Atlantic have soared in recent years. The Royal Gazette talked with one of Bermuda's most respected accountants, Mr. Charles Kempe, about the problems of insolvency, including the different approaches of the United Kingdom/Bermuda and the United States.

Hard though it may be for the man in the street to comprehend such a risk to reward ratio, Mr. Charles Kempe knows of a case where a company ended up with a liability of approximately $25 million on a policy that carried a premium of just $1,000.

It should come as no surprise then that a glut of unexpected catastrophes on a scale rarely seen before led to an unprecedented number of insurance company collapses in the unpredictable world of insurance and reinsurance on both sides of the Atlantic over the last few years.

Mr. Charles Kempe, senior partner in accountancy firm Kempe & Whittle/Ernst & Young (Bermuda), is all too familiar with the problems. A significant part of his career has been spent cleaning up the mess left behind by company failures: the bigger the collapse, the more likely his experience will be called upon.

He is now in the process of concluding Bermuda's largest ever liquidation, Mentor Insurance, which had liabilities of over $1 billion.

"The reasons insurance companies get into trouble are varied,'' said Mr.

Kempe. "There are occasions when their activities are managed by people with fraudulent intent. There are a number of examples of that, principally in the US, but we've also had one or two cases in Bermuda where fraud has been alleged.'' The principal cause of financial problems was inadequate pricing of a product which later led to liabilities vastly exceeding the original actuarial estimates.

"I see a lot of Lloyds of London's problems as being caused by underwriters who were not acquainted with the trends in US litigation, for instance,'' said Mr. Kempe.

"The awards of vast sums in US litigation have decimated insurers and reinsurers. These weren't contemplated by people when they priced their policies. That's the predominant cause of failure.

"Societies change, values change and the products that the industry has been selling and the way they are constructed and priced has lagged behind. It's taken the industry a while to catch up but they are beginning to do so now.'' Insurers and reinsurers have managed to reduce their exposure by writing more policies on a claims-made basis, which means claims will only be paid out if they are made during the length of the policy.

Anyone who only gets around to making a claim for something which happened during the term of the policy after the policy has run out will not be paid, said Mr. Kempe.

Insolvencies of insurance and reinsurance companies are generally far more complicated than, and different in nature to, those of companies in other industries, he said.

When a non-insurance company becomes insolvent, it is typical for its assets to be sold and the sums raised used to meet its debts.

"But the crux of the problem with insurance or reinsurance firms is that it is often difficult to assess precisely what its liabilities are,'' said Mr.

Kempe.

Companies writing long-tail business may not know the full extent of their liabilities for several years and then there is the question of how much they can recover from reinsurance agreements.

"Even simple insolvencies can take a long time to sort out,'' said Mr. Kempe.

"For instance, it took 20 years to liquidate Vehicle & General in the UK and that was only a retail motor insurer.'' Two processes are available when an insurer or reinsurer becomes insolvent, he said.

"Either a liquidation can take place which will allow for the receipt and processing of information over a period of time which ultimately ends up with a determination of liabilities and a distribution of assets. This can take many, many years.

"Secondly, if creditors wish to see the process compressed into a short space of time, other techniques can be employed to determine a rate of credit.'' The latter involves the implementation of "a scheme of arrangement'' -- the reorganisation of a company's assets and liabilities to ensure creditors are paid at least a portion of what they are owed quickly.

Such schemes must have the support of creditors and shareholders before they can be implemented.

"A long-term liquidation does not satisfy the needs of the industry which wants to get the asset pools that belong to insolvent companies circulating again as soon as possible,'' he said. "If you're going to sit there on a huge pot of money in investments (Mentor was sitting on hundreds of millions of dollars), it's possible to create liquidity problems for other players in the industry.'' Sections 99 to 101 of The Companies Act 1981 provides for the establishment of schemes of arrangement in Bermuda.

Mr. Kempe said the Island was "reasonably well served'' by its legislation on company insolvencies.

"Not a great deal of adjustment is necessary,'' he said. "There are some amendments to the insolvency provisions of The Companies Act 1981 and The Insurance Act 1978 in the works right now which have been put together by a sub-committee of the Insurance Advisory Committee.

"They are going to make it easier to put insolvent insurance and reinsurance companies into a form of administration where custom-built schemes can be devised for the best method of satisfying their creditors.'' This proposed change was important because "every single insolvency of a reinsurance or insurance company was different'', said Mr. Kempe. "There's no panacea for all of them.

"Sometimes, a straight, unadulterated liquidation is the best method.'' He said the industry was becoming "far more sophisticated'' in the way it dealt with insolvencies, although he said the UK/Bermuda system was superior to that in the United States.

In UK jurisdictions, insolvencies are handled by the private sector and the creditors under the regulation of the state with the interests of the creditors placed first. In the US, the state regulators take over.

He added: "The British system is the only logical way to do it. The unsatisfactory nature of the US system is manifested in that almost every reinsurer which has become insolvent in the US has disappeared into a black hole behind state insurance departments, its assets and liabilities never to be seen again. They take forever and nothing ever happens.'' BACK IN THE BLACK -- The current account balance of payments has recorded surpluses for the last two years after suffering deficits from 1988 to 1990.