Managing a Runoff Business
Resolve Your Run-Off Business with Better Results
Between questionable underwriting profitability (i.e., loss leaders), terrorist activity and a variety of natural disasters, insurance companies and captives worldwide are putting increasing numbers of poor-performing property and casualty lines of business (construction, trucking/fleet and professional lines, etc.) into run-off to improve their financial strength and protect their solvency rating. Current estimates show global reserves in run-off at roughly $300 billion – with US companies accounting for half of that amount. Given the increase in run-off lines of business, the biggest questions for insurance companies and captives are: Who is going to manage existing claims – both pending and IBNR (incurred but not reported)? And how?
While moving a line of business into run-off can help boost profitability and limit risk, the process is lengthy. You may have discontinued the business and stopped accepting new premiums, but the law may require that you provide your insured the option to renew for one more annual period. And settling existing claims (including IBNR)– some or most of which may be in litigation – will take real estate, capital, and focused attention by experienced, claim professionals (sometimes for years.)
For an insurance company or captive to successfully close the book regarding a line of business in run-off, it must close claims quickly, plan appropriately and maintain the reputation of the business. By following the recommendations posed by Stauber Associates in this paper, companies limit the expense and uncertainty of a lengthy run-off process.
Assign Top Talent to the Case
Simply put, closing claims quickly requires people who know what they’re doing. You need specialists that are efficient with expenses and effective at settling within the reserves you’ve established. This is not the place for a learning curve. Mistakes at this juncture put companies at risk for unsettled claims and costly, protracted litigation.
Unfortunately, keeping your best people on a discontinued line of business is not often practical. The more talented employees prefer active business, and assigning them to a run-off may trigger the desire to leave for a better opportunity. And lesser talented employees have little incentive to close run-off claims quickly because once all claims are settled, they could lose their jobs.
Outsourcing is an attractive option in run-off claim situations. You benefit from high-quality talent with expertise in settling difficult, lingering claims – even with little new information. And because outsourced talent know upfront that the business is discontinued, they have the motivation to close and will act proactively by pushing the right people for a quick settlement.
Ensure Adequate Reserves
It’s a tricky proposition – insurance companies or captives are required to have sufficient capital and maintain adequate claim reserves (indemnity, expense and ULAE) to handle claims; however, setting aside too much money means less is available for other needs within the company. Having too little in claim reserves can mean additional capitol is required to strengthen claim reserves, which may lead to additional financial reporting and possible charges that lead to a restatement of quarterly or annual earnings.
Conducting detailed, thorough due diligence helps tremendously in ensuring sufficient capital. It’s always better to have more than you need, but thorough due diligence helps keep the amount set-aside in reserves as realistic as possible.
Avoid Additional Liabilities
Inexperienced or poorly motivated staff can create additional liabilities that add unnecessary costs or expense and lengthen the run-off process. For example, inexperienced staff with overly aggressive behavior in settling claims can unknowingly breach “good faith” claim regulations or standards and damage your company’s reputation by having to pay extra contractual damages on individual claim files.
Less motivated staff who have little incentive to settle claims quickly also run the risk of a courtroom face-off with sophisticated lawyers highly trained in getting their best – and your worst – verdict. Attorneys in New York, Florida, Texas, California and Illinois, in particular, are known for their ability to get the verdicts they want at trial.
To avoid these unnecessary liabilities, work with people who have the motivation to proactively settle claims and know how to avoid costly claim handling mistakes.
Establish Consistent Accounting
Once you’ve committed to a line of business to run-off and have hundreds or thousands of existing claims, consistent financials are critical to a company or captive. An accurate quarterly or annual budgeting process must exist to ensure that you have the resources necessary to settle all claims, despite the length of your claims settlement process.
If the uncertainty of a lengthy run-off creates problems for your budget, outsourcing can provide more accounting accuracy. With outsourcing, you work with a set fee for claim handling costs and have the opportunity to reduce real estate expenses; with internal resources, you face fluctuating real estate costs, staff numbers, benefits, incentive costs, etc.
When choosing an outsourcer, be sure the firm has extensive experience in claims and in specific venues. If your run-off claims are in Texas, for example, your outsourcer should have handled sufficient cases in Texas – and created relationships with local attorneys.
The ultimate goal in a run-off situation is to settle claims quickly and have money left over. By working with a talented team and establishing appropriate resources, companies are more likely to achieve success.
Charles E. Stauber has 20 years’ experience in the insurance industry and has handled run-offs in all fifty states.
