Insurance & Reinsurance Runoff CAS Annual Meeting Chicago, Illinois November 14, 2007 Dave Ostrowski, FCAS, MAAA RiverStone Resources

Runoff Solvent vs insolvent Causes –Hurricanes / earthquakes –Asbestos / pollution –Sustained unprofitability Structure –One company going into runoff –Part of an ongoing (re)insurer –Purchaser/manager of several runoffs

Death Throes Underwriting changes –Rate level –Expansion –Coverage Retention changes Cutting expenses

Relationships Brokers Reinsurers Underwriters TPAs Auditors Regulators

Systems IT problems correlated with runoff status? –Causal relationship –Same brain trust –Focus on cutting expenses Appetite for new IT investments Transitions –No need to worry about closed claims –… or actuarial coding –Amplified for managers of several runoffs

Staffing Employee retention Institutional knowledge –Excellence outside of Excel –The Box Theory Troop morale The best and the brightest.

Critical Mass Especially in a claims shop Senior management Litigation management Specialists –State Workers Comp laws –Second Injury Funds –Excess claims Administration

Outsourcing Changes in case reserve adequacy –Different philosophy –Re-review of each claim Changes in payment patterns –Different philosophy –Incentive to settle –Workload Communication with handlers Systems changes?

Breaking the Law! All those ’s add up Exposure-based methods –Asbestos / pollution –Low frequency / high severity –$100 claims Combining heterogeneous classes

RiverStones Asbestos Pollution Construction defect Surety bonds Excess Workers Comp Pools Extra-contractual obligations

What Now? Poor service from brokers Loss of key personnel and institutional knowledge Systems issues Outsourced claim handling Law of large numbers no longer enforceable The “other stuff” emerging

Commutations! Your reinsurers teetering on insolvency Your European reinsurers going into solvent schemes Reduce administrative burden “Simplify” Profit

How to Measure Success Reinsurance collections Claim handling –Closing ratio –Average loss payment –ALAE-to-loss ratio Overall –Ability to make dividends –Reduce reserves

Pace Accelerate dividends –Premium to entice claim settlement –Premium for uncertainty –Either premium is probably net! Sit on the cash –Do claims get better with time? –Greater expense pressure How do shareholders value the company?

Purchasing Runoffs – Pricing Risk-adjusted reserves –Core business –The other stuff Operating expenses Quantify the value of your management team –Can you? –Should you?

Seller’s Motivation Reserves are fine! Finality Many years before long-tailed liabilities fully emerge

Other Considerations Exit strategy –Ride it out –Fold it into an ongoing insurer –Fold it into another runoff –Start it back up! Can you manufacture a decent return?

Career Opportunities Working for a small and shrinking company Claims modeling Pricing commutations Financial modeling for exit strategies