Captive Insurance Runoff Trends

Over the last 30 years, insurance company runoff has grown from a cottage industry focused on a handful of "troubled transactions" related to generally impaired insurance company platforms, into a "good bank, bad bank" rescue strategy for various global insurance groups, and, finally, into what it is today: a means of allocating dedicated capital through an alternative permanent risk funding mechanism for entities seeking an exit from a particular segment of business. This has created a more secure global insurance system and has reallocated capital and insurance capacity efficiently. Runoff should be viewed through this up-to-date prism and not the more dated connotations of the past.

A Step in the Natural Process

Runoff and finality transactions are essentially not a "bad thing"—companies evolve and are recast every day in all industries, and capital continues the inexorable flow towards its highest and best use, with pockets of risk finding their most efficient capital supporters. Runoff is merely a step in the natural process of an efficient market. Runoff transactions serve to enhance the capital efficiency of the insurance industry and represent well-priced and profitable business that simply no longer meets the initial strategic needs of its originators.

Looking Back

2018 saw a great deal of activity around insurance company and reinsurer runoff transactions.

During 2018, Oklahoma enacted the Insurance Business Transfer Act, which allows any insurer to transfer and novate books of business to an Oklahoma-domiciled insurer without the affirmative consent of policyholders (an "Insurance Business Transfer") pursuant to approval of both the Oklahoma Insurance Commissioner and the District Court of Oklahoma County. Oklahoma is the latest state to pass a runoff law in response to increasing demand for these types of transactions.

The Oklahoma Insurance Business Transfer Act will be transformative for the Midwest region and serve as the catalyst for a variety of legacy transactions to now be conducted in Oklahoma across a variety of lines of insurance businesses.

Insurers and reinsurers have witnessed a number of strategic changes during 2018 involving various books of business entering runoff, including some of the embedded underwriting business of Aspen Re, Maiden Re, AmTrust Syndicate, and various other global insurance carriers. These transactions represent the aforementioned point of capital reallocations and strategic realignments to better position the groups for better prospective success.

Looking Ahead

The future augurs well for continued growth in runoff as respects captive insurance companies, corporations' self-insured liabilities, and certain insurance company and reinsurance company liabilities on a global scale. Looking ahead, there is potential for some new mass tort emerging risks in the industry—beyond the traditional issues of environmental and asbestos liabilities—that may serve as an impetus for "lasering" out specific legacy liability reinsurance transactions.

For example, recent adverse litigation around Talc, food additives, "fracking," and other issues may cause some companies with retained liabilities residing in captive insurers to move these liabilities to counterparties in order to remove the potential long-term volatility affecting their captive's capital base (and ultimately, the owner's capital).

Captives and Runoff

Of the 7,000 captives that exist globally, approximately 2,000 are estimated to be dormant—this is the potential universe of such finality transactions. Often, the captive owner is unaware of the variety of tools that may exist within finality solutions, such as loss portfolio transfers or assumption agreements.

There is a need for greater awareness around the specialized runoff and finality insurance and reinsurance market niche, and EWI Re has worked with Captive.com to disseminate information about some of the possibilities surrounding finality transactions

Generally, the insurance broker community tends not to optimize its ability to cultivate new runoff transactions for a variety of reasons. Sometimes, an incumbent broker may have sourced the original underlying transactions and may be conflicted. Others may lack the deep knowledge of runoff and related tools on a widely distributed basis, given its unusual financial nature, and, thus, at a tactical level, account brokers may not have a full awareness of these tools.

As respects captive insurers, the options may be even more opaque, and the process tends to proceed along as a "fee annuity" to the service providers maintaining a dormant captive into perpetuity. The possibilities around runoff for captives appear to be in the "early first inning" from EWI Re's perspective. When discussing runoff options with captive owners, it is often the first time they have been presented with such options, and we believe that, with time, increased penetration into captive runoff transactions will gain momentum.