Unraveling the Unicover mess - and more to come.

• Author: Barker, Adam C.

Writing in the June newsletter of the Reinsurance Committee, Adam C. Barker of the London office of Sedgwick, Detert, Moran & Arnold, looks at the unfinished state of the Unicover "mess":

Unicover was virtually unknown in 1996. Four years later it became the talk of the insurance industry, with multi-billion losses predicted, along with the collapse of some insurers/reinsurers. One commentator compared the Unicover "mess" to the LMX spiral disaster of the 1980s that brought Lloyd's to its knees, concluding "allegations of fraud and racketeering, losses, unscrupulous brokers, dubious managing agencies and, of course, spirals. Unicover has it all".

The Unicover mess has not concluded. It continues to be considered by courts and arbitration panels on both sides of the Atlantic, and so has not been fully unraveled. How it will unravel finally probably will be for the IADC 2005 annual meeting!

What is the Unicover mess?

Unicover Managers Inc. was formed in 1994 as a small managing agency based in Illinois that ran a pool of reinsured so-called "carve-out" workers' compensation business written by primary U.S. insurers. At various times the pool consisted of Phoenix Home, Reliastar Life, Cologne Life Re, Connecticut General Life (Cigna) and Lincoln National. Unicover also handled reinsurance facilities for Reliance and Lincoln National. The carve-out left the primary insurers responsible for the employers' liability aspects and the carve-out insurers responsible for the health insurance risks.

Unicover was and is run by John E. Pallat. It was purchased at the end of 1998 by Delphi Financial Group. Five months later it was sold back to the management and then changed its name to Cragwood Managers L.L.C. By 1998 it is claimed that Unicover wrote for the pool or its facilities carve-out business that will produce multi-billion dollar losses to the insurance market. In doing so, it and the brokers involved earned significant fees. While the exact figures have not been made public, it has been estimated that the gross premium at the primary level of the Unicover business amounts to $8 billion, or approximately 16 percent of the entire workers' compensation market.

Size is only one part of the "mess." If the carve-out business had remained with Unicover and its pool/facilities members, there probably would be no mess to unravel. This business, however, was then passed from one reinsurer to another reinsurer and so on, with commissions being paid every...