AILA 2013 – Sydney September 2013 WP Distribution of Insurance Products

1. AILA 2013 – Sydney September 2013WP Distribution of Insurance Products Intermediaries and Conflicts of Interest – The Paradigm of Fronting Insurance Dr. Kyriaki Noussia k.noussia@lexarb.com

2. 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

3. 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

4. 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

5. The Problem • In essence  real insurer is the reinsurer • Reinsurer  bears the risk • Direct conflict of interest  reinsurer is in fact the real insurer

6. 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) BancoFicohsa v. AseguradoraHondurena, S.A., 937 So. 2d 161, 165 (Fla. Dist. Ct. App. 2006)

7. Understanding Whom The Broker Represents • USA  specific conduct andrelationship of parties • determines nature and extent of agencystatus • 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)

8. Understanding Whom The Broker Represents • Where intermediary is agent of cedent • cedentmay 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. UnigardMut. Ins. Co., 526 F. Supp. 623, 638-39 (D. Neb.1980)

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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.

16. Understanding Whom The Broker Represents • Still  no good solution • We argue  no permission for dual representation • Direct conflict of interest  unsurpassable and insurmountable

17. 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)

18. 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

19. 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

20. 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

21. Leeways – The Way Forward Choices once a conflict of interest is identified • avoid it OR • seek to manage it Most reinsurance brokers • would seek to manage it by way of disclosure to the client.

22. 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

23. Intermediaries and Conflicts of Interest – The Paradigm of Fronting Insurance THANK YOU FOR YOUR ATTENTION ! Dr. KyriakiNoussia k.noussia@lexarb.com