Insurance & Reinsurance Runoff
CAS Annual Meeting
Chicago, Illinois
November 14, 2007
Dave Ostrowski, FCAS, MAAA
RiverStone Resources

• Solvent vs insolvent
• Causes
– Hurricanes / earthquakes
– Asbestos / pollution
– Sustained unprofitability
• Structure
– One company going into runoff
– Part of an ongoing (re)insurer
– Purchaser/manager of several runoffs

• Underwriting changes
– Rate level
– Expansion
– Coverage
• Retention changes
• Cutting expenses

• Brokers
• Reinsurers
• Underwriters
• TPAs
• Auditors
• Regulators

• IT problems correlated with runoff status?
– Causal relationship
– Same brain trust
– Focus on cutting expenses
• Appetite for new IT investments
• Transitions
– No need to worry about closed claims
– … or actuarial coding
– Amplified for managers of several runoffs

• Employee retention
• Institutional knowledge
– Excellence outside of Excel
– The Box Theory
• Troop morale
• The best and the brightest.

• Especially in a claims shop
• Senior management
• Litigation management
• Specialists
– State Workers Comp laws
– Second Injury Funds
– Excess claims
• Administration

• Changes in case reserve adequacy
– Different philosophy
– Re-review of each claim
• Changes in payment patterns
– Different philosophy
– Incentive to settle
– Workload
• Communication with handlers
• Systems changes?

• All those 1.0005’s add up
• Exposure-based methods
– Asbestos / pollution
– Low frequency / high severity
– $100 claims
• Combining heterogeneous classes

• Asbestos
• Pollution
• Construction defect
• Surety bonds
• Excess Workers Comp
• Pools
• Extra-contractual obligations

• Poor service from brokers
• Loss of key personnel and institutional knowledge
• Systems issues
• Outsourced claim handling
• Law of large numbers no longer enforceable
• The “other stuff” emerging

• Your reinsurers teetering on insolvency
• Your European reinsurers going into solvent schemes
• Reduce administrative burden
• “Simplify”
• Profit

• Reinsurance collections
• Claim handling
– Closing ratio
– Average loss payment
– ALAE-to-loss ratio
• Overall
– Ability to make dividends
– Reduce reserves

• Accelerate dividends
– Premium to entice claim settlement
– Premium for uncertainty
– Either premium is probably net!
• Sit on the cash
– Do claims get better with time?
– Greater expense pressure
• How do shareholders value the company?

• Risk-adjusted reserves
– Core business
– The other stuff
• Operating expenses
• Quantify the value of your management team
– Can you?
– Should you?

• Reserves are fine!
• Finality
• Many years before long-tailed liabilities fully emerge

• Exit strategy
– Ride it out
– Fold it into an ongoing insurer
– Fold it into another runoff
– Start it back up!
• Can you manufacture a decent return?

• Working for a small and shrinking company
• Claims modeling
• Pricing commutations
• Financial modeling for exit strategies