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Runoffs change the relationship between buyer and insurer

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Risk managers face some particular—and highly challenging—hurdles when it comes to obtaining claims payments from insurers that are in runoff.

Because runoff entities are no longer ongoing companies concerned about keeping risk managers' business, they have no incentive to pay claims promptly, say experts. Furthermore, because runoff insurers are no longer writing new business, they are likely focused on preserving their limited remaining resources, which could be reflected in how they consider claims as well as the number and experience of claims examiners they retain.

There are steps, though, risk managers can take to minimize, if not eliminate these problems, and obtain a fair settlement of their claims (see stories, page 18).

Certainly, obtaining claims payments from runoff insurers presents risk managers with some unique challenges, say experts.

"The big problem for a risk manager in dealing with a runoff entity is that the goal posts have shifted," said Jonathan Terrell, president of Washington-based Kenesis Corporate & Information Consulting L.L.C.

Bruce C. Shulan, managing director at the Stamford, Conn.-based Princeton Partnership L.L.C., who has worked in managing runoff companies and represented them as an attorney, said the risk manager also faces a "potential deterioration in claims handling by the insurer as a result of cost-cutting, as the insurer in runoff tries to control its operating expenses."

When risk managers are dealing with an active insurer, the insurer will usually strive to hold on to their policyholders by providing certain levels of service, and claims handling is one of the "very few places" where insurers compete with one another, he said.

"All that goes out the window with a runoff company, which no longer views the policyholder as a customer. It merely views the policyholder as a potential liability to be minimized as efficiently as possible. The managers of runoffs have as a goal to close down the estate, usually as cheaply as possible, and are often incentivized to do so," said Mr. Terrell.

Carol A. Fox, senior director, risk management, with Cincinnati-based software company Convergys Corp., said the challenge in dealing with runoff insurers is you break "that ongoing relationship with that company because they're in runoff and potentially will become insolvent."

A risk manager becomes "a terminated client, if you will, for them, and so their service levels might have a tendency to slip because they don't have an ongoing relationship as you would with a normal, third-party administrator or insurance industry claims unit," said Ms. Fox.

Convergys had a high-deductible workers comp policy for its 30,000 employees with Long Grove, Ill.-based Kemper Insurance Cos., which is now in runoff.

The nature of commercial insurance claims also complicates relations between policyholders and runoff insurers, said Jonathan Bank, an attorney with Lord Bissell & Brook L.L.P. in Los Angeles.

Most claims are not black or white to begin with and are more likely to fall in gray areas, he said. Runoff insurers "are going to focus on those gray areas much more carefully" than they did when they were still active because of their limited reserves, said Mr. Bank.

Tough choice

In addition, runoff insurers are "not particularly shy to play the card of financial vulnerability in their negotiations with policyholders," said Mr. Terrell. "A risk manager is therefore often confronted with a choice of accepting a steeply discounted settlement or not, but taking the financial risk that the runoff company may no longer be viable in the future" if he chooses not to settle.

All the time though, runoff insurers are "trying to remain somewhat solvent," which leads to the layoff of claims adjusters with whom risk managers may have developed a relationship over time, said Ms. Fox of Convergys. "So the history of your claims philosophy walks out the door."

In addition, "the morale within that company starts falling because as adjusters are leaving, case loads for the remaining adjusters get even higher, and at the same time they tend to cut managers," with whom the policyholder has developed relationships as well, said Ms. Fox. As a result, "It's very difficult to get any attention paid to any difficulties you might be having."

Does this mean risk managers must resign themselves to getting less than full payment of claims? Not necessarily, observers say.

Stephen Eisenmann, a director at Princeton Partnership L.L.C., said, "Depending on the circumstances, there could be a high chance they could take a haircut. But they may not, either. Some companies go into runoff and wind up paying all their liabilities at 100 cents" on the dollar.