Is the role of the broker that of doctor or mortician when it comes to the run-off market? ask Stephanie Mocatta and Richard Whatton
Most individuals, who have ever witnessed even part of the process, and the market as a whole, generally view run-off as a deeply depressing experience. It's old business, so why worry about it? The stark reality however, is that exposure to run-off provides an invaluable insight into insurance, and provides myriad lessons in how to, and how not to, manage an insurance policy.
To simplify the insurance equation down to policyholder (insured), broker and underwriter, the broker's role in run-off is as important, if not more so, as when the insurance was originally placed. Why? Because the broker is the gatekeeper to the records (placing files, policy documents, premium records and claim files), relationships and knowledge that will ultimately determine whether or not claims from policies in run-off can in fact be paid.
Different parties will have different answers to a host of questions: Has the claim been paid? And if not, why not? If it was part paid, which underwriters settled and which did not? Who were the underwriters on the policy? Do they still exist? And so on. It is only the broker that can have all of this information, and may indeed actually know many of the individuals involved and have the relationships necessary to affect a quick and efficient run-off. In a perfect world that is.
But what's in it for the broker? Imagine having placed a piece of liability business in 1950, for which you collected $25 in brokerage (a realistic fee in 1950). Some 55 years on you didn't expect still to be playing a role in the execution of the policy. But that is just one example of exactly what brokers are facing. Brokers' terms of trade, which historically were never documented with relationships relying on custom and practice, do not account for obligations in the event of an insurer (or the broker itself even) going into run-off. Sure, as the agent of the insured and having been paid commission they have an obligation to the client as the broker, but there's no legal redress.
The golden era
If you look back to the 1960s, there was no real problem. The broker was happy to continue to service his old clients who had renewed with other brokers because he saw his relationships with the insurance market as a valuable driver to keep operating efficiently. At that time very few London market insurance entities had gone into insolvency and very few into run-off. It was only the disastrous impact that asbestos and pollution claims had on the insurance market that started the rapid increase in insurance company failures.
These failures resulted in the brokers developing strategies for "discontinued business" which really started with the reinsurance protections relating to these failed insurance companies and other entities that went into run-off. It was not long before these discontinued business units had the non-renewed business passed on to them leaving the broker's "live" operations to concentrate on live clients and the live market.
The obvious next stage was to try to reduce the costs of running these discontinued business units and in the main the brokers reduced the staffing levels and the entire operations were relocated out of town. It was inevitable that these units would become viewed as a drain on the brokers' resources and over time, in an effort to become "profit centres", some of these units have implemented a two-tier system of operation: one for clients who pay and one for those who do not.
The process of developing discontinued business units has been accelerated in recent years by the consolidation of the broking market. Whereas before a small broker might have felt a continuing obligation to its clients in run-off, once these smaller brokers were subsumed into a larger organisation any such obligations tended to disappear. The run-off clients were moved into the discontinued units.
For the insurance market the best-case scenario is where the broker completely fulfils its role and continues to manage policies while those policies are in run-off. While rare, it does happen but inevitably the broker's involvement is more easily secured with some negotiation. The run-off administrator might help the broker by putting staff in to clear up backlogs of claim files, help to trace slips, cover-notes and claim files, cleanse data and generally manage all non-broking work. On top of that, however, the administrator's staff might also broke the claims as well, leaving the broker with the conclusive role of managing the final settlement process via the bureau.
Sometimes the administrator may actually pay the broker a fee for continued work. It is important however, that any fee is tied into service delivery being either claims collection, or motivating delivery and accelerating the process.
The original broker
There are plenty of occasions though where the broker will not be involved.
This might be because they no longer exist (although where a broker has been subsumed into a larger organisation, the mother ship becomes responsible for any business in run-off) or because they have neither the staff nor the solvency to devote the resources. In this instance, third-party service providers might be invited to look after the business. Many of these providers evolved from brokers themselves.
But that also requires an incentive, and involves a massive accounting reconciliation exercise as the service provider seeks to identify all of the funds in the IBA; who's been paid, how much, by whom and what for?
The greatest enemy in that scenario is time. If the cash-flow cannot support a six-month reconciliation and data transfer process, then the whole operation becomes somewhat redundant.
There is a glimmer of hope on the horizon as we are beginning to see the larger broking groups establish actual reserves on their balance sheets for the cost of maintaining these discontinued business units, and we would encourage other brokers to follow suit. This reality check will begin to see better and more efficient management of these units and at last some investment in improving the operating efficiency, which is the only way that costs can be contained.
In today's market, looking possibly 50-years from now, run-off should be left with the original broker, and if necessary policy conditions (be it claims collecting commission or wording in the policy relating to terms of trade) should encourage or enforce this.
- Stephanie Mocatta is a partner and Richard Whatton is a partner at Whittington (formerly Omni Whittington) in London.
- ARC calls for run-off succession planning.