On November 9, an en banc opinion of the Fifth Circuit Court of Appeals ruled that arbitration provisions in international reinsurance contracts are enforceable despite a Louisiana statute prohibiting arbitration agreements in insurance contracts.

In Safety Nat’l Cas. Ass’n v. Certain Underwriters at Lloyd’s the Underwriters provided reinsurance for excess policies issued to a workers compensation self-insurance fund. After Underwriters refused to recognize as an assignment of the fund’s rights to Safety National, the fund brought suit in a Louisiana federal court. Underwriters moved to compel arbitration. The court ultimately denied the motion, finding that the McCarran-Ferguson Act allowed a Louisiana statute forbidding arbitration provisions in insurance contracts to “reverse-preempt” the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its implementing legislation, the Convention Act. The McCarran-Ferguson Act provides that no act of Congress is to be construed to invalidate, impair or supersede a state insurance law unless the act of Congress specifically relates to the business of insurance.

The Fifth Circuit reversed, holding that the term “act of Congress” as used in the McCarran-Ferguson Act did not encompass international treaties such as the Convention regardless of whether the treaty was self-executing or required implementing legislation. The court specifically disagreed with the Second Circuit opinion in Stephens v. American Int’l Ins. Co., 66 F.3d 41 (2d Cir. 1995), which had held that the implementing statute, rather than the Convention itself, was the relevant consideration and that state law could invalidate an arbitration provision in an international agreement.

The conflict between the circuits sets the stage for a possible resolution of the issue by the U.S. Supreme Court. Until this resolution occurs, the Safety National opinion constitutes the law of the land in Louisiana, Texas and Mississippi and provides substantial ammunition for non-U.S. insurers and reinsurers to obtain enforcement of arbitration provisions in the face of hostile state law.

The case is Safety Nat’l Cas. Ass’n v. Certain Underwriters at Lloyds’, London No. 06-303262 (5th Cir. Nov. 9, 2009).

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This article from the NYT does not make happy reading for D&O carriers.

It’s about a mortgage underwriter at WaMu, and is a telling, salutory tale (like so many that are emerging) of corporate greed and, more to the point, stupidity.

“If a loan came from a top loan officer, they didn’t care what the
situation was, you had to make that loan work,” she says. “You were
like a bad person if you declined a loan.”

One loan file was
filled with so many discrepancies that she felt certain it involved
mortgage fraud. She turned the loan down, she says, only to be scolded
by her supervisor.

“She told me, ‘This broker has closed over
$1 million with us and there is no reason you cannot make this loan
work,’ ” Ms. Cooper says. “I explained to her the loan was not good at
all, but she said I had to sign it.”

Uh-oh.

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The new administration, struggling to deal with the largest deficit in over 50 years, will have to look into all sorts of ways to raise revenue and plug perceived holes.

One of those is to tax those evil offshore reinsurers who write US business but then, oh horror, reinsure it in Bermuda, one effect of which is to reduce their tax liabilities.

…[A] proposal to crack down on offshore reinsurers gained momentum in September with the introduction of House legislation by Rep. Richard Neal, D- Mass.

The Neal bill is backed by a coalition of U.S.-based insurers including the W.R. Berkeley Corp., the Chubb Corp. (CB), and the Travelers Companies (TRV).

Those companies claim that foreign-based insurers, including the ACE Group ( ACE) and XL Capital Ltd. (XL), avoid taxes on their U.S. business by reinsuring policies written in the U.S. to Bermuda-based affiliates.

“No one wants to impinge upon the free movement of capital. But we don’t want people to use the guise of risk-spreading to avoid tax,” said William R. Berkeley, Chairman and CEO of W.R. Berkely Corp.

Of course not. And if that happens to mean that WR Berkeley et al pick up a little more market share, too, well that would be incidental, though rather nice for domestic US carriers. Umm, except that this leads then back to another problem in that the industry generally believes that US carriers are uncompetitive compared to Bermudian companies, so any move to tax those offshore carriers would lead to a decline in capacity, which would in turn lead to price hikes

“Putting this tax on all U.S.-associated reinsurance products is likely to reduce the appetite of U.S.-exposed business,” said James Livett, a business process development manager with Alwen Hough Johnson Ltd. in the United Kingdom. “In a time of reducing margins and tightening of capacity in the international reinsurance market, adding an additional financial burden on reinsurers can only be detrimental to the capacity being offered by international players, as such rates for U.S.-exposed business will increase due to lack of meaningful competition.”

And presumably those increased prices for US citizens will be precisely something that the new President would rather avoid.

Which rather begs the question whether Obama has really thought through the full impact of this proposal. As Bermuda Premier, Ewart Brown, has said:

I think the Obama camp probably doesn’t have a full understanding how much Bermuda’s operation means to the US. That’s a little known component of this whole equation.”

Dr. Brown said that between 2001 and today, Bermuda-based companies had paid out $30 billion in claims for US catastrophic events and that he believed the tax haven label was “unfair” for the Island.

For a slightly less, um, measured view — or more heartfelt expression of belief, if you prefer — you might also want to consider this.

Whatever, it looks as if we may be in for some more or less radical changes to all manner of financial systems around the world. Times are set to become interesting.

Sources: CNN, and The Royal Gazette.

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Willis boss Joe Plumeri tells the FT that without serious (think $50bn-$100bn) catastrophe losses, it could be the end of 2009 or into 2010 before rates recover.
>”All the signs are that I don’t think the soft market is going to last a long long time . . . but it does not seem to be something that is going to end in a few months.”

he said (perhaps a little ungrammatically, but you get the drift).

This contrasts somewhat with some of the more optimistic reports I’ve seen coming out of Monte Carlo, but it seems more credible–rates are under pressure just as investment income is falling because of the global financial unrest. And we’ve already had a catastrophic first 6 months.

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