Run-off: unwanted offspring or invaluable tool?

The subject of run-off can often evoke a sniff of disdain from senior insurance executives. The trouble is that run-off is linked to the notion of failure, even insolvency.

But run-off has a key strategic role to play in the lifecycle of the insurance market and is not just the embarrassing and unwanted offspring of an ill-advised dalliance.

We now trade in a market where the balance sheet has assumed a pre-eminent importance to buyers of our product. Whilst the ebb and flow of capital will ensure that underwriting profitability remains cyclical; mergers and acquisitions in our consolidating industry will continue to strand portfolios that are surplus to requirements.

Run-off should be seen as a strategic management tool: deciding to put a portfolio, or a whole business, into run-off must no longer be a knee-jerk reaction to events, but represent the execution of a core element of the business planning process.

Those responsible for the formulation of strategy need a clear comprehension of the dynamics of run-off. They must understand the criteria for selecting portfolios to be discontinued, the consequences and costs of stopping underwriting, and the ways to achieve early finality for run-off liabilities.

Professional run-off service providers must broaden their offering beyond mere portfolio management to include the ability to advise those who are unfamiliar with, or even totally unaware of, run-off, how to devise and execute a run-off strategy. CMGL have identified four distinct phases to run-off that need discrete skill sets and knowledge:

1. The run-off decision: Shareholders and senior management need clear and unambiguous guidance on how to assess the suitability of portfolios for run-off, including advice on the financial, regulatory and HR implications of discontinuing underwriting and a realistic estimate of the likely duration of their commitment.

2. A strategy for the run-off: To meet the business critical regulatory requirements, an experienced professional service provider should be an invaluable partner in the process of drafting a strategic plan, discussing it internally and with the regulator, and refining it.

3. Managing the run-off: What matters is optimising the available resources and focusing all energies on the key objective of managing the run-off economically down to a position where an exit mechanism can be deployed.

4. Achieving finality: A professional service provider should help to select a mechanism that best suits the nature of the business and the appetite of shareholders and senior management for speed and cost.

Run-off has become a distinct market sector in its own right with a significant influence on the health of the worldwide insurance industry.

However, there is still a lack of understanding in the highest echelons of our industry that run-off is not a passing phenomenon arising solely out of mistakes committed in the past.

As a phase of the insurance lifecycle, it must form part of the strategic planning process and not be relegated to the status of an irritating operational nuisance.

Properly planned and managed, run-off can be an invaluable means of managing capital, optimising return on equity and freeing senior management to concentrate on driving the business forward.

The key is understanding, planning and proper execution.

Philip Grant is director of London Market Division for Claims Management Group Limited. He is also the treasurer and a member of the Executive Committee of the Association of Run-Off Companies (ARC).