As we enter the final quarter of 2007 can we predict the challenges which will face reinsurers during the course of 2008? We know that 2008 will be a year containing events of global significance; we will see the occasion of the Beijing Olympics and the upheaval of the US Presidential elections. However, what of the events and challenges which are unknown at this point? Will there be other events of global significance which impact on the reinsurance market? We consider below the sources of possible future claims against reinsurers in 2008 and evaluate the way in which the market is likely to respond to these claims.

Financial risks are likely to continue to pose a potential headache for reinsurers in 2008. Financial products are becoming increasingly complex and encompassing yet greater sums. The potential exposure of those involved in these products has been highlighted by the increasing activity of regulators. In the US, the SEC has seen a big increase in investigations into insider trading and hedge funds, sub-prime lending, options backdating and municipal finance. In the UK, the FSA has continued to increase in size and presence. If the current credit squeeze continues, it is easy to see how 2008 may bring an increase in E&O and D&O claims as shareholders, regulators and customers alike look for individuals and institutions to be accountable for financial imprudence or miscalculation.

In 2007, the UK experienced widespread disruption and saw around £3bn of insured losses in respect of flooding. Currently Africa is enduring the worst floods experienced for decades. Reinsurers have not been and are unlikely to be greatly affected by these two incidences as most UK claims were restricted in their impact to primary policies and few African risks will be insured. However, going forward reinsurers are likely to take on more of the risk of UK flood exposures and more flooding could lead to increased claims against reinsurers, particularly should widespread flooding occur across Europe or the US.

While flooding is a natural catastrophe, there is now an increasing question about the role of human activity in climate change. This is beginning to materialise in litigation and will in time impact on insurers and reinsurers. For example, actions have commenced against carbon emitters as well as public bodies in several jurisdictions including the USA, Australia, Germany, Argentina and Nigeria. There are difficulties with these actions, principally in the areas of causation and foreseeability. However, while it may be that claimants are unsuccessful initially in attributing liability for climate change, this situation will continue to develop and it is possible that insurers and reinsurers will face exposures to claims arising from climate change both as a natural catastrophe and a man-made problem.

The impact of the risk of terrorism on the insurance and reinsurance markets is likely to continue to be felt during the course of 2008. Hopefully there will not be large claims. However, regardless of whether or not terrorist events take place or succeed, the market is likely to monitor very carefully the definition of terrorism coverage and consider how to manage the increasing risk of some exposures becoming virtually uninsurable.

It is not only new risks or changing circumstances which may give rise to increases in claims during 2008. The existing exposures faced by insurers and reinsurers from asbestos in the UK are predicted to continue to rise until at least 2015 when there will be a peak in deaths. The number of people prosecuted in the UK for breaches of asbestos regulations in the last year has tripled. The 2006 UK Compensation Act has now made it clear that negligent employers are jointly and severally liable in mesothelioma cases and therefore a claimant can recover in full from any employer and that company can in turn recover in full from one of its insurers.

While it is difficult to predict what the 'next asbestos' will be, insurers and reinsurers will no doubt continue to remain wary of the development of claims from nanotechnology, mobile phones and toxic mould, and also have an eye on climate change.

Whatever the source of the claims, there are three trends which suggest that claims which do materialise are more likely to culminate in litigation or another form of dispute resolution during 2008 than in previous years. Firstly, we appear to be entering a period of economic downturn which typically leads to increases in the frequency and seriousness of reinsurance disputes. This may, in the current climate, be particularly exacerbated by the rise in the number of US securities actions and the possible emergence of class actions in Europe. Secondly, the end of 2006 and the course of 2007 has seen a genuine softening of the market led by the influx of fresh capital and the low cost of capital following Katrina, Rita and Wilma. A softening of the market in the past has typically led to an increase in reinsurance disputes. Thirdly, the fact that the cost of capital is now rising will place even greater burdens on reinsurers to ensure that claims are closely examined and liabilities reduced wherever possible. These three factors all suggest that unless claims are clear cut there is a likelihood that disputed claims will increase rather than decrease during the course of 2008.

The outlook for 2008 is, therefore, unclear. However, it does seem that insurers and reinsurers will be entering a period of economic downturn which is likely to impact on the way in which claims are assessed and disputes are handled.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.