Unicover Pool Closes; Losses Flow.

The zeal to accept huge margins of business in a highly competitive workers' compensation market led to an industrywide dispute as business that could yield losses of $1.9 billion wound its way through a pool of reinsurers managed by Unicover Managers Inc.

The dispute led to arbitration battles between Unicover's pool and its retrocessionaires--life insurance companies that assumed business from the pool. Those life insurers say they were misled into accepting more business than they wanted to, while Unicover officials say the companies knew what they were doing and simply wanted to renege on their contracts.

As the arbitration continued at year's end, the industry continued to work toward a settlement.

Sun Life Assurance Company of Canada and Phoenix Home Mutual Life Insurance Co.--two of the retrocessionaires--were seeking to void contracts they had with the pool as each faced potential losses of at least $700 million, according to Sun Life.

Another retrocessionaire, Cologne Life Reinsurance Co., required a $150 million cash infusion from its parent company, Cologne Re, to help cover a $275 million gross loss from the pool's business. That gross loss could have rendered Cologne Life Re insolvent. Cologne Life Re's disclosure shut down the pool as publicity led to uncertainty in the market.

The pool worked this way: Direct workers' comp insurers passed business on to Unicover through brokers or fronting insurance companies. The brokers primarily were Guy Carpenter & Co., E.W. Blanch, Aon Re and Sedgwick, Unicover has said. Then Unicover, through brokers such as Aon Re and London's Rattner MacKenzie, bought retrocessional coverage to protect its pool members.

Other reinsurers that were part of a pool or other facility included Life Reassurance Company of America, Lincoln National Life Insurance Co., Connecticut General Life Insurance Co., Reliance Insurance Co. and ReliaStar Life Insurance Co.

The Unicover debacle spurred insurance regulators into studying workers' comp pools to determine whether life insurers should be allowed to reinsure the business.

A National Association of Insurance Commissioners working group "has been put together because of Unicover, but it's not going to do a post-mortem on Unicover," said group Chairwoman Frances O'Connor, the chief financial examiner in Connecticut's insurance department.

If the group determines that life insurers can continue to serve as reinsurers on risks they can't write directly, it will examine a host of other questions. Issues to be studied this year include whether:

* companies should change actuarial practices when assuming such risks;

* regulators should increase risk-based capital requirements, particularly for workers' comp reinsurance business;

* pools should be forced to hold reserves to cover losses; and

* pools should be forced to file financial statements with regulators.