Liquidation of Kemper Insurance Co. would cease the insurer's runoff operations, leaving commercial policyholders fewer options for recovering money from their insurance contracts, experts say.

Many policyholders already have opted to settle with Kemper in an effort to recover funds before rigid liquidation rules apply, but some are waiting for liquidation in the belief that they might achieve a better outcome.

Considerations policyholders should weigh in deciding whether to wait for liquidation, experts say, include whether state guaranty funds will pay outstanding insurance claims and the prospect of recouping collateral paid to Kemper.

With recent financial statements showing the insurer's surplus is running low, a window to reach an agreement with the insurer may be closing after six years in runoff, experts say.

“Runoff gives (policyholders) more flexibility,” said Francine L. Semaya, an insurance insolvency expert at Nelson Levine de Luca & Horst L.L.C. in New York. “Understand that the rules will change” should Kemper go into liquidation, she added.

Even negotiations already in the works while Kemper is in runoff could come to a halt as liquidation statutes are applied, Ms Semaya said.

The most popular disengagement arrangements used by policyholders involve workers compensation policies under a “buy-up” arrangement or a trust transaction, said Len Churnetski, chief operating officer in New York for the national casualty practice of Chicago-based Aon Corp.

Under a buy-up transaction, Kemper pays a policyholder a percentage of loss reserves it has posted for its policyholder's claims and the insured takes control of its claims handling, sources said.

With the trust arrangement, money Kemper pays the insured is placed into an escrow account to be applied only for paying claims.

Both arrangements require the policyholder to agree to restructure their workers comp policy with an unlimited deductible, Mr. Churnetski said.

Restructuring an existing policy, rather than terminating it, is necessary because insurance statutes prohibit policyholders from buying back statutorily mandated workers comp policies, sources said.