The reinsurance market is ever changing as it seeks to deal with the needs of its clients, the restraints imposed upon it by the economy and the challenges created by losses. As the reinsurance market evolves, the legal framework that supports it must also adapt, although the development of law is generally slower and more cautious.
The past decade has seen significant changes to the reinsurance landscape but relatively little in terms of legal development. The next 10 years seem likely to see greater changes to the way in which law supports the marketplace.
In 2000, the reinsurance market was in the midst of a soft period. From 1997, rates had declined. Only in mid 2001 was there an indication of a hardening of the market; a hardening that was made evident after the awful event of 11 September that year and the demands that that atrocity made on reinsurance resources. By 2004, the market might have been ready to soften again but was hit by the three Florida hurricanes that kept rates up for the next 12 months until Katrina, Rita and Wilma (KRW) struck in 2005 creating not only unprecedented losses for the market but also unprecedented rises in rates. A market that had been long and hard, became still harder and for longer.
While the effects of KRW may be dwindling, talks of a soft market appear premature. Rates dropped at the 01.01.2010 renewal but from a very hard base and, in comparison with the late 1990s, the market is still hard. There are significant pressures on rates, not least of which is the effect of the recession on underlying insurance rates as well as increasing capacity available more generally. Against this, the effects of the Chilean earthquake and the Xynthia windstorm, may be compounded by hurricane activity later this year.
The reinsurance cycle may not follow general economic trends but it is affected by them and, most particularly, the way in which the market is able to respond to the issues that confront it, are, to a significant degree, dictated by those trends. Thus the relative cheapness of reinsurance capacity in the late 1990s and 2000 led to reinsurers participating in ventures more usually the preserve of the capital markets. Credit derivative swaps, film finance and reinsurance wraps on structured finance deals were all entertained as a counter-cyclical hedge against traditional reinsurance underwriting. When the market hardened, financial products became more attractive to insurers and reinsurers and so CAT bonds and sidecars emerged. Since the recession began, while the capital markets have been more difficult to access, capital has become more easily available to the insurance industry than to most other industries with the possible exception of the armaments and munitions industry.
Against this backdrop, reinsurance law has not developed much during the past decade. The 1990s were probably the most influential decade for reinsurance decisions from the courts. Issues such as non-disclosure, aggregation and follow the fortunes were debated and opined upon in a way that had not happened before. In January 1997, however, the Arbitration Act 1996 came into force. Since that time, most disputes have been arbitrated and few appeals from arbitrations have been heard. History shows that reinsurance disputes are generally born of soft markets although, oftentimes, they are fought in hard ones. The length and hardness of the hard market since 2001 has also played its part in reducing the number of disputes and therefore court decisions arising from disputes and accordingly developments in reinsurance law.
There have been court decisions in the past decade such as Bonner v Cox (2006) in the Court of Appeal and Wasa v Lexington (2009) in the House of Lords. These have not, however, been as universally significant as cases such as Pan Atlantic v Pine Top Insurance Co (1994), Axa v Field (1996) and Hill v M&G Re (1996). More recent cases can be seen as fine tuning of the landmark decisions of the 1990s.
The future for the reinsurance market is not certain. If nothing else has been learnt from the extraordinary events of the past few years, it is clear that predictions on the economic future are impossible to make. If there is major hurricane activity this autumn, it is likely that the softening of rates will be reversed and the hard market will persist. A benign hurricane season could result in a rapid softening of the market and bring with it some of the underwriting indiscipline of the past. Then again, advances in ERM could allow a soft market without indiscipline.
A soft market is more likely to give rise to disputes than a hard one and an undisciplined soft market the most likely to cause ructions. If, either this winter or at some stage in the next few years, a softening of the market occurs, disputes will give rise to legal developments. At present, the courts have intimated concern about the lack of precedent and therefore guidance that they are giving due to the success of arbitration and it appears that leave to appeal arbitration decisions may become more frequent even if reversals of decisions do not.
Most of all, however, statute based developments in reinsurance law are inevitable during the next decade. The Law Commissions' review of the law of non-disclosure and misrepresentation and the remedies available for breach of warranty is due to reach a conclusion shortly and, legislative time permitting, should be enacted in some form over the next few years. The changes to the law will result in test cases. These developments are likely not to stop at that point as a trend towards European harmonisation in commercial and consumer law takes hold. A fallow decade for legal developments is likely to be replaced by a decade of change.
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