Run-off is the transition between a live operation and a liquidated one, that much is self evident. It is less clear how the process works and whether it is being utilised to its greatest potential. Do companies run on rather than run-off? asks Leslie-Ann Giovnilli.
With around 186 UK companies in run-off, of which only 35 are in some form of formal or informal liquidation1, is it fair to conclude that run-off exists in its own right? Does run-off have a life of its own, if so what is it and how long should it be? At this present time there are companies in the London market that have been in some form of run-off since the late 1980s. The Weavers stamp stopped underwriting in 1987/88 and its run-off has since separated into a solvent and insolvent management company. Will the solvent run-off end before the insolvent, or will it also need to go into some form of scheme before it can be finalised?If a scheme is the only way to finality why does run-off as a separate state exist?
In the London market, companies have gone into run-off for several reasons:
• [Class of] business no longer profitable.
• Reinsurance cover is inadequate.
• The company was a member of a stamp, but is now writing in its own name.
• Director errors & omission.
• No longer core business.
In all the above circumstances when underwriting ceases a determination of liability and assets is the beginning of the assessment for the decision to go into run-off. It is fair to assume that as long as the company remains solvent the claims will be met in full and that all recoveries will be paid to the company in a timely manner. This is the necessary balance to keep the company out of liquidation.
A company operating in run-off can control its own destiny. It can plan its own strategy for resolution; however, not all companies in run-off plan for finality.
Purpose of run-off
There is no difference between a UK registered live company and one in run-off as regards the following:
• The books and records of the company must be accurate, current and available to reinsurers.
• Claims must be adjusted.
• Premiums and reinsurance must be calculated and collected.
• DTI returns must be compiled.
However in the case of a company in run-off its purpose is not to underwrite new insurance and reinsurance business but the collection of reinsurance and distribution of funds to claimants.
If we accept finality as the aim of the company in run-off then, after determining the total liabilities and assets of the company, the next stage is to ascertain monies due in and plan to recover them. This will include reinsurance recoveries, premiums, surplus letters of credit, UPRs and any funds being held by others in the advent of a claim, for example managing agents or brokers. Active credit control and debt recovery will allow the company to continue trading.
A review of reserves should be undertaken as well as a review of claims with an eye to available cover and adequate documentation. There are plenty of insurers that will delay a company in run-off's recovery payments for little reason, without the additional problem of inadequate documentation to support the claim being made. Active pursuit of commutation and offset will achieve the fastest resolution of the company's business.
Without finality a company does not run-off, but continues to run on. A company running on is to all intents and purposes a live company. It may no longer be writing business, but it is not in active pursuit of finality. Some branch offices or business class closures are outside of active run-off because the parent company continues to write other business and its objective was merely to stop writing in this particular area. Such companies can afford to administer run-off within their overall operation.
For the majority, once in run-off the business plan should encompass the company's attitude to resolution. This may include an active commutation policy, a credit control and debt recovery unit as well as a claims and reinsurance litigation area. This type of structure is typical of a company that actively seeks finality.The archetypal “run-on” company takes a passive stance on commutations, does not maintain an active diary system for debt recovery, and follows the lead as a matter of course; to shareholders, directors and staff its objective is unknown and its future uncertain.
Legally a company, in run-off or otherwise, cannot close if there are still potential claims to come in and it must therefore go into a scheme or liquidation.The administration cost of a company in run-off is a considerable one and must take account of inflation and new FSA or market demands. With salaries the largest expense, the administration cost of a company in run-off reaches a point where the burden of administration is too great. This could be avoided if a company plans for finality.
Many companies elect to reduce their costs by outsourcing their run-off business. This is an interim measure because it moves the overheads from one company to another; it does not provide a final solution for the liability carrier. No London market service provider can yet boast of achieving finality for any one of its run-off clients.
Liquidators and accountants are slow to administer large and cumbersome schemes and liquidations and from personal experience they make little apparent attempt to simplify them, or to promote finality to a client. Perhaps they do indeed assess the viability of each client for the option they choose, but if they are doing so they make a poor job of communicating their reasons to the market.
Legal restrictions governing the current UK schemes and liquidations slow the process of effecting commutations and recoveries by requiring approval of the agreements from appointed liquidators. Typically, the only person who can give approval is the appointed liquidator; often they are not available. Sometimes they will only deal with those who come to them with an offer of money, or “drop hands”.
Perhaps consideration ought to be given to a set of guidelines for run-off. There is already an FSA department for run-off and an association for those companies in run-off. The accounting and legal professions have their own specialists in run-off and liquidations. With all this expertise perhaps they should take the lead here and provide companies considering the option of run-off with a recommended procedure to determine their ongoing practice and finality.
This procedure could start with a review performed by both the FSA and an appointed liquidator to ascertain the best route for the company, followed by a requirement for a new business plan designed to run until finality is achieved. Having subscribed to such a plan the company ought to be bound to submit, along with their annual report to the FSA, a review of its own business plan to include a timetable of milestones for achieving a final solution.
Creditors and shareholders would welcome regulations governing the control of the spending of the company in run-off alike. Often the company's professional advisors, to no apparent purpose, seemingly squander a high proportion of the company's liquid assets. Finality may be easier to achieve if spending on professional services was regulated with scale fees.
There is a transparent lack of planning for run-off to finality in the London market. The reluctance to do so, is in my experience, due to perceived difficulties such as enforcing guidelines, assessing a fair deal for policyholders for a company's closure and a certain consideration of fee income for those working in the run-off area. At this time no UK registered London market company has completed its run-off without a scheme of some kind. Scottish & Commonwealth2 has achieved finality and HIR (UK) is also pursuing the live scheme option to close at the end in 1999. These, and other, examples would seem to indicate that run-off is an interim step to a scheme or liquidation, and that the sooner companies in run-off include finality in their business plan by using the solvent scheme approach the more closures we will see, and perhaps even the end of run-off.
Leslie-Ann Giovnilli has worked for 23 years in the London market and is a director of Account Management Solutions Ltd, a company specialising in claims practices and procedures for companies in run-off. She can be contacted on +44 370 890948.
1. This number does not include branches or any dormant areas of composite groups.
2. A Bermuda based company finalisation that was approved in the UK Court.