Case Study: Taisei Marine and Fire Insurance

The Taisei Marine and Fire Insurance (TMFI)company along with Nissan Fire & Marine and Chiyoda Fire & Marine Insurance was part of the Fortress Re pool. Fortress Re was responsible for inward reinsurance business. TMFI  had large property and casualty business in Japan.

TMFI was Japan’s 15th in the list of top non-life insurers. TMFI’s solvency margin (assets over liabilities) was 815%. The norm set by Japanese authorities being 200%. This margin was calculated to assess financial strength. TMFI had large volumes of domestic Japanese property and casualty business. It also had a large volume of inward reinsurance (reinsurance business accepted by the insurer or reinsurer, but not given up to another insurer) through its US reinsurance pool managed by Fortress Re, a North Carolina based reinsurance managing agency.

Fortress Re used traditional methods and products to offset risk. Later on though, it started implementing finite insurance, and by 2000 was using only this method to offset its risk. Typically insurers set aside a percentage of the payouts in the event the cause of insurance occurs. If the amount does not cover the insurer will pay for the rest. This means lower costs and it also lowers the level of potential risk an insurer can face. Fotress served as the pool’s reinsurance manager. The Fortress Re pool included aviation, marine and many other reinsurance products with aviation comprising 70% of the portfolio. Fortress ceded 25% of its business to Carolina Re, a Bermuda-based reinsurer, which was owned by the principals and close family of Fortress executives.

The pool made large profits. Then there were a number of aviation related accidents which triggered claims. These included TWA off Long Island, New York (1996), Swissair off the coast of Nova Scotia (1998), EgyptAir of the East Coast of the US (1999), Alaska Airlines off the West Coast of the US (2000) and Concorde in Paris (2000).

Then 9/11 happened and the strain of all the previous claims meant TMFI went bankrupt as it could not provide sufficient reinsurance protection against this major event. The players other than Fotress Re in the pool were not fully cognizant of the risks inherent in the portfolio. Fotress Re was granted liberty by other members of the pool to conduct business on their behalf and to arrange reinsurance protection. A trust that was misguided and ultimately fatal.

The finite reinsurance model allowed Fortress Re to claim reinsurance claims payments from the finite reinsurers and it paid premiums to cover these deals over a 5-year period. As the risks were spread over time, the future premiums were not accounted for as current liabilities on the books of the pool members, giving a false impression of profitability.

The aviation insurance regulators state that airline companies must buy insurance from local insurers (fronting insurance companies). Then, these local insurance companies are allowed to transfer all risks to in this case the Fortress Re pool which in turn reinsured but with a limit on coverage (finite reinsurance).