Demystifying Runoff Insurance: Definition and Operations

Gain insights into runoff insurance, its meaning, and how it operates in the management of insurance portfolios.

Runoff insurance, often referred to as legacy or discontinued business insurance, is a type of insurance that deals with the management and coverage of liabilities from discontinued or "runoff" insurance policies. These policies are typically no longer sold but still have active claims and obligations. Here's a demystification of runoff insurance, including its definition and operations:

Definition:Runoff insurance is a specialized insurance product that provides coverage for claims and liabilities associated with discontinued or historical insurance policies. These policies are usually no longer underwritten or sold by insurance companies, but they continue to have active policyholders with ongoing claims.

Operations of Runoff Insurance:The operation of runoff insurance involves the following key components:

  1. Identification of Discontinued Business: Insurance companies identify lines of business or specific insurance policies that they no longer want to underwrite or that are no longer profitable. This could be due to changing market conditions, regulatory concerns, or the desire to focus on more profitable lines of business.

  2. Transfer of Liabilities: Once a decision is made to discontinue a line of business or specific policies, the insurance company may seek to transfer the liabilities associated with those policies to a runoff insurer. The runoff insurer, in this case, takes over the responsibility for handling claims and obligations of the discontinued policies.

  3. Management of Claims: The runoff insurer is responsible for managing and settling claims filed by policyholders under the discontinued policies. This may involve making payments for covered losses, handling legal disputes, and ensuring that policyholders receive the benefits they are entitled to.

  4. Financial Reserving: To meet their obligations, runoff insurers establish financial reserves, which are funds set aside to cover future claims and other policy obligations. These reserves are invested to generate returns that can help fund the ongoing liabilities.

  5. Runoff Period: The runoff period is the time during which the runoff insurer manages the discontinued policies. This period can extend for several years, sometimes even decades, depending on the nature of the liabilities.

  6. Runoff Insurance for Legal and Regulatory Compliance: In some cases, runoff insurance may be necessary for legal and regulatory compliance. Insurance regulators may require insurers to have a solution in place for managing discontinued business to ensure that policyholders' rights are protected.

  7. Closure and Wind-Down: Over time, as the liabilities are settled and the policies reach their natural end, the runoff period comes to a close. The runoff insurer may then be dissolved, and any remaining assets may be distributed to the policyholders or shareholders, depending on the legal and contractual agreements in place.

Benefits and Rationale:Runoff insurance serves several purposes, including:

  • Allowing insurance companies to exit unprofitable or risky lines of business.
  • Protecting the rights of policyholders and ensuring they receive their benefits.
  • Complying with legal and regulatory requirements.
  • Providing policyholders with continuity of coverage for existing policies.

It's important to note that runoff insurance can be complex and requires specialized expertise in managing claims, reserving, and handling legal matters related to discontinued policies. It is typically used for older, long-tail lines of business where claims may continue for many years after the policies were initially issued.

Understanding Runoff Insurance and How It Works.

Runoff insurance is a type of insurance that protects companies from claims that are made after the company has been acquired, merged, or ceased operations. Runoff insurance is also known as closeout insurance.

Runoff insurance is important because claims can be made against a company long after the company has stopped operating. For example, a former client of a financial advisor might file a lawsuit against the advisor alleging that the advisor gave them bad advice. Even if the advisor is no longer in business, the advisor's runoff insurance policy would cover the claim.

Runoff insurance policies are typically purchased by companies that are being acquired or merged. The acquiring company will purchase a runoff insurance policy for the acquired company to protect itself from any claims that may be made against the acquired company after the acquisition is complete.

Runoff insurance policies can also be purchased by companies that are going out of business. This type of runoff insurance policy is designed to protect the company's directors and officers from personal liability for any claims that may be made against the company after it has gone out of business.

Runoff insurance policies are typically written on a claims-made basis. This means that the insurance company will only pay for claims that are reported during the policy period. Runoff insurance policies can be written for a period of one year or more.

The cost of a runoff insurance policy will vary depending on a number of factors, including the size and industry of the company, the company's claims history, and the length of the policy period.

If you are considering purchasing runoff insurance, it is important to speak with an insurance agent who specializes in this type of insurance. The agent can help you to choose the right type and amount of coverage for your needs.