In this article in Captive Review, Rob Collins, Captive Segment Leader, Jesse Sommer, Managing Director, and John West, Senior Vice President, describe ways that captive insurance companies can approach run-off liabilities when they are no longer writing new business but still need to manage prior obligations.
While a captive can be in a state of runoff or dormancy, clients can use a variety of financial strategies to mitigate their exposure to known or future liability without thinking the whole enterprise has to be closed in order to do so. Run-off liability within a captive can be transferred to a third party through 3 primary mechanisms: novations, loss portfolio transfers and acquisitions.
Novations provide full legal and financial transfer of the liability. Loss portfolio transfers provide financial finality through a reinsurance contract. Stock acquisitions allow for a full divestment not only from the liabilities, but also allow the captive owner potential revenue based on the value of the captive’s intrinsic value.
By acting as a central hub for potential bidders, brokers can leverage their position to encourage competitive pricing from legacy buyers. Brokers play another crucial role by assembling historical loss data and providing proprietary analysis and loss projections.