ILS characterised by greater propensity for litigation

The short-term focus of ILS investors suggests that there is greater potential for litigation over ILS contracts and wording than in the traditional catastrophe reinsurance sector

That is the view of Clive O’Connell, partner at Goldberg Segalla Global, who tells Bermuda:Re that while it is too early to characterise the ILS sector as more litigious than the traditional reinsurance sector, “a large proportion of transactions that have been triggered ended up in some form of dispute.”

“ILS presents itself as having no solvency risk; but it does come with litigation risk”, says O’Connell.

As he explains, in the traditional catastrophe re/insurance space, insurers are under pressure from consumers and politicians to pay and to pay promptly.

Reinsurers, for their part, face a choice of “paying out and benefitting from the increase in premium that will come with the renewal, or disputing the pay-out”.

The decision tends to be an easy one to make, says O’Connell.

“It is far more profitable to pay and renegotiate terms—both in terms of language and rate—and to remain on the programme, than going into a dispute.”

Unlike in the casualty space where losses may herald others further down the line, catastrophe losses are unlikely to result in reinsurers walking away from business or entering into litigation, says O’Connell.

The same cannot be said for ILS, which is more transactional in nature and O’Connell senses that there is greater propensity to dispute claims within the space.

“My feeling is that there isn’t the long-term relationship that can help keep disputes at bay.”

In the ILS space “investors crack the whip” and if they are facing a triggered bond and potentially a complete loss, there may be a temptation to dispute claims.

O’Connell says that this situation makes it all the more pressing to draft contracts that are appropriately worded in order to minimise the chances of dispute.

Contracts tend to be innovative and bespoke, but what is needed is robust and careful wording that takes into account the market and the particular nuances of the individual bond, concludes O’Connell.

O'Connell and Goldberg Segalla are hosting an event in Hamilton regarding the legal challenges facing the ILS sector, details of which can be found on our events page.