What is an insurance company “in run-off”?
An insurance company is considered to be in run-off when it ceases selling new insurance policies. The essential business of an insurance company is risk pooling. Insurance companies evaluate risks, price and sell insurance policies that assume risks, and pay claims to policyholders that suffer losses covered by the insurance. Insurance companies generate revenue to pay claims principally from two sources: premiums and investment income. Insurance companies also typically buy insurance to insure the risks they have assumed – called reinsurance – which acts as a secondary risk pool. When an insurance company enters run-off, it loses the benefit of ongoing premiums as a source of income to pay claims. The only sources of income become investment earnings, sales of assets, and potential recovery from reinsurance.
What does run-off mean for the policyholder?
Being in run-off does not absolve an insurance company of its duties under policies it has already sold. The contractual relationships between the insurance company and its policyholders do not end. The insurance company still owes to its policyholders the full complement of duties that the policyholder purchased with its premiums. Most important, the insurance company must pay claims as they come due under the policies.
While entering run-off cannot rewrite the terms of existing insurance policies, in practice, many policyholders encounter unexpected challenges from an insurance company in run-off. Because the insurance company is no longer writing new business, its claims-handling protocol may not prioritize customer service as an active company, seeking to maintain its customers, might. In many circumstances, the insurance company may contract with a professional run-off administrator to handle claims. While, again, a run-off insurance company and its agents are subject to the same duties to policyholders as existed before the run-off, from the policyholder’s perspective, the quality of claims handling is often diminished.
What happens if the run-off is mismanaged?
An insurance company in run-off is fundamentally less stable than an active insurance company because in run-off, an insurance company does not receive continuing income from premiums. In some cases, run-off insurance companies appear to be actively mismanaged – paying administrative expenses and executive compensation that are outsized for a company not engaged in current underwriting.
Sometimes, the assets of run-off insurance companies dwindle to the point of insolvency. Insurance companies are not subject to federal bankruptcy law. Instead, state laws dictate what happens to the assets and obligations of an insolvent insurance company. The law of the state where the insurance company is domiciled will typically appoint the state’s insurance commissioner as rehabilitator or liquidator. We have written elsewhere about the recent liquidation of Bedivere Insurance Company, now ongoing in Pennsylvania. With respect to Bedivere specifically, Pennsylvania law establishes a system under which policyholders may file a proof of claim. The deadline to file a claim in the Bedivere liquidation is December 31, 2021. Other avenues of recovery from insolvent insurers are also possible, for example, via a statutory guaranty association or directly from reinsurance. Thus, even in the worst case scenario, when a run-off insurance company enters insolvency, recovery remains possible.