The London Market Excess of Loss Spiral

Abstract

This thesis explores the London Market Excess of Loss Spiral (“LMX Spiral”), a phenomenon based upon excess of loss reinsurance contracts that developed within the London reinsurance market of the 1980s. The unwinding of the LMX Spiral was a key factor in the crisis the Lloyd’s insurance market had to face in the early 1990s. However, whilst the crisis resulted in a wave of litigation in the English courts, there is no legal appraisal of the additional element of risk brought by the LMX Spiral itself. The case law instead focuses on the duties of the underwriters and various agents that fuelled its development.

This situation is unsatisfactory for two reasons. Firstly, reinsurance spirals are a potential side-effect of XL reinsurance markets and therefore other spirals may develop in the future. Secondly, this thesis shows that once a reinsurance spiral reaches a certain point, it becomes unsustainable, generating instability within the relevant reinsurance market.

This thesis provides a detailed legal appraisal of reinsurance spirals and a new analysis of excess of loss reinsurance contracts. The first part sets out the relevant legal principles and describes the LMX Spiral and its impact; listing, for the first time, the “Spiral Effects” identified through reports and actuarial models. The second part reviews the case law and assesses the legal nature of the excess of loss “Spiral Contracts” at the core of any reinsurance spiral, concluding that the Spiral Effects can distort the Spiral Contracts to the point where they become simple contracts of indemnity. The third part explores the nature of excess of loss reinsurance in light of the review of the Spiral Contracts, submitting that excess of loss reinsurance contracts cover both the liability of the reinsured and the relevant insured peril.

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