RUN-OFFS

(March 2023)

A run-off is, ideally, the orderly process of ridding an insurer of its book (inventory) of policies and its claims obligations. Run-offs can be and are used by insurers that have chosen to leave a line or business or an area of operations. However, for purposes of this discussion, the term is considered as a step that avoids having to liquidate an insurance operation.

The use of run-offs as a method for handling troubled operations is increasing. Traditionally, run-offs have been strictly an internal process that has been favored by larger insurers. However, the method is now being used by regulators. There are features inherent in run-offs that may suggest they should be used more frequently to ease pressures on guaranty funds; however, that premise is debatable.

Time is running out for a company that is placed under control of the state, first in receivership and then in liquidation. Use of a run-off as an alternative for this terminal process should be carefully evaluated.

Run-offs – Advantages

There are several reasons that state authorities and insurance regulators find run-offs attractive.

No Official Impact – A company that is wound down via a run-off does not trigger action under a guaranty fund. So, time and money are saved because the guaranty fund process is not initiated.

State Statistics – Use of a run-off to handle a failed insurer eliminates its inclusion as part of the state’s insolvency data. This supports an insurance authority’s preference to avoid any feeling of regulatory failure. Further, the guaranty fund’s resources go untouched and no related assessments have to be made, collected or managed.

Tax Impact – Depending upon the state, a run-off does not affect premium tax revenues.

Job Preservation – For the duration of the run-off, a process that could last years, the insurer’s employment level is largely preserved, along with the accompanying benefits to the applicable, local economy and tax base.

Run-offs – Concerns

The primary concern regarding use of run-offs is whether the core, regulatory purpose is being addressed. A healthy regulatory system is one where insurers in serious financial trouble are quickly identified, attempted to be rehabilitated or that are liquidated in a manner that minimizes expenses, maximizes assets and distributes funds to claimants and policyholders.

Run-offs, by their nature, lack transparency and are difficult to monitor. While they may eliminate or postpone tapping into guaranty resources, they do not fall under the same administrative rules and requirements of either rehabilitation or liquidation. An ongoing operation will have a higher level of continuing expenses since it is more likely that staff and infrastructure will remain larger than they would in a liquidation mode. There are several reasons that state authorities and insurance regulators have issues with run-offs:

Control–There are no standards on how to supervise run-offs. In particular, they are not addressed by statutory language, so the handling of different run-offs can vary substantially, with an equal variation in results. When considering any concern which avoids the stigma of failure and the impact on guaranty funds, it is much more likely that the larger insurer operations would be targeted for run-off; this also makes it more likely that insurer personnel would oversee the process rather than regulators. Consider the possible problem in that situation: the same persons responsible for the insurer’s poor position are handling the correction. Would they manage the situation in favor of the proper interests or would the goal of protecting policyholders and claimants be compromised?

Prioritization–Speaking of claimants and policyholders, an insured that is deemed insolvent by the state results in the elevation of the claimants and policyholders to a position where their concerns are to be addressed first. Under a run-off, no such priority is established. This means that all creditors (including claimants and policyholders) have, theoretically, equal access to insurer resources. It then becomes possible that a run-off may result in diverting available funds from benefiting the parties that are most vulnerable to insurer insolvency.

Undue influence–The fact that general creditors maintain an equal claim to insurer resources that may be a serious problem. These creditors may be given a substantial incentive to argue in favor of run-off rather than liquidation. Their competing financial interest in the decision contradicts public policy and statutory intent.

Run-offs - Management

It may be argued that run-offs, in light of public policy, should be avoided rather than embraced. However, perhaps the method could be managed in a manner that would preserve benefits and minimize problems. Perhaps run-offs should be addressed by statute, including the process under a state’s guaranty laws. If run-offs could be handled in a similar manner, such as making them subject to strict regulatory oversight, establishing a primacy of handling policyholder and claimant losses, and requiring proper reporting as well as keeping other rehabilitative or corrective steps in place, they may act as a viable, effective method.

However, the issue of run-offs has, to date, not been considered in enough detail to justify either their embrace or their avoidance within the guaranty fund world.