicable conditions, etc).
Matthew Jacobs: From a policyholder’s perspective, this is a positive development. The scrutiny being given to the denials following Superstorm Sandy is quite welcome and not unexpected. Because that storm received so much attention in the US, and because many communities remain in ruins, the failure of many property insurers to react in a timely and professional fashion has gotten the attention of the legislatures of New Jersey and New York. This is resulting in more claims being pursued more vigorously, and insurers must give more careful consideration to denying claims and then hoping that the insured will move along. With the aid of public scrutiny, and new laws relating to claims handling, policyholders are somewhat emboldened.
Who’s Who Legal: Solvency II is having a big impact, not only across Europe but also in other countries. What impact is it having in your jurisdiction? How has the uncertainty of its implementation date and exact wording impacted on the market where you are?
Mark Goodman: The uncertainty over timing is almost as bad as the uncertainty over the substance of the rules. Like most businesses, the insurers and reinsurers we deal with want reasonable regulation and financial reporting requirements. But they also want and need certainty. The uncertainty over the timing of when Solvency II type of requirements for insurers and reinsurers will come to the US, and whether US regulations will be deemed “equivalent” to EU regulations, makes it very difficult for companies to plan strategically. The other concern is that large multi-national companies will be better placed to adjust to these rules than will regional and middle-market companies. We have seen that kind of dynamic with the Dodd-Frank banking rules, which favour large companies over small companies.
James Grennan: Reaction to the delays in Solvency II has been mixed in Ireland. Many insurers are disappointed to have devoted significant time and resources to preparing for Solvency II only to find that the delays in implementation have taken away a lot of the momentum behind their preparations. However, I suspect that some others are secretly relieved!
There is a general acceptance in the Irish insurance industry that the current Solvency I model of regulation is outdated and will be replaced by a risk-based system. There is also general acceptance that Solvency II will come into effect substantially in its current form. However, like their peers throughout the EU, the Irish industry is looking for as much certainty and guidance as possible. This is essential to allow insurance businesses to plan their development in the next few years.
The industry has made a submission to the Central Bank of Ireland warning against the dangers of Ireland moving ahead of the rest of the EU in implementing aspects of Solvency II and encouraging the Central Bank of Ireland to continue to perform work such as internal model pre-authorisations and development of the own risk and solvency assessment framework.
Solvency II has been given some additional impetus by the recent EIOPA Opinion and proposed guidelines for implementing harmonised, Solvency II standard, rules on certain aspects of governance and reporting throughout the EU. We expect Irish insurers and reinsurers to participate fully in public consultation on the guidelines.
Pablo Cereijido: Adjusting local regulations to Solvency II requirements is not among the goals of the insurance regulator, although some of its principles underlie regulations introduced in recent years (for example, regulations on internal controls).
Nevertheless, local subsidiaries of EU insurers are implementing within their companies some of the measures of Solvency II, as required by their home offices.
Who’s Who Legal: Although M&A activity seems to remain slow in most areas, we have heard reports of new clients in non-traditional capital, specifically private equity funds, entering the market. Have you noticed this trend? What has the effect of this been on the market in your jurisdiction and how are regulators reacting to this?
Mark Goodman: The trend of private equity funds and hedge funds participating in the insurance market, which we have seen for a number of years, is definitely continuing unabated. Private equity funds and hedge funds continue to put significant capital into reinsurance side-cars and special purpose reinsurance vehicles, with the goal of obtaining risk adjusted returns not correlated to the equity securities and debt securities markets. They continue to favour lines of business that have relatively short tails, particularly property CAT covers, but one new development is that we have seen increasing interest in longer-term property and casualty coverages. Private equity interest in brokers, service companies and other intermediaries also continues, albeit at perhaps a slower pace than before 2008.
James Grennan: Interestingly, we have seen quite a degree of M&A activity in Ireland in the last year. The prime example is the recent sale of Irish Life to Canada Life for €1.3 billion. Previously, Irish Life had been sold to the Irish State in return for a contribution of capital to its owner, a bank that received financial assistance from the State.
We have also seen a number of other insurance and reinsurance operations sold. For example, HSBC recently sold its non-life insurance and reinsurance operations to Catalina. We are currently working on a number of other sales. Two of these are substantial in size and value.
We have seen a lot of interest on the part of alternative capital providers, particularly private equity funds, in the Irish insurance market. We expect these funds to continue to take a significant interest in insurance operations and wouldn’t be surprised if they were to begin to compete with consolidator operations in buying up closed books of business.
It is fair to say that regulators, in Ireland at any rate, have a preference for trade buyers who they see as taking a long term interest in the operations that they require. However, many alternative capital providers now have a good understand of the regulatory environment and the nature of insurance business and we expect that alternative capital providers will ultimately take ownership of a number of Irish insurance operations.
Pablo Cereijido: We have been involved in some of these transactions, which have been taking place since 2010. In general they resulted in the direct or indirect acquisition of small operations by non-traditional capitals; they mostly target specific niches of the insurance industry.
The Argentine Superintendence of Insurance has recently issued a regulation amending, among other things, the regime to request authorisation to incorporate an insurer or reinsurer in Argentina. The regulator seems to be increasing the level of surveillance of the players. When incorporating an insurer or reinsurer, its shareholders and members of the direction and supervisory bodies will have to evidence experience in the insurance industry. The new regulation will also affect transfers of shares from existing insurers or reinsurers.
Charles Scibetta: Non-traditional capital continues to enter the market and increase competition for traditional market participants. According to reports, in 2012, new CAT bond issuance reached approximately $6.3 billion, the highest volume since 2007, with many deals oversubscribed. We expect that the increase in these non-traditional capital deals will continue on the transactional side of the market, and that disputes in the area will increase as well.
Who’s Who Legal: What do you foresee for the year or so ahead in terms of your practice, this sector in your jurisdiction and the legal market?
Mark Goodman: The pace of change will continue to increase. Thirty years ago, insurance regulation in the US changed fairly slowly and gradually, and foreign regulatory schemes were intellectually interesting but not all that relevant. Now, regulations change quickly and dramatically, and every company needs to be aware of the impact of international regulatory developments. In the past insurers and reinsurers in the US were not terribly affected by federal legislation other than on tax issues. Now, federal laws such as the Affordable Care Act are radically changing entire industries. This pace of change makes it incumbent on our practice to continue to both broaden and deepen our knowledge and to never become comfortable with our existing expertise.
James Grennan: We expect the trends apparent over the last few years to continue for 2013. We are already working on a number of insurance portfolio transfers and sale transactions, some of them very significant. We are also working on a number of cases likely to lead to enforcement actions. We expect clients to continue to need a significant amount of regulatory advice and that the trends we have seen in litigation will continue.
Pablo Cereijido: The government has launched a national programme allegedly aimed at increasing the share of the insurance industry in Argentina GDP over the next five years. This will require, among other things, significant changes in the insurance and reinsurance regulatory frameworks.
The Argentine Congress is also expected to pass a new civil and commercial code, which will abrogate codes that have been in force for over 100 years. This will bring about important changes, especially those connected to general liability and liability insurance. All this will require the assistance of lawyers.
Changes to exchange control regulations, the consequences of a high inflationary process and the government’s increasing intervention in the economy are obliging insurers to introduce constant changes in their business and products. We anticipate our clients will need assistance adapting to these circumstances and with the disputes that may arise.
Matthew Jacobs: I believe that the improvement in the economy will result in a decision by more corporations to pursue claims through mediation, arbitration or litigation as they will have greater financial means to do so and they also will likely perceive a greater potential willingness on the part of more healthy insurers to pay disputed claims rather than require that any litigation matter proceed to trial. Settlements should be somewhat easier to obtain if the insurers are making more money from their stock market investments, and they should be more interested in paying disputed claims to continue business relationships. We are very busy in the D&O, E&O and property coverage area, and we see things continuing to pick up as they did in 2012.
Charles Scibetta: Our insurance and reinsurance disputes practice continues to grow. However, from our vantage point, it is difficult to tell whether this growth reflects an uptick in overall market demand, or a continuing increase in the demand for and acceptance of boutique disputes practices for complex disputes work. As clients continue to demand greater flexibility on fees and fee structures, while still maintaining quality, we expect to see larger, more complex cases continue to move to the boutique firm market.