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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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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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Overview

  • Runoff Market

  • Runoff Management

  • Evaluating the Book of Business

  • Risk Management

  • Exit Strategies


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Overview

  • Runoff Market

  • Runoff Management

  • Evaluating the Book of Business

  • Risk Management

  • Exit Strategies


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Exit decisions may be driven by many different reasons

  • Adverse loss experience

  • Difficult pricing environment

  • Increased regulatory requirements

  • Changes in strategy or focus


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Management may perceive a sale of the business to be the best strategy:

    • Frees up capital

    • Avoids distraction

    • Positive impact on share price


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Overview

  • Runoff Market

  • Runoff Management

  • Evaluating the Book of Business

  • Risk Management

  • Exit Strategies


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Skills to Retain for Runoff Management

  • Claims management and Audit

  • Accounting, Financial reporting and Contract administration

  • Reinsurance administration


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Skills to Strengthen for Runoff Management

  • Program management

  • Actuarial forecasting

  • Reinsurance collections

  • Dispute resolution


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Overview

  • Runoff Market

  • Runoff Management

  • Evaluating the Book of Business

  • Risk Management

  • Exit Strategies


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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?


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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.)


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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?


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Overview

  • Runoff Market

  • Runoff Management

  • Evaluating the Book of Business

  • Risk Management

  • Exit Strategies


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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”


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Overview

  • Runoff Market

  • Runoff Management

  • Evaluating the Book of Business

  • Risk Management

  • Exit Strategies


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Wholesale strategies

    • Portfolio transfer by sale or reinsurance

    • Solvent Scheme of Arrangement (UK)

    • Insolvency and Liquidation


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • Retail strategies

    • Claim commutations

    • Structured settlements

    • Contractual clauses


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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


Standley h hoch fsa chief operating officer and chief financial officer cigna reinsurance

  • 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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