Legal And Business Skills Deliver Great Deals: A Discussion About Innovation In The Insurance Industry

Thursday, October 23, 2014 - 16:09

The Editor interviews Nicholas R. Williams, a Partner in the Corporate and Insurance practices of Clifford Chance LLP. 

Editor: Welcome, Nick. Please tell us about your practice and that of Clifford Chance’s insurance group generally.

Williams: I’ve been practicing insurance law for more than 25 years, and our firm's insurance group focuses solely on that industry. Our practice encompasses the two major insurance segments – property and casualty and life and health – and covers all of the key aspects of legal advice in the sector: transactional, regulatory, and insurance products.

On the transactional side, our insurance practice works closely with the broader corporate group at Clifford Chance, which is essential to our M&A work. It covers all types of industry transactions: stock purchases and sales, asset purchases and sales, reinsurance transactions, securitizations, capital market transactions, loans, and any others that fall within the transactional rubric. The group is generally acknowledged as the preeminent global transactional insurance practice, but it is our regulatory and products expertise that really distinguish us from our competitors.

Insurance M&A is a peculiar animal because of its regulatory aspects. There is very little federal regulation of insurance. That is a result of the McCarran-Ferguson Act, which was passed in 1945 and which exempted the business of insurance from most federal regulation and left to the states the power to regulate insurance. It's the reason insurance regulation can vary so much from state to state, and it is critical for lawyers to understand these variations.

Clifford Chance offers particularly deep expertise in this regard. I personally have represented the State of New York Insurance Department (now the Department of Financial Services), the California Insurance Department, and the New Hampshire Insurance Department in the past – relationships that have led to some very high-profile transactions. I believe that being a credible player in this industry depends on having extensive regulatory experience.

Likewise, our product work in the insurance field is an important differentiator for us. That work comprises developing and advising both insurance companies and insureds on insurance policies and products. For example, we do substantial work in directors' & officers' insurance, helping address concerns of clear significance in this day and age. We also do a lot of specialized work in areas like trade credit insurance, which are used extensively by companies like IBM that have massive global supply chains. We also have developed unique expertise in financial guaranty and other non-payment insurance products, including Basel III-compliant insurance for financial institutions.

Editor: What are the unique advantages for clients that engage with your insurance practice?

Williams: The first is our reach. Clifford Chance serves a global client base and offers the world’s largest dedicated practice group of approximately 150 professionals handling insurance issues. We are further distinguished by the scope and breadth of our industry experience, which enables us to step right into matters involving the most complex insurance issues. For example, the insurance industry has its own accounting system, Statutory Accounting Principles (SAP), which is different from Generally Accepted Accounting Principles (GAAP) used by non-insurers. Our awareness and understanding of these kinds of industry-specific concerns can be invaluable to clients.  

Our clients also value our ability to be more than just great lawyers – we consider ourselves business advisors with commercial expertise specific to their companies. It is an established element of Clifford Chance’s reputation across a variety of industries, but one which I believe is impressively demonstrated by our insurance and reinsurance team. It feeds right into the tripod concept on which we base our practice so that, in addition to “eating, breathing and sleeping” insurance, we offer a one-stop shop for transactional, regulatory, and product-related work.

Editor: What are the trends and any recent developments in the insurance industry?

Williams: The trends in insurance lie primarily on the regulatory side, which of course has a trickledown effect on the execution of transactions and the selection of products.

Regulation has never been more rigorous than it is today, largely because of the 2007 market crash and subsequent recession. This is ironic, however, because the insurance industry actually weathered the recession much better than the commercial and investment banking industries. The much-publicized AIG problems, for instance, were experienced by AIG Financial Products (AIGFP), a non-regulated non-insurer entity, rather than one of its regulated insurance companies. Nevertheless, the industry trend since the recession is that insurance regulators want to regulate more closely.

We've touched on the variances among state regulation already, but it is important to understand that there is also a mechanism for creating some consistency amongst those laws. The National Association of Insurance Commissioners (NAIC) convenes periodically to develop model laws and regulations, and can even impose certain penalties on states that don’t conform with its guidance. In recent years, the NAIC has promulgated a suite of sweeping regulations and requirements, including model laws for Enterprise Risk Management (ERM) and for Own Risk and Solvency Assessment (ORSA). The ERM rules require that an insurer conduct an annual assessment to understand and quantify its enterprise risk and then adopt measures to deal with it. The ORSA rules require an insurer to continuously monitor its overall solvency needs in relation to the risk profile of the company. There is also a new model law for corporate governance in insurance companies. When considered alongside Dodd-Frank, the trend toward general and more significant regulatory control only becomes clearer.

From a broader legal perspective, we are seeing that clients, particularly large global companies, are demanding that their law firms be large and global. In the last year, several multinational corporations that use various firms in different countries or regions have approached Clifford Chance, specifically looking for a one-stop shop using one firm to manage the client’s outside legal needs globally. For instance, we are currently representing MasterCard International on a very large insurance-related project that involves work in over 160 countries.

Editor: What about the transactional side? Any noteworthy deals in which insurance industry trends are playing out?

Williams: We worked with Watford Re on a transaction that involved what we call an alternative asset reinsurer. Watford is backed by Arch Capital Group, an insurance and reinsurance group with third-party investors. Its investment strategy is managed by Highbridge Principal Strategies, a subsidiary of J.P. Morgan Asset Management. The deal essentially involved a marrying of traditional insurance underwriting with alternative investment strategies. The Watford deal is not the first of its kind, but it was well publicized and is the most recent in a constantly developing environment.

The real development here is the change in attitudes this deal represents. In the past, insurance was viewed through an underwriting lens, meaning that considerations surrounding the investment of assets, or reserves, were subordinate to those surrounding the underwriting loss experience. In recent years though, the industry has shifted toward a greater focus on enhancing investment return. The implementation of this strategy is more difficult for U.S.-domiciled insurance or reinsurance companies because regulators limit their investments. The alternative asset reinsurers are being created as offshore vehicles in Bermuda where there is more flexibility about investment guidelines. That’s essentially the Watford deal. It’s the latest, and it was a very successful launch and capital raise.

Editor: Please discuss some of the finer points. Why is the Watford transaction innovative?

Williams: The distinguishing takeaway from Watford is its dual emphasis on solid underwriting and investment returns, as opposed to one or the other. The Watford deal breaks new ground in heralding a more balanced approach; and it may be the start of new a trend toward making business decisions that give equal weight to assessing the risks/rewards of underwriting and investment strategies.

Editor: Corporate legal departments increasingly are called on to address business issues, well beyond the provision of legal advice. How does this dynamic play into your insurance practice?

Williams: A successful lawyer must proactively understand clients’ business needs in addition to their legal needs. It’s an ongoing education. It involves going to conferences and reading industry publications and major business newspapers like The Wall Street Journal every day. But most of all, it’s about talking to your client and getting acquainted with his or her needs and the company’s business. It’s particularly incumbent upon senior lawyers to address issues directly with clients and ask questions: What is the two-year plan? The five-year plan? What is the biggest business opportunity you see in your industry? What is the biggest threat? Clients may differ in the extent to which they will disclose that information, but I can tell you that they really like it when you ask. And whatever insights are gained from the conversation undoubtedly will improve your ability to provide meaningful legal and business guidance.

I love serving in that role for my clients. When I was looking to join a firm and trying to learn what distinguishes Clifford Chance from its competition, one of the things I was most impressed by was its organization-wide emphasis on hiring lawyers with a keen commercial understanding and real-world business savvy. I can say from personal experience that it has been a key ingredient in making our Insurance practice group as successful as it has been.

Editor: Please comment on the broader implications and benefits when law firms help clients to be innovative.

Williams: Innovation starts with a comprehensive understanding of the particular industry, business, and marketplace that you are dealing with, what I call your primary knitting.  Recognition of a company's strengths, weaknesses, opportunities and threats – the traditional SWOT analysis – inspires the necessary courage and creates the substantive underpinnings to proceed in a new direction. I use the term "courage" because, by definition, innovation is something new and untried. It doesn’t always work. There is risk. A good lawyer can assist a client in its quest for innovation by having a foundational knowledge of the client's industry and the relevant business issues that exist, which then instills that client with a confidence that can only come from knowing that their legal advisors “get it.” Exploring different or even radical ideas depends fundamentally on this trust.

The benefits go both ways. Opportunities to innovate allow lawyers to rise above typical professional concerns, let’s say about the wording of an agreement or any particular representation or warranty. And clients are delighted when they hear a lawyer say: Have you thought about the implications of this move from a commercial standpoint? It’s wonderful when this happens.

Please email the interviewee at nick.williams@cliffordchance.com with questions about this interview.