RUNOFF – A New Project
“Legacy reserve management is widely recognised as a solution for insurers of all sizes, with larger than ever portfolios being brought to the market. We expect to see continued growth in 2020 and beyond as sellers seek counterparties that are well capitalised with an established track record and possess industry expertise and a sophisticated approach to claims handling”.
– Paul O’Shea President, Enstar Group
Even prior to COVID there was year on year increased activity in the claims runoff space. PWC estimated worldwide runoff liabilities (non-life) increasing to $800bn in 2019. There are a number of reasons driving the increase in runoff – releasing capital remains one of the prime motivations. But it isn’t the only one – those involved in runoff also talk about being motivated by an orderly exit from a territory or class of business, or managing claims volatility. Separating claims to runoff may also be a strategy for earlier finalisation of claims, or to release resources for other areas of focus.
Covid has introduced increased volatility and unpredictability into the insurance space – and those factors driving the decisions to move portfolios into runoff would seem even more relevant now. There have been some suggestions of industry rationalisation in wake of Covid, but irrespective of this, the factors driving runoff – releasing capital, a focus on current priorities and resources, as well as bringing some order and predictability to existing tails in claims, seem to loom larger.
The big piece in a successful runoff strategy is the management of legacy claims. The question that often comes into play in a legacy situation is whether the claims should be left in their current claim management structure, or should they be moved to a dedicated runoff specialist?
We have learned the hard way that combining what is runoff claim management with new and ongoing work creates stresses and difficulties. Our view moving forwards is the interests of the client is best served if – when looking at a portfolio of claims – new and ongoing work is separated from any transition of existing claims. Generally when there is a volume of legacy claims – say material enough to create resourcing questions – that will be enough older claims to distract focus from the model for new claims.
A specialised runoff service brings a focus to a set of claims that already have a history and often need a fresh approach. A dedicated runoff service will bring focus to existing claims and create a strategy for each and this ideally fits within an overall runoff strategy for the legacy portfolio. You can create targets, KPIs and service provider panels that are suited to the runoff business.
On many occasions legacy claims will remain where they are or they are consolidated into new arrangements that include new business. Often this is the convenient option as well as eliminating switching costs for any transfer of the portfolio. We would encourage a number of questions to be asked before this kind of decisions is made.
- Have we analysed the data to determine if the incumbent is actually doing a good job – what are the current outcomes / duration / legal and loss adjusting spend?
- Have we compared the cost of switching to a dedicated runoff solution with the Loss costs in issue? For instance, our experience is claims management costs are on average about 2% of Loss costs (and vary between 1 and 5% generally, depending on portfolio). So are you focused on the best way of reducing the 95% plus of the pie which is your Loss costs?
- Have we got the best suite of service providers to ensure the most orderly exit?
- Have we set ourselves targets in an effort to curtail adverse loss development – in essence do we want predictability over surprises?
Read more about PROject Runoff, our dedicated runoff service?
This last point in particular is critical. Legacy is about managing clams effectively and avoiding surprises. To do that your reserving becomes super important – and will, at times, vary from your approach to existing business. You may set yourselves aggressive closure targets and reserve accordingly and then ensure opportunities to resolve claims on goods terms within those reserves are a real focus.
We have been managing claims at Proclaim for over 20 years. We have done a number of runoff projects. We have learned some valuable lessons. These include:
- Verification and objective due diligence around current claims numbers, reserves and practices is a necessary prerequisite to a successful claims runoff strategy. Invariably claims portfolios are not exactly what they were represented to be.
- Taking on a legacy portfolio while trying to manage new and ongoing related work is possible but difficult – invariably the legacy piece is a material distraction from the ongoing piece. Both need their own focus so both suffer as a result.
- Runoff portfolios actually work better if they are transferred and a fresh set of eyes and fresh set of objectives developed. Switching costs will be far less significant than the savings that can be generated.
- A thorough claim model and reserve review can be the starting point for developing a coherent set of targets and KPIs for a runoff portfolio
- Do not underestimate the power of good data, and likewise understand that with some books of business the data may not represent an accurate picture of where claims actually are – in which case the first job of the runoff team is to restore data order.
At Proclaim we have set up a dedicated team to manage legacy claims and runoff projects. We have called it PROject, in a nod to what we see as the crucial aspect of any runoff assignment – being that it really is about project management. When we contemplate the transfer of a portfolio of claims, expect an exhaustive set of steps that are required to even get to the claim management piece – and then a set of tight time lines and targets to ensure the project stays on track.
Maria Rosman has re-joined us to manage this new team. We are excited about the value a focus on these clams can bring, while we are equally excited that the existing teams will no longer ride the cycle of up and down resourcing when a new runoff project comes in.