Run-off Considerations
Standley H. Hoch, FSA
Chief Operating Officer and
Chief Financial Officer
CIGNA Reinsurance
May 7-8, 2007
Overview
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Runoff Market
Runoff Management
Evaluating the Book of Business
Risk Management
Exit Strategies
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Overview
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Runoff Market
Runoff Management
Evaluating the Book of Business
Risk Management
Exit Strategies
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Runoff Market
UK Life Assurance Cos in Runoff: 53 Companies
with £136 billion of Liabilities
UK Non-Life Cos in Runoff: £26 billion of Liabilities
(excluding Lloyds)
Continental Non-Life Cos in Runoff: €75 + billion of
Liabilities
Membership in AIRROC (US runoff org.): 53
companies
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Exit decisions may be driven by many different reasons
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Adverse loss experience
Difficult pricing environment
Increased regulatory requirements
Changes in strategy or focus
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Management may perceive a sale of the business to be
the best strategy:
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Frees up capital
Avoids distraction
Positive impact on share price
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But the sale of a discontinued business or product line
may be difficult or quite costly
• Opportunity for profitable new business may be limited
• Customer base and infrastructure of minimal value
• Loss exposures difficult to quantify
• Regulatory issues or adverse publicity
• Buyers of distressed assets may demand a significant
premium to reserves
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Overview
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Runoff Market
Runoff Management
Evaluating the Book of Business
Risk Management
Exit Strategies
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Companies often decide to establish dedicated runoff
administration
• May require specialized product/market knowledge and
skills
• Different approach to external relationships than an
active business
• Improve transparency and alignment around strategy
• Employee incentives can be tailored to the requirements
of a runoff business
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Skills to Retain for Runoff Management
Claims management and Audit
Accounting, Financial reporting and Contract
administration
Reinsurance administration
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Skills to Strengthen for Runoff Management
Program management
Actuarial forecasting
Reinsurance collections
Dispute resolution
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Attracting and Retaining Employees for a Dedicated
Runoff Management Unit
• Retention incentives tied to specific skills and
product knowledge
• Some functions may be shared with other active
businesses
• Some functions may be outsourced or
supplemented with external resources
• Hiring from outside the business unit will bring a
fresh perspective and help avoid conflicts of
interest
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Turn-key alternatives are available
How much of the existing structure can be redeployed?
How confident are you in your assessment of the
liabilities?
Importance/availability of risk transfer alternatives?
Organizational capabilities/experience in managing
outsourced arrangements
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Overview
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Runoff Market
Runoff Management
Evaluating the Book of Business
Risk Management
Exit Strategies
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Access to records can be a significant issue for
companies transitioning to runoff
• Claim and contract info should be fairly well
organized and accessible
• What about email records? Underwriting files?
• Do you have contracts written and/or administered
by MGUs? Are they still in business? Are they still
talking to you?
• Who administers your reinsurance program?
• What is their commitment going forward?
• What is the quality, timeliness and level of detail of
the information being reported to you by ceding
companies?
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Resources, models, methodologies and assumptions
• Who’s the expert in evaluating your block of
business?
• What do you need to know about the exposures
and how will you measure them (premiums,
reported claims)?
• What information is available “in-house”? What do
you need to seek elsewhere?
• Will you use expert information? Industry data?
Broader economic models?
• How will you segment your book for experience
analysis?
• How much individual contract information will you
use (deductibles, limits, sunsets, commutation
clauses, etc.)
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Planning for the future
• How frequently should you refresh the analysis?
• What can you do to improve the data,
methodologies and overall analysis the next time
around?
• How will you incorporate new/updated information
into the analysis in the meantime?
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Overview
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Runoff Market
Runoff Management
Evaluating the Book of Business
Risk Management
Exit Strategies
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We’ve already talked about three important risk
management initiatives
• Securing and enhancing program/contract
documentation
• Ensuring access to the right people/resources/skills
• Developing a solid evaluation of claim and contract
exposures
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Other areas to consider
Strengthening regular claims
review/adjudication/administration
Enhancing audit scope/frequency/resources
Dedicating additional resources to reinsurance
collections
Purchasing additional reinsurance for open exposures
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Ways to leverage risk management effectiveness
• Improving the effectiveness of ceding company/TPA
claims management procedures
• Improving communications with ceding companies,
TPAs, reinsurers and other business partners
• Using reserving/exposure studies to identify and
prioritize segments of the portfolio with greatest potential
for volatility
• Taking advantage of the “domino effect”
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Overview
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Runoff Market
Runoff Management
Evaluating the Book of Business
Risk Management
Exit Strategies
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Readiness to exit
Improved controls on claim administration and
reinsurance collections
Enhanced contract documentation and the quality and
timeliness of financial data
Comprehensive assessment of exposures and liabilities
Addressed significant areas of uncertainty in the portfolio
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Wholesale strategies
Portfolio transfer by sale or reinsurance
Solvent Scheme of Arrangement (UK)
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Insolvency and Liquidation
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Considerations in pursuing wholesale strategies
• Length and credibility of loss history
• Impact on existing reinsurances
• Potential for cost reduction/redeployment of capital
• Buyer’s risk tolerance and capacity to absorb future
adverse development
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Retail strategies
Claim commutations
Structured settlements
Contractual clauses
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Considerations in pursuing retail strategies
Development methods may be difficult to apply due to
limited history
Assess open claims exposure and adequacy of case
reserves
Determine timing of expected cash flows
Apply discounts for interest and mortality
Evaluate exposure to new/reopened claims
Consider contractual sunset and commutation clauses
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Windows of Opportunity may be important in executing a
retail approach
• Addressing counterparty credit issues
• Resolving disputes
• Seeking administrative cost savings
• Simplifying complex arrangements
• Securing net settlements
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