Written by Teresa Zink

Will this soft market lead to a claims spiral? “I think my answer to that question is, maybe not in this cycle, but ultimately something like that is bound to come back,” says Fee. “The reality from the most recent round is that I think companies are less likely to repeat the folly of what happened in the last five or ten years, but as time goes on and memories fade, this will be repeated. It is almost inevitable in my opinion.”

 Claim spirals occur, Fee explains, “when companies write excess of loss covers on each other and they don’t know or fully appreciate the business that their own retrocedent is covering. So they end up covering their own business and losses spiral.” There are ways to avoid spirals, according to Fee. Companies could include exclusions in their contracts for business that ultimately comes into the market from themselves, for example. “But in a soft market, those type of exclusions are abandoned.”

So, Fee summarizes, “In a soft market you need to worry about what your underwriters are doing from a pricing standpoint, but there is more to it than that, such as loosening underwriting guidelines and collateral clauses.”

patrick-fee [Patrick Fee has been the President and CEO of Clarendon Insurance Group since April 2006. Prior to joining Clarendon, he was a partner with Foley & Lardner LLP. He spoke on implications of the soft market on reinsurance and recoveries during the “General Counsel’s Roundtable Discussion: What Keeps Us Awake at Night?” at Mealey’s Conferences Global Reinsurance Forum held Oct. 6 and 7 in Boston. The views expressed are those of the author and do not necessarily reflect the views of his company or clients.   Fee was interviewed by Teresa Zink, a freelance writer and former editor of Mealey’s Litigation Report: Insurance.  The full article will appear in the new Reinsurance Roundtable Continuum, a monthly report on reinsurance and insurance law featuring commentary and analysis by our chairmen and speakers.  Recordings and materials from the Top 10 Conference are now available.  See the Archives section of this site. ]