Reinsurance tutorials #40
What is run-off?
There is no official definition of run-off. So what is run-off?
Run-off portfolio refers to insurance policies or reinsurance contracts terminated but for which the Insurer or the Reinsurer remains liable for until the final settlement and payment of the claims. It may be a business or a territory for which the Insurer or Reinsurer is no longer operating but where contracts or liabilities are still in force.
Due to these outstanding claims or the potential claims to be notified, the Insurer or Reinsurer must set up reserves; especially for long tail businesses (such as motor liability, medical malpractice, and general third party liability). These risks are highly volatile. Moreover, discontinued run-off businesses must respect Solvency 2 rules. Their management requires resources. Run-off liabilities may require significant equity at the expense of the development of new businesses.
Run-off management is strategic. The Reinsurer and insurer can decide to:
- Manage the run-off portfolio until the settlement of all related claims (by its own team or by a service provider). It is recommended to have a dedicated team.
- Release either by commuting with the Insured of the Reinsured or by transferring the business to another company, which would be a novation.
According to the PWC 2019 Run-off Survey, run-off businesses represent 292 billion USD (up to 30% of reserves).
Some companies are specialized in this legacy market management. Their objective is to reduce the liabilities amount and generate income. To do so, they purchase liabilities and corresponding assets and set up an active management of the claims.
Transferring run-off portfolio is interesting when:
- There is a low rate framework,
- To optimize capital management required by Solvency 2,
- To enhance operations efficiency.
If you are interested in learning more about run-off, please read the dedicated note published in 2019 by the French Association of Reinsurance Professionals, available on its website: https://www.apref.org/contributions/note-apref-gestion-du-run-off-en-reassurance-fevrier-2019/
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