AILA 2013 – Sydney September 2013

WP Distribution of Insurance Products

Intermediaries and Conflicts of Interest – The Paradigm of

Fronting Insurance

Dr. Kyriaki Noussia

k.noussia@lexarb.com

Introductory Thoughts - Setting the Scene

Fronting special cases of risks

large risks  

Fronting risk occurs

fee owed to local insurer.

Local insurer intermediary acts for insurer and places risk entirely with reinsurer

Introductory Thoughts - Setting the Scene Insurance intermediary acts in dual

capacity Broker towards insurer (first insurer’s

broker /intermediary eg. bank) Serves interests of reinsurer towards first

insurer = > Apparent conflict of interest broker serving both first insurer and

reinsurer Clear cut case - direct conflict of interest

Introductory Thoughts - Setting the Scene Representing dual interests

not good practice should be prohibited - high risk entailed

In addition double intermediary fee fee from the first insured (materialized and

collected via the premium owed by the first insured to the first insurer)

commission/ fee owed by the reinsurer

The Problem

In essence real insurer is the reinsurer

Reinsurer bears the risk

Direct conflict of interest

reinsurer is in fact the real insurer

Understanding Whom The Broker Represents

Issue whose agent broker or intermediary is.

General rule intermediary is agent of ceding company but facts may show otherwise

Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F. Supp. 2d 789, 799-800 (S.D. Tex. 1999)

Banco Ficohsa v. Aseguradora Hondurena, S.A., 937 So. 2d 161, 165 (Fla. Dist. Ct. App. 2006)

Understanding Whom The Broker Represents

USA specific conduct and relationship of parties

determines nature and extent of agency status

most critical factor is control

St. Paul Fire and Marine Ins. Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS 8916, at *18-19 (S.D.N.Y. 1997)

Understanding Whom The Broker Represents

Where intermediary is agent of cedent cedent may be responsible for agent’s

actions, including misrepresentations

Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F. Supp. 2d 789, 802-05 (S.D. Tex. 1999)

Reliance Ins. Co. v. Certain Member Companies, 886 F. Supp. 1147, 1152-55 (S.D.N.Y. 1995)

Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 638-39 (D. Neb. 1980)

Understanding Whom The Broker Represents

Reinsurance intermediary integral role in reinsurance transactions

placing risk on behalf of ceding company

participating in negotiation of reinsurance contract

serving as a conduit between cedent and reinsurer

Understanding Whom The Broker Represents

Depending upon relationship of reinsurer and intermediary

possible that intermediary is deemed a dual agent

this entails conflicts of interest

Understanding Whom The Broker Represents

Conflicts of interest circumstances where some / all of

interests of persons to which reinsurance broker

provides a service are inconsistent with, or diverge from, some or all of the reinsurance broker's

interests. In cases of dual agency intermediary

bound by principles of agency

Understanding Whom The Broker Represents

Agency status

determined by factual enquiry

may be governed by statute, regulation or contract

absent statute, regulation or express contract, the question is a question of fact

Understanding Whom The Broker Represents

In Re Pritchards & Baird Inc. 8 B.R. 265 (D. N.J. 1980) aff’d 673 F2d 1299 (3d Cir. 1981)

Pritchard and Baird (P&B) intermediaries prior to filing for bankruptcy

acted regularly for a group of companies named the Hartford

Understanding Whom The Broker Represents

In Re Pritchards & Baird Inc. 8 B.R. 265 (D. N.J. 1980) aff’d 673 F2d 1299 (3d Cir. 1981)

Issue - whether P&B served as Hartford’s agent or as agents of the reinsurers

Court agency relationship existed between P&B and Hartford ( insurer) only

Understanding Whom The Broker Represents

Since In Re Pritchards & Baird Inc.

intermediary clause of reinsurance contracts

expanded to stipulate that reinsurance intermediary (for payment and receipt of premium) acts as agent of reinsurer.

Understanding Whom The Broker Represents

Still no good solution

We argue no permission for dual representation

Direct conflict of interest unsurpassable and insurmountable

The European Response – IMD I & Proposal for IMD II

European Commission

began review of IMD I

so that insurance intermediaries

comply with new rules (disclosure, conflicts of interest)

The European Response – IMD I & Proposal for IMD II

Article 12 of IMD I touches on conflict of interest issues intermediary has to provide information but no specific rules about managing

conflicts of interest CEIOPS advice to Commission on IMD2 both intermediaries and insurers comply

with high level principles on conflicts of interest

The Law in Australia

In Australia Conflicts of interest depend on precise circumstances

affected by:

- agreement of parties

- relevant legislation

- general law obligations

- relevant circumstances of parties & transaction

 

The Law in Australia

No legislation specifically governing the conduct of reinsurance brokers

There is general consumer protection legislation

In Australia nothing prevents broker from entering agreement

which allows the relevant conflicted entity to act in conflict with obligations otherwise owed to principal.

Great care needs be taken in drafting contract and obtaining such agreement

Leeways – The Way Forward

Choices

once a conflict of interest is identifiedavoid it ORseek to manage it

Most reinsurance brokers would seek to manage it by way of disclosure to the client.

Leeways – The Way Forward

Above solution doubtful

Since real insurer = the reinsurer he bears the risk hence direct conflict of interest exists as the reinsurer is in fact the real insurer

Intermediaries and Conflicts of Interest – The Paradigm of Fronting Insurance

THANK YOU FOR YOUR ATTENTION !

Dr. Kyriaki Noussia

k.noussia@lexarb.com