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US bail bond loss hits London

London market insurers are facing a series of claims from insuring US bail bond firms, The Insurance Insider can reveal.

One of the worst culprits appears to be the Capital Bonding Corporation, a Pennsylvania based firm whose principals have been suddenly replaced by their US underwriter Harco National Insurance Company amidst allegations of misconduct and improper business practices.

The London market, which has provided reinsurance protection to Harco for the bailbonds it has underwritten via its programme administrator Capital Bonding, has been shocked to discover late deterioration on the 2002 account.

According to sources, the Capital Bonding account alone may lead to an estimated market wide loss of $15mn-$20mn in 2002 and an even greater amount in 2003 and 2004 years.

Following the revelations, one of the insurers on the 2002 account, the Heritage Syndicate 1245, recently marked down its forecast result for the entire year from a 7.5-12.5 percent profit to a 0 to -5 percent loss. Other Lloyd's insurers on that problem year are thought to include Faraday, while the 2003 and 2004 years are believed to include Hiscox and Beazley. Among the company market, reinsurers such as Converium have also participated on the programme.

Late deterioration shocks market
The late deterioration has shocked the London reinsurers because the business was presumed to be short-tail (and profitable), and indeed was originally written under the P (pecuniary) Lloyd’s risk code before being later changed to the surety bond risk code, SB.

Firms such as Capital Bonding provide bail bonds on behalf of underwriters like Harco in exchange for a fee, which is used to defray the bond costs and to finance a build-up fund if the bond is forfeited. The business is short tail because most bonds are for a fixed period, often less than six months, yet at Capital Bonding something went terribly awry.

Investigators led by Harco - who have replaced Capital Bonding's colourful founder Vincent J Smith - are currently determining the scale of the problem but in the meantime Capital Bonding is also facing regulatory pressures.

In recent months, the Californian insurance commissioner John Garamendi levied a "cease and desist" order on Capital Bonding after the company was found to be transacting bail bonds without a bail licence in California, while in Connecticut the company agreed to surrender its licence following an investigation into the company's practices. A quick Google search also identifies a host of aggrieved bounty hunters who also claim they are still owed money from the company.

London based reinsurers - who may now be asking themselves why they became involved in such an exotic business in the first place - will be watching the investigations with great interest.

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