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Standley H. Hoch, FSA Chief Operating Officer and Chief Financial Officer CIGNA Reinsurance

Run-off Considerations. Standley H. Hoch, FSA Chief Operating Officer and Chief Financial Officer CIGNA Reinsurance May 7-8, 2007. Overview Runoff Market Runoff Management Evaluating the Book of Business Risk Management Exit Strategies. Overview Runoff Market Runoff Management

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Standley H. Hoch, FSA Chief Operating Officer and Chief Financial Officer CIGNA Reinsurance

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  1. Run-off Considerations Standley H. Hoch, FSA Chief Operating Officer and Chief Financial Officer CIGNA Reinsurance May 7-8, 2007

  2. Overview • Runoff Market • Runoff Management • Evaluating the Book of Business • Risk Management • Exit Strategies

  3. Overview • Runoff Market • Runoff Management • Evaluating the Book of Business • Risk Management • Exit Strategies

  4. Runoff Market • UK Life Assurance Cos in Runoff: 53 Companies with £136 billion of Liabilities • UK Non-Life Cos in Runoff: £26 billion of Liabilities (excluding Lloyds) • Continental Non-Life Cos in Runoff: €75 + billion of Liabilities • Membership in AIRROC (US runoff org.): 53 companies

  5. Exit decisions may be driven by many different reasons • Adverse loss experience • Difficult pricing environment • Increased regulatory requirements • Changes in strategy or focus

  6. Management may perceive a sale of the business to be the best strategy: • Frees up capital • Avoids distraction • Positive impact on share price

  7. But the sale of a discontinuedbusiness or product line may be difficult or quite costly • Opportunity for profitable new business may be limited • Customer base and infrastructure of minimal value • Loss exposures difficult to quantify • Regulatory issues or adverse publicity • Buyers of distressed assets may demand a significant premium to reserves

  8. Overview • Runoff Market • Runoff Management • Evaluating the Book of Business • Risk Management • Exit Strategies

  9. Companies often decide to establish dedicated runoff administration • May require specialized product/market knowledge and skills • Different approach to external relationships than an active business • Improve transparency and alignment around strategy • Employee incentives can be tailored to the requirements of a runoff business

  10. Skills to Retain for Runoff Management • Claims management and Audit • Accounting, Financial reporting and Contract administration • Reinsurance administration

  11. Skills to Strengthen for Runoff Management • Program management • Actuarial forecasting • Reinsurance collections • Dispute resolution

  12. Attracting and Retaining Employees for a Dedicated Runoff Management Unit • Retention incentives tied to specific skills and product knowledge • Some functions may be shared with other active businesses • Some functions may be outsourced or supplemented with external resources • Hiring from outside the business unit will bring a fresh perspective and help avoid conflicts of interest

  13. Turn-key alternatives are available • How much of the existing structure can be redeployed? • How confident are you in your assessment of the liabilities? • Importance/availability of risk transfer alternatives? • Organizational capabilities/experience in managing outsourced arrangements

  14. Overview • Runoff Market • Runoff Management • Evaluating the Book of Business • Risk Management • Exit Strategies

  15. Access to records can be a significant issue for companies transitioning to runoff • Claim and contract info should be fairly well organized and accessible • What about email records? Underwriting files? • Do you have contracts written and/or administered by MGUs? Are they still in business? Are they still talking to you? • Who administers your reinsurance program? • What is their commitment going forward? • What is the quality, timeliness and level of detail of the information being reported to you by ceding companies?

  16. Resources, models, methodologies and assumptions • Who’s the expert in evaluating your block of business? • What do you need to know about the exposures and how will you measure them (premiums, reported claims)? • What information is available “in-house”? What do you need to seek elsewhere? • Will you use expert information? Industry data? Broader economic models? • How will you segment your book for experience analysis? • How much individual contract information will you use (deductibles, limits, sunsets, commutation clauses, etc.)

  17. Planning for the future • How frequently should you refresh the analysis? • What can you do to improve the data, methodologies and overall analysis the next time around? • How will you incorporate new/updated information into the analysis in the meantime?

  18. Overview • Runoff Market • Runoff Management • Evaluating the Book of Business • Risk Management • Exit Strategies

  19. We’ve already talked about three important risk management initiatives • Securing and enhancing program/contract documentation • Ensuring access to the right people/resources/skills • Developing a solid evaluation of claim and contract exposures

  20. Other areas to consider • Strengthening regular claims review/adjudication/administration • Enhancing audit scope/frequency/resources • Dedicating additional resources to reinsurance collections • Purchasing additional reinsurance for open exposures

  21. Ways to leverage risk management effectiveness • Improving the effectiveness of ceding company/TPA claims management procedures • Improving communications with ceding companies, TPAs, reinsurers and other business partners • Using reserving/exposure studies to identify and prioritize segments of the portfolio with greatest potential for volatility • Taking advantage of the “domino effect”

  22. Overview • Runoff Market • Runoff Management • Evaluating the Book of Business • Risk Management • Exit Strategies

  23. Readiness to exit • Improved controls on claim administration and reinsurance collections • Enhanced contract documentation and the quality and timeliness of financial data • Comprehensive assessment of exposures and liabilities • Addressed significant areas of uncertainty in the portfolio

  24. Wholesale strategies • Portfolio transfer by sale or reinsurance • Solvent Scheme of Arrangement (UK) • Insolvency and Liquidation

  25. Considerations in pursuing wholesale strategies • Length and credibility of loss history • Impact on existing reinsurances • Potential for cost reduction/redeployment of capital • Buyer’s risk tolerance and capacity to absorb future adverse development

  26. Retail strategies • Claim commutations • Structured settlements • Contractual clauses

  27. Considerations in pursuing retail strategies • Development methods may be difficult to apply due to limited history • Assess open claims exposure and adequacy of case reserves • Determine timing of expected cash flows • Apply discounts for interest and mortality • Evaluate exposure to new/reopened claims • Consider contractual sunset and commutation clauses

  28. Windows of Opportunity may be important in executing a retail approach • Addressing counterparty credit issues • Resolving disputes • Seeking administrative cost savings • Simplifying complex arrangements • Securing net settlements

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