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More Links in the Claims Chain

Running off closed lines is increasingly complex these days.

October 20, 2009 Photo
Insurance and reinsurance companies have long dealt with managing and mitigating legacy exposures to asbestos, lead, pollution, toxic tort, construction defect and other long-tail liabilities. Running off these more volatile and closed books of business requires deploying proper operational resources and creating a claims handling process sufficient to evaluate and assess the underlying risks and volatility in the various portfolios. Pressure is always on to accurately anticipate the financial impact to the company.

Many companies abandoned traditional risk management policies and hierarchical claims handling structures in favor of more bespoke and specialist strategies for handling these portfolios. In some cases, liabilities remained with the originating company. In others, they were transferred out by way of sale, portfolio transfer, debt-purchasing vehicles, bankruptcy or some other form of ring fencing. With the increasing complexity of liability transfers and reinsuring, runoff claims are in need of more rigorous scrutiny.

Runoffs are not part of any current books of business and provide no ongoing source of premium or other income. In most cases, they do not relate to the core business of the ongoing company. They are the claims from business placed long ago by companies that looked very different from their mature successors. Underwriters and executives who wrote the policies are long gone from the companies, and documents and memories fade or even disappear. Without an ongoing trading relationship with the insured (or reinsured), emphasis shifts from one of partnership to one of fulfilling legal and corporate requirements—a pretty sterile and somewhat impersonal transaction.

Tort Litigation Determines Priorities
Despite their lengthy run, legacy claims and related mass tort litigation haven’t leveled off; in fact, we are experiencing a resurgence of complex liability claims that are testing even the most sophisticated and experienced of direct and reinsurance claims operations.

Old trends are now new trends. Coverage implications of asbestos non-product claims, acceleration of asbestos liabilities due to the bankruptcy of insureds, projections and reserving for asbestos and toxic-tort-related liabilities, commutations and the impact on retrocessional coverage, and other emerging sources of bodily injury and property damage liability still jockey for position atop the issues “leader board.”

Court decisions affecting insurer and reinsurer liability have already spurred efforts for judicial and legislative reform, policy and contract wording changes, industry-wide reserve and surplus evaluations, and corporate restructuring. Direct insurance and reinsurance writers have taken action as a result of previous trends in legacy exposures.

Runoffs from Shore to Shore
Business landscapes differ, but underlying problems have much in common.

By Mike Palmer

In general, business for U.S.-based service providers seems to have followed a similar direction to that in the U.K. The credit crunch, lack of cheap capital and the attention or focus of entities on being “big ticket” has made business conditions for runoff service providers pretty tough on both sides of the pond. While it could be argued that U.S. runoff has historically been seven to 10 years behind U.K. runoff, the Americans are catching up and catching on fast. They tend to know what they want and whence they want to buy it.

The British concept of whole-portfolio outsourcing has never been readily accepted by most U.S. insurers, and—in general terms—most outsourcing is done piecemeal. Many runoff service providers in the U.K. came into being to handle large portfolios and manage insolvent estates. This was not the case in the U.S. due, in part, to variations between states in the regulation of insurance companies and the very different legal requirements of state insurance departments and regulators. Thus, service providers in the U.S. tend to differ from their counterparts in the U.K.—for example, there are fewer “one-stop shops” and more niche providers in the U.S.

The most frequently purchased service in the U.S. is that of outsourcing a particular function within a portfolio. This could probably be summarized within the following service parameters:
  • Reinsurance recoveries
  • Non-domestic debt collection
  • Audit and inspection
  • Commutation
  • Accounting and credit control
  • System implementation.
Unlike the U.K., the U.S. has some significant logistical and size issues that make communication and dialogue much more difficult. Until the formation of the Association of Insurance & Reinsurance Run-Off Companies (AIRROC), there really was not a runoff or legacy forum at all. AIRROC has done a truly remarkable job in unfolding many of the runoff and legacy issues within North America. It has been at the forefront of the U.S. runoff market, and its board of directors has created an opportunity for U.S. participants to meet and network on a regular basis and to educate staff on legacy issues.

What lies ahead for the U.S. runoff market? U.S. insurers are quite able and have grasped many of the runoff nettles with both hands. That being said, there is an enormous briar patch of troubled legacy asset and liability within North America that will need to be handled and managed over the next decade and beyond. Senior managers and executives must be proactive and wise to the complexities of their legacy claims. Additionally, there may be a need for U.S. insurers to turn to outside experts to manage what could be a turbulent and increasing runoff trend.
Mike Palmer is head of business development for Randall & Quilter/Cavell, a London-headquartered runoff services provider with offices in the U.K., the U.S. and Bermuda.

Details, Details
In a runoff scenario, claims administration for that area of legacy exposures becomes the locus of the insurer-client relationship. No longer does the cultivation of a continuing commercial relationship dominate the business interaction; instead, contracts, facts and the law set the parameters for what is, by and large, an exclusively claims-handling process. This puts pressure on insurers and reinsurers to be on top of their game—to leave nothing to chance and no stone unturned in the investigation, handling and settlement of claims.

Through this process, we as an industry have developed a broader knowledge base and have refined our collective thinking regarding assessment and value of these legacy claims. The more we know, however, the less we seem able to get to finality in this sector.

Every day, we face issues of proper date of loss and allocation of complex multi-year claims. Disputes between primary and excess carriers wage on, and issues surrounding the extent to which an insured should be required to participate in uninsured/bankrupt layers of coverage are watched in the courts. Whether in-house or outsourced to a professional runoff claims manager, decisions are made based on decades-old contracts. The obligation to follow the terms under which the original business was written faces off against the economic realities of devising solutions for complex claims while maintaining appropriate reserves. In order to be successful in running off these exposures, companies must be more flexible than ever before. They must reconcile principled and efficient claims handling with business objectives which are ever more scrutinized by regulators and shareholders.

An Expanding List of Claims Issues
Aggregation/reinsurance contract interpretation issues over the terms “event” and “common cause,” allocation of loss to policies and reinsurance covers, follow fortunes, claims estimation, commutation and shifting arbitration temperaments—all are moving parts in the claims management process.

One of the biggest issues confronting the reinsurance market, in particular, is the lack of accurate information on complex reinsurance claims, and there is no easy answer. With thousands of claims being divided up over thousands of reinsurers (and even more reinsurance programs each day), the possibility of full and complete description and disclosure of the underlying claim and/or lawsuits is almost impossible.

Physical logistics, incongruous reinsurance programs, multiple parties, agents and brokers in at least their fourth of nine lives, and defects in human nature impede a global system of satisfactory reporting. Effective runoff claims managers need to develop synergies in relationships that transcend individual claims or books of business.

Despite all the impediments to success, actively managing discontinued business can produce financial gains for companies that are willing to put the time and resources into claims operations. While companies can certainly garner a benefit through in-house administration, unsupervised deferment to outside lawyers and the unorganized use of external consultants can generate their own costly problems. Corporate chiefs, particularly claims leaders, should decide what is most important in evaluating and adjusting these types of claims. They must be open to alternatives that allow for more integration of the underwriting history with current accounting, security, legal and financial concerns.

Running off closed or underperforming lines of business is always a difficult task which requires not only operational expertise, but a demanding level of keeping up to date with the law, the intricacies of global industry movements, regulatory activity, political temperatures, and the financial wellbeing of your counterparties. Solvency concerns are at an all-time high regarding both underlying insureds and insurers/reinsurers in the coverage chain.

Having a professional team devoted to this sector of business can provide early evaluation and proper assessment of emerging risks and ultimate liability. With such keen attention being paid to each and every inwards cession, insurance and reinsurance ceding companies must be ready to present and defend clean and clear paid claims.

As the debate continues in the courts over aggregation, allocation, late notice and other contract- or reinsurance-specific issues, companies in runoff and those dealing with them must understand that getting a handle on the details can mean the difference between an accepted claim and costly disputes. It can mean the difference between having a defined yet fluid plan that moves the company toward finality of long-tail exposures and a book of business that requires constant capital deployment and an uncontrolled drag on the financial viability of an operation.
Susan E. Grondine is chief claims officer and general counsel for Cavell USA, a division of Randall & Quilter, a London-headquartered specialist in insurance runoff administration with offices in the U.K., the U.S. and Bermuda.

About The Authors
Susan E. Grondine

Susan E. Grondine is chief claims officer and general counsel for Cavell USA, a division of Randall & Quilter, a London-headquartered specialist in insurance runoff administration with offices in the U.K., the U.S. and Bermuda. 

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