Insurance Company Run-Off Management Strategies Face Obstacles, Study Says

February 13, 2007

The U.S. insurance industry should be paying greater attention to the run-off market, according to a study published by PricewaterhouseCoopers’ (PwC) Insurance Restructuring Group. The “US Discontinued Insurance Business Survey” noted that although the market has an estimated $150 billion to $200 billion in reserves, run-off as a stand-alone business is less mature. Furthermore, recent high-profile exits from the U.S. underwriting market have put a spotlight on liabilities being held by insurance companies to meet their obligations from legacy underwriting (“run-off liabilities”), PwC said.

To get a better understanding of the current trends in run-off management, PwC asked a group of property and casualty insurance and reinsurance companies with discontinued insurance operations across the United States about their run-off management strategy and their plans for this business. The study indicated that companies are having success strategizing plans for managing their run-off, but are facing obstacles with the implementation of effective operational plans to meet these goals.

A key factor that measures whether run-off liabilities are a primary focus for an insurance organization is the extent to which separate strategic plans and financial forecasts have been created for the run-off operations, PwC said. More than eight in 10 (83 percent) of respondents in the study indicated that strategic plans are in place for their run-off operations. In most cases, those plans are supported by financial forecasts, and management and staff are measured by whether they attain the goals set out in the financial model.

“Run-off is clearly a major industry in its own right,” said Andrew Rothseid, partner with PricewaterhouseCoopers and author of the report. “The survey results indicate that the industry is dealing with some aspects of run-off management fairly well while struggling to gain the support of reinsurers to meet their goals of early closure.”

When asked what their top strategic goals are, eight in 10 respondents (almost 80 percent) hoped to gain finality to assumed exposures. Removal of volatility from their portfolios and minimizing claims settlement amounts were also named key goals.

Other major findings included:
*Outsourcing of run-off management appears to be more focused on specific specialized tasks rather than outsourcing the management of the entire portfolio.
*Approximately one-third of respondents indicated that they outsourced either their claims or information technology functions post-runoff.
*Run-off appears to generate additional regulatory interest and scrutiny; however, relationships with regulators appear to be sound.
While the majority of respondents indicated that their run-off strategy is supported by a plan and financial model, 67 percent of respondents noted that they are not required to file their run-off plans with regulators.

Despite the desire to achieve finality, respondents acknowledged difficulties in doing so. Respondents noted they face challenges in attaining successful conclusion of their run-off exposures such as:
*The impact of adverse claims development on the enterprise.
*The ability to retain and motivate staff who are key to the effective management of the run-off.
*Increased reinsurer scrutiny of run-off cessions or the reinsurers’ own inability to meet their reinsurance obligations.
*The ability to gain finality to the companies’ assumed liabilities.
*The ability to conclude commutations with ceded reinsurers.

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Source: PwC

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