Exactly what happens when a company goes into run-off? Leslie-Ann Giovnilli explains all.
What is a run-off account? It can be described in many different ways and can occur when the liability carrier has: gone into liquidation; stopped writing all insurance business; stopped writing certain types of business; or, the underwriting agent has ceased writing for the carrier.There is scope for more definitions but the issues are fairly similar. These situations all result in run-off accounts and the need for the liability carrier to service them.
With the move from a live operation to one in run-off it is normal practice for the management to revisit their business plan and review the company's capital and resources. If the company is found to be insolvent, then control moves to the liquidator, but assuming it remains solvent, a full review can be undertaken by the current management.
Companies that have undergone the change from live to run-off and reviewed their current business plan may believe that it no longer applies and therefore discard it. In many cases the company simply continues to be managed and to act as though it is still a live company focusing on a swift payment of claims that will result in a large backlog in processing, while not speeding up any of the recovery processes. In reality a whole new plan is required.When a company first enters run-off, income is going to be limited to additional or reinstatement premiums, so it is important to reduce costs as early as possible. For a liability carrier this means stopping all underwriting activities and releasing all underwriting staff and the majority of the associated administration staff.A review of other staff too is essential. Often areas that were important when the company was active can be less so when the company is in run-off. The opposite is also true, and the focus may need to shift to other areas that will need more, and/or superior staffing. An example of this can be found in the advertising of a company. As sales are no longer an issue the costs related to this function can be directed elsewhere. Greater focus could be given to researching unused reinsurance covers, and the accuracy of reported losses for any treaties with a loss retention facility.
Perhaps it will be possible to reduce the amount of office accommodation, although the leasehold for many offices will not be as easy to relinquish as it was to purchase. Marketing costs and entertaining can be drastically reduced as the company will no longer be seeking to bring money in for placement, but will be trying to improve their cashflow with a high volume turn around on reinsurance recovery.
Membership of all the associations the company belonged to when live is a good area for review. Continuing to subscribe as a run-off member can be costly, but it may also be that as a run-off company you are no longer entitled to belong. Cancelling the fee or recovering a pro rata proportion of the fee may be followed up.The emphasis should also change for staff training. Run-off does not mean that training stops, but it should undergo a complete review for the new needs of the company and to ensure that key staff who remain continue to have a clear career path. Lack of attention in this area could result in the loss of the necessary staff for successful transference of the company to a run-off organisation.
Once the initial staff issues have been resolved, further thought should be addressed to a complete review of activities, in which all departments' daily routines are included. Each department head should examine his department's functions and clarify the continued need for the work and/or the priority of it. The nature of the business changes and the running of the department needs to reflect this.
Practices and procedures
The main area for review, and one that does not seem to receive the attention it deserves, is practices and procedures. The review should apply to all departments and be driven by the junior management who have hands on knowledge of the day to day work of the company. If a new business plan has been agreed, then explaining this to the staff would help them to understand how the company intends to go forward.
A run-off company requires:
1. a clear understanding of the way forward for the company,
2. a well resourced and motivated staff force,
3. superior adjusting staff,
4. a tightly controlled reinsurance recovery area,
5. a good credit control and bad debt system.
Goals three to five can be achieved, if not already in place, by reviewing the business plan. Goals four and five by updating the company practices.The company in run-off must reduce reserves and minimise payments. Looking at all claims reserves for currency and accuracy can affect the first. This will also affect existing letters of credit, as many may be over collateralised and once a current position is clarified a refund or reduction in collateral can be obtained Claims ought to be treated as if the company was the only insurer at risk, and was not reinsured. Staff should be satisfied that they have all the documentation they require and that they are able to reply to any question on the case, should they be called to do so. Run-off is not about volume processing but about an accurate adjustment of a loss, ensuring that a swift recovery from reinsurers can be made.
Reinsurance recovery, which is the main source of income, should be current, frequent and maintained on a diary system. Queries should be logged and a response given promptly. The procedures should be in place for the initiation of legal proceedings. Two or three years of exchanging the same collection backwards and forwards is not good recovery practice. A review of the reinsurance records may also bring forth undiscovered policies that are available for more recovery collections. With the companies' claims adjusters taking time to look at claims there is also a readily available source of information to respond to those queries that reinsurers raise.
If reinsurers still refuse to meet their obligations the run-off company may consider commutation or credit control. Not to be confused with the work ledger keepers perform in a live operation, credit controllers actively seek out recovery from reinsurers that are late in paying or are not responding.
Achieving finality must be considered as a priority in the new business plan and commutations are a major part of achieving this. Therefore focusing on this area of resource is essential. Identification of targets and recognition of priorities are the difference between a cash recovery, or an offset deal some way down the line. As a company in run-off, a commutation is appealing, if only because others must always have in mind how long you will continue to exist. Commutations too can be a useful tool; enabling collection of monies due without becoming mired in a lengthy legal argument regarding the merits of either party.
Both commutation and credit control are instructive in using negotiation for recovery rather than the supine approach of lodging a claim within a (reinsurer's) scheme, or pursuing another lengthy argument via the inspection of records route. A run-off should be focused on recovery and finality, not the setting of new legal precedents.
Servicing of the account
After the review of the business plan and following consideration of above, changes have been made resulting in a more efficient and cost effective service. But how far has this really been explored? Has the issue of broker service and the possibility of paying to purchase a better service been considered? Is it appropriate for your company? Has the option of outsourcing all, or part, of your run-off been fully explored? If there are no plans to take on new business, and there must be the skills and resources for this, then very soon the core expertise required to run the business will be greater than the work itself.Has careful thought been given to what today's technology can do for your company? Would the company benefit from more computerisation, or less? Is an outlay on technology now going to benefit the company in the years to follow? Has this been assessed against the other options, for example new work or outsourcing?
Reviewing these options, we can understand that run-off is different. It is a new practice and must be treated with the same respect that any new aspect of the business is given. To continue to act as before, except for redundancies in underwriting, will only extend the life of a run-off beyond what may reasonably be expected by the insured or shareholders, resulting in a lack of clarity in the minds of both, as well as in the minds of reinsurers. Finality is the goal and only by making run-off a new and separate aspect of the company plan, will it be reached.
Leslie-Ann Giovnilli is a director of Account Management Solutions, Ltd, a consultancy providing reinsurance and claims control. She is also secretary of the Association of Run-off Companies, the trade association for discontinued underwriting operations in the London insurance market. She can be contacted on 0370 890948.