Vol 4 (2007) - Issue 5

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PwC Survey Explores How US Insurers Address Run-Off Liabilities

A 2006 survey by PricewaterhouseCoopers (PwC) reveals some surprising results regarding how the US insurance industry is coming to grips with the management of run-off liabilities. Given the perceived size of the US run-off market, the management of these exposures is significant to ongoing operations as well as to those dedicated solely to run off.

The survey results indicate that the US marketplace continues to struggle with fundamental run-off management issues such as reserve volatility, claim administration, reinsurance recovery, staff retention and outsourcing options. In addition, survey responses appear to acknowledge that the US marketplace is devoid of a recognised solution that brings a clear and transparent end to these types of exposures.

Background

In 2004, PwC surveyed the UK insurance run-off market to determine key practices and issues. Because no comparable study had been undertaken of the US runoff market, PwC decided to initiate one. Approximately 60 US insurers were asked to participate in the study. The surveyed comprised both insurers with ongoing operations and those whose sole function was to run off existing liabilities. About 50 percent of those surveyed responded to the information requests, and the companies that did respond were evenly split between ongoing operations and stand-alone run-off operations. The survey’s key areas of focus included:

– Run-off management and strategy
– Regulatory issues
– Claims strategy
– Ceded reinsurance
– IT systems

Run-off management

The survey responses suggest that US insurers place significant emphasis on run-off management. The vast majority of respondents manage run-off liabilities either in separate divisions or separate legal entities, as opposed to alongside existing businesses. Nearly 50 percent of respondents employ more than 100 people to manage their run-off portfolios. In addition, most respondents indicated that they have a strategic plan for managing run-off liabilities as well as a financial model to monitor future run-off performance. However, there is no consensus on the anticipated length of the run off on which to base those financial models.

Respondents indicated they have a specific strategy in place to bring closure to run-off liabilities, yet there is no consistent strategy. These strategies range from run off to expiry (arguably not a strategy at all) to opportunistic, or proactive, commutation initiatives. Further strategic considerations include the sale of liabilities or other structured exit strategies.
Although most respondents have a run-off strategy, nearly half of them stated that they were already more than a decade into run-off management without significant closure of liability. Both the percentage and length of run off may be understated because many companies have only recently recognised the need for a dedicated run-off unit.

The survey respondents identified adverse claim development, staff retention and culture, loss of available reinsurance and cost management as potential impediments to meeting strategic objectives and to a successful run-off strategy.

The importance of retaining staff with institutional knowledge of the book of business, as well as keeping staff motivated and attuned to the goals of the run-off strategy, was recognised by a large number of survey respondents. Surprisingly, nearly half of respondents had no retention plan in place. Of those that have such plans, the majority uses either financial retention payments or performance-based incentive programs. Given the breadth of the US run-off market, management of run-off liabilities should continue to grow as a viable career, making recruitment more attractive for talented staff. However, this probably will increase competition among run-off facilities for such staff, emphasising the need for proactive staff retention methods.