Insurance company "in run off"

[Kermit power]

Can anyone tell me exactly what the above means in simple terms?

[Beardy10]

Basically it's not taking on any new business but will try to honour any claims on exsisting policies.

There is basically a regulatory safety mechanism with insurance companies when the net balance of their assets and liabilities means that they may not be able to honour all exsisting policies based on expected losses from their exsisting book of business. At that point the insurance company stops writing new policies and uses it's assets to pay off any claim that may arise from policies that are still current. It's typically caused by the insurance company taking on too much risky business or the assets it has bought to hedge those policies having performed badly.

The good news is that as a policy holder you are (I think) senior to all other creditors should the insurance company go bust. I should add that they generally only go into run off when the regulator intervenes to protect policy holders so as a policy holder you should be okay.

[Kermit power]

Thanks!

I was just running through a list of companies to focus on as potential customers. It's quite shocking how many go into run off!

[grumbas]

Thats interesting, I've not come across many at all in run-off? The only 2 I can think of recently are HSBC who shut their motor insurance division voluntairly after being unable to find a buyer, and Quinn the other week for other well publicised reasons.

What happens far more frequently is that insurers will put a poor performing product into run-off and replace it with another product in the same market with a completely new set of rates etc. Or sometimes they'll choose to exit a poor performing market altogether but retain their other product areas. Is this perhaps what you're referring to?

[Kermit power]

grumbas said:

Thats interesting, I've not come across many at all in run-off? The only 2 I can think of recently are HSBC who shut their motor insurance division voluntairly after being unable to find a buyer, and Quinn the other week for other well publicised reasons.

What happens far more frequently is that insurers will put a poor performing product into run-off and replace it with another product in the same market with a completely new set of rates etc. Or sometimes they'll choose to exit a poor performing market altogether but retain their other product areas. Is this perhaps what you're referring to?

I've been through a good couple of hundred companies in the last few days. Maybe it just seems like a lot!

[princeperch]

I didn't think it was a case that they would try and honour any claims - I thought they have to have run off cover if they are shutting down, same as a firm of solicitors/accountants etc. They have to have run off cover for a number of years until limitation is no longer an issue on their last client's case...

[Mattt]

I was thinking about this earlier - how do Insurance companies actually declare profit, as the true cost of the policy might not be known till much later?

Or because they price on risk + profit = premium, do they just take the profit element (and any miscalculated risks will detract from future years profits)?

[Beardy10]

princeperch said:

I didn't think it was a case that they would try and honour any claims - I thought they have to have run off cover if they are shutting down, same as a firm of solicitors/accountants etc. They have to have run off cover for a number of years until limitation is no longer an issue on their last client's case...

It's basically caused by the regulatory circuit breaker...i.e. they step in before things get so bad that the company can't honour exsisting policies. An insurance company has to post regulatory capital (i.e. cash) which is calculated on it's book of business, that's it's minimum capital requirement. It has to have capital in excess of this (retained profits etc) and if this amount becomes too small the regulator steps in....i.e. so there is a buffer.

If you think about it think about the absolute mess if an insurance company did go bust....absolute nightmare. They are EXTREMELY complicated businesses

[Beardy10]

Mattt said:

I was thinking about this earlier - how do Insurance companies actually declare profit, as the true cost of the policy might not be known till much later?

Or because they price on risk + profit = premium, do they just take the profit element (and any miscalculated risks will detract from future years profits)?

Simple way of looking at it is the Combined Ratio

http://www.investopedia.com/terms/c/combinedratio....

It's a lot more complicated than that though because you obviously have some policies (i.e. Life Insurance) which might be thirty or forty years til maturity and the value of those policies is based on an actuarial model which in turn is as good as the assumptions they make. Then to hedge those long term liabilities the insurance company will go and buy assets of a similar maturity to hedge those exposures.....now obviously the prices of those assets fluctuate.

As you say the true cost of a policy may not be known til much later.

For example there is a market which trades surrendered life insurance policies...to put it crudely people are punting on when someone dies. Lovely.

[sidicks]

Kermit power said:

Can anyone tell me exactly what the above means in simple terms?

Are you talking about a General Insurance company (car insurance etc) or a Life Assurance company (term assurance, endowments etc)??

They are VERY different and very different reasons could apply.

However, as has been explained in the posts above, because these are regulated entities and have to hold significant additional capital above the minimum amount deemed necessary to match a prudent assessment of their liabilities, they are unlikely not to be able to payout on policies already in-force.


Sidicks