Wednesday, August 30, 2017

Subrogation Opportunities in Latin America

Subrogation is the process by which an insurance company seeks to recover, from a third party responsible for a loss, the money it paid to the policyholder as a result of the loss.  In Latin America, subrogation claims are not sufficiently investigated and pursued.  This area presents a recovery opportunity for (re)insurers writing risks in the region, and for their clients.

Legal Regulation

The insurance statutes of Latin American jurisdictions contemplate subrogation claims.  These statutes generally provide that, upon payment of an indemnity under the policy, the insurer receives the rights that the insured had against third parties as a result of the loss, up to the amount paid by the insurer.

In addition, these laws often require that the insured cooperate with the insurer in the prosecution of a subrogation claim, and make the insured liable for any conduct that negatively impacts the claim.  Some jurisdictions, like Colombia and Mexico, expressly provide that a policyholder that impairs the insurer’s subrogation rights may lose its right to an indemnity under the policy, in full or in part.

The Colombian Code of Commerce takes this issue one step further, by prohibiting the insured from waiving its rights against third parties responsible for the loss.  A policyholder that waives those rights will lose its entitlement to a recovery under the insurance contract.  This can be particularly important for construction or energy risks, where the policyholder’s EPC or other contracts often contain waivers of subrogation against key contractors or suppliers.

Participation of Original Insured

Ideally, the insured will not only co-operate with the insurer in the recovery effort, but also will actually participate in the action, joining the claim against the responsible third party.

This will allow the policyholder to seek recovery of amounts not covered by the insurance, such as the deductible and any uninsured losses.  There are other benefits as well:  the existence of a larger claim will probably put additional settlement pressure on the defendant, and the closer involvement of the insured (who now has become a stakeholder in the action) is likely to facilitate the insurer’s access to relevant evidence.

The insurance statutes of some Latin American countries, such as Chile and Mexico, contemplate the possibility of the insured joining the claim, and provide that the recovery will be shared between the policyholder and the insurer in proportion to their respective interests.

Reinsurance Considerations

Large Latin American risks are frequently reinsured with international companies.  As the parties ultimately bearing the costs of the claim, reinsurers will often seek to pursue a subrogation recovery. 

However, the regulation of reinsurance in Latin America is very limited, and when it comes to the participation of reinsurers in the subrogation process, it is practically non-existent.  An agreement with the cedant for the joint prosecution of the subrogation claim, or an assignment of the cedant’s rights, will protect the claim from challenges to the reinsurers’ ability to proceed.  Further, in many Latin American countries, the subrogation claim must be brought in the name of the insurer, making the cedant’s co-operation necessary.

Where the reinsured retains some of the risk, the same rules that apply at the direct insurance level should govern the allocation of the recovery between the reinsured and the reinsurers.

Recovery Opportunities

In practice, subrogation recoveries are not pursued in Latin America as often as they should be, and significant amounts of money are being left on the table.  (Re)insurers should consider the subrogation potential of every claim, as a matter of routine.  It is most effective to investigate subrogation potential at the outset of a claim, in order to interview witnesses, secure relevant evidence, and make sure it is properly preserved for possible use in court.  Subrogation presents an opportunity for (re)insurers doing business in the region, and also for their clients.

Posted by José Umbert

Wednesday, August 16, 2017

Cyber Claims in Mexico: A Reactionary Evolution of an Insurance Sector

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In the wake of numerous cross-border, well-publicized cyber-attacks, cyber-insurance has quickly become a hot issue. This area has also become a trending topic because of the abrupt and quick need for response in a generally uncharted area. The increasing levels of revealed vulnerabilities, the multiple methods of security breaches and the domino effect damage exposure are all major concerns.  Aware of this problem, it becomes imperative to understand best practices aimed at solving and/or minimizing issues that may arise in the context of reporting a cyber-attack or breach to a carrier.  Looking specifically to the practice in Mexico, here are some examples of claim reporting and handling in this field.

Notice of Claim:

Article 66 of the Mexican Insurance Contract Law indicates that the occurrence of a claim must be reported to the insurer within 5 days, unless the policy has another reporting provision. In the event that the claim is untimely reported outside of the statutory or policy deadline, the insurer may reduce the indemnity to what would have been paid had the claim been timely reported (Article 67). In view of the nature of the risk, it is best to report a cyber loss immediately upon learning of it.  One of the obvious reasons is that even with timely reporting, the claim investigation is time-sensitive and very involved.  Between the identification of the attack, verification, provisional decision-making, notice to the risk management area and to the corresponding insurer and to those impacted by the cyber breach, critical hours, days and even weeks may pass.

What would be the impact of failure to report cyber-attacks "immediately" or at the "first opportunity" or "promptly"? Presently, cyber claim teams are very scarce throughout Latin America, and insurers sometimes rely on general adjusters that may not have a wealth of experience in this area.  The scarcity of these types of claims cause steep learning curves, difficulty in launching teams that may not be geographically ideal, or have individuals unfamiliar with the insured’s computer systems and unable to quickly stop the loss of information. Because of this, one critical question may be, “can the insurer reduce the amount of its obligations by arguing that it would have taken immediate steps to reduce the loss?” 

Early Intervention:

It has become common for insurance policies to include a panel of cyber forensic consultants and suppliers in the event of a loss.  However, many times these suppliers’ fees are likely to fall below the deductible.  If the insured wishes to utilize an off-contract consultant or supplier that may charge a lesser fee, the issue of compelling the insured to stick to the policy’s listed consultants and suppliers even where the amount is below the deductible may arise.

In addition, Article 113 compels the insurer to pay expenses incurred by the insured in mitigating its damages post-loss.  Therefore, one may wonder, are Article 113 and the policy supplier provisions at odds?

In practice, consultants and suppliers written into the policy usually have the function of verifying that there was an actual "attack" -a trigger of many cyber policies- therefore assisting the claim progression by streamlining the verification and recommendation process. One of the reasons why this becomes imperative is because there have been instances where the policy – subject to Mexican law and delivered in Mexico – requires the insured to absorb the costs of the cyber consultant or supplier in completing this otherwise claim handling role.

In case the "advisers" swing quickly into action to assist, if it is then established that the loss is excluded for some reason, the insurer has already intervened through the experts appointed in the policy to provide crisis control, which might be interpreted as an acceptance of coverage for the claim.

As with any facet of claim handling, but particularly in the context of cyber-attacks, it is imperative to have a specialized strike force.  Knowing the local law, the practical realities, and keeping up with the continual evolution of this growing area are vital tools that make each type of consultant and supplier uniquely qualified for the challenge.

Please join Zelle in Miami on October 11 for the inaugural LatAm Gateway Summit. The Summit will focus on Latin American insurance and reinsurance issues. The economic climate, claims, underwriting, and opportunities unique to Latin America will be explored. Insurers, reinsurers, risk managers, brokers, and vendors based in Miami, Latin America, the U.S., London, and Europe are invited to attend. Please explore the LatAm Gateway Summit website at www.latamgatewaysummit.com

Posted by Daniel Baron* and Nestor Rodriguez, Socio Director en Medina y Rodriguez Abogados

*Not licensed to practice law in Florida

Wednesday, August 9, 2017

Tiny, But Mighty: How Portfolios of Small Claims Present Claim Handling Challenges in Latin America

While complex, commercial claims are highlighted in many claim handling discussions, small value, large volume claims also present challenges that play an important role in establishing efficiency and infrastructure. Small value, repetitive claims such as those arising from automobile, homeowners or small commercial risks  present claim handling challenges comparable to catastrophic loss claim handling. These small value, repetitive claims do not test the limits of regular claim handling on an individual basis because they seem tiny by comparison to high value losses. However, these tiny claims -when in bulk- prove to be mighty. In bulk, they test the limits of claim handling infrastructure.  
If we consider these claims collectively as a portfolio to be managed intelligently and efficiently, the task becomes more complex. Insurers must establish claim handling infrastructure from intake and registration through resolution to ensure that each claim is timely acknowledged, reserved, investigated, and resolved. The  next time you think of high-volume, low-value claims as “the small stuff”, bear in mind that Lloyds acknowledges that these cases account for 85% of the total claims in the Lloyd’s Market, leading to changes in the context of Lloyd’s Claim Transformation Programme to cope with the challenges.
The importance of these small claims management procedures also accounts for added issues particular to insurance practices in Latin America, namely, the following:
a)  Economic Issues: With few exceptions, local economies tend to be unstable. Inflation, high interest rates and changing monetary policies affect the prices of local goods and services. In turn, this works against proper reserving and payment of claims. Thus, careful valuation procedures and periodic reserve review are a must.

b)  Changing Regulatory Landscape: Local regulations are evolving rapidly and continuously forcing local insurers to meet new standards in areas such as regulatory reporting, service of complaints, claim file maintenance, and monetary reserves and payments.

c)  Lack of Instrumentalities: Access to information necessary for certain claim handling, such as obtaining a police report related to an automobile accident, is not an easy task. Similarly, information sharing and privacy controls are not as commonplace. For example, in some countries sharing data amongst insurers (which is very useful for fraud detection) is resisted. 

d)  Challenging Local Cultures: Claim handling, like any other aspect of life, relies heavily on the interaction among people. In Latin America, there are vast cultural differences with deceivingly similar roots that may create a false sense of commonality. A variety of local cultural aspects will also come into play when disposing of small high-volume business. As a result, an understanding of the local nuisances is particularly helpful in the handling of these claims. 
By comparison, reinsurers appear to have less involvement in these types of claims because their treaties are well-structured. But reinsurers are particularly sensitive to uncommon trends. Part of the reinsurance role is to visit cedants to discuss specific claims and arrange audits. Because of the traditional role that reinsurers play, the existence of infrastructure is already present and therefore better equipped to handle portfolios of small, value claims in a similar manner to handling catastrophic losses. However, despite having the structure, reinsurers cannot take on the front-line obligations of administering claims. Local insurers should look to reinsurers as models, not as substitutes for setting up an efficient claim administration.

While reinsurers certainly offer a template for efficient handling of small value claims, there is a cost-effective analysis that plays a critical role. Local insurers need to be particular in selecting à la carte portions of claim handling practices that provide the necessary attention to these small-value, high volume claims, whilst recognizing the economies of scale in dispatching vendors. It may prove beneficial to have monitoring counsel overseeing these large portfolios of claims and make best practices recommendations to provide local insurers with the infrastructure necessary to handle this challenge. Getting out ahead of the challenge can make a big difference.

Posted by Daniel Baron*
*Not licensed to practice law in Florida

Please join Zelle in Miami on October 11 for the inaugural LatAm Gateway Summit. The Summit will focus on Latin American insurance and reinsurance issues. The economic climate, claims, underwriting, and opportunities unique to Latin America will be explored. Insurers, reinsurers, risk managers, brokers, and vendors based in Miami, Latin America, the U.S., London, and Europe are invited to attend. Please explore the LatAm Gateway Summit website at www.latamgatewaysummit.com