COMMERCIAL RUNOFF

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COMMERCIAL RUNOFF
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Advantages (vs. rehab or liquidation)

• Preserves greater estate value for the
  satisfaction of insurance liabilities.
• Faster and more effective claim resolution.
• Avoids protracted delays in the collection of
  reinsurance recoverables.
• Quicker resolution of the estate obligations.
• Lower administrative cost during the pendency of
  the runoff.

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Disadvantages

• Regulators are not yet comfortable with
  nonjudicial runoff of distressed insurance
  companies.
• Regulators perceive greater risks in supporting a
  commercial runoff vs. a proceeding.
• Permitted practices may be needed to sustain
  accounting solvency.
• Ultimately a proceeding may not be avoidable.

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Is Every Financially Distressed Insurance Company
a Viable Runoff Candidate?

• Accounting vs. economics.
• Cash is king and queen.
• Operation must be cash flow neutral or better.
• Investment income and operating expenses.

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Role of the Regulator

• Political issues.
• Second guessing by non-domiciliary regulators.
• Cooperation.
• Permitted accounting practices or allowances.

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Types of Runoffs

• Traditional.
• Nonjudicial liquidation.
• Direct business vs. reinsured.
• Liquidation priorities.
• Other non-insurance creditors.

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The End Game

• Payment of dividends during the pendency of the
  runoff.
• Challenges of extracting excess value.
• Winding up under a formal proceeding.
• Creation of a liquidating trust outside of a
  proceeding.
• The new Rhode Island statute.
• Conversion of an insurance company to a C
  corporation.

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Other Issues

• ADC and LPT covers
• Investment quality and duration
• Liquidity

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Role of the Actuary in a Runoff

• Looking through the rearview mirror.
• Exposed but not recognized EBNR.
• Statistical challenges.
• Modeling.