Left: Carolyn Fahey, Right: Steve McElhiney
17 August 2020Actuarial & underwriting

Captives can benefit from run-off in the COVID-19 world

The concept of insurance “run-off” or “legacy” business is not new. For decades insurers and reinsurers have effectively used run-off strategies and solutions to manage their discontinued business. They allow insurance companies to create new lines of business to respond to the ever-changing needs of their policyholders.

Today’s run-off is yesterday’s underwriting. It is any line of business that a carrier decides to discontinue writing for any reason at all. Run-off can be very old lines or lines that are only a year old. It can involve any line that is considered non-core, that premiums aren’t being collected on, that has been discontinued by an insurer or a captive for any reason at all.

“Captive owners should consider the run-off tools that are available to them to pare down the numbers of captives that are not in use.”

Insurance and reinsurance companies go into run-off for varying reasons: unprofitable lines, changes in strategy, a need to focus on new lines, shed business with poor returns, or capital deployment. Captives may find themselves in very similar situations and turn to run-off as a strategic portfolio management tool.

PwC’s “Global Insurance Run-off Survey 2019” estimates that the size of the global run-off market is $791 billion, with $364 billion of those liabilities in North America. That is a sizable part of the insurance industry, and is up from the 2018 level by 8 percent.

The current operating environment for most companies means that we will continue to see the number increase as companies choose to avail themselves of the creative and abundant tools provided by the run-off sector.

Finding the value

Some might ask why a legacy acquirer would want to buy a captive’s old liabilities? In a nutshell, they find value in these old lines. Companies that specialise in run-off know how to continue to manage the claims and resulting payments. The operations continue somewhat as would be expected from an insurance company: processing business, paying losses, recovering on reinsurance and consulting with actuaries to protect reserve requirements.

Of the more than 6,500 single parent captives in existence globally, it is estimated that as many as 20 percent of them may be currently dormant. While it is relatively easy to form a captive, it can be much more challenging to exit it. Captive owners should consider the run-off tools that are available to them to pare down the numbers of captives that are not in use. Each one incurs costs for the parent each year.

Captives have been a great source of coverage innovation over time to address emerging risks not currently covered effectively in the conventional insurance market. Thus, there has been some innovation with expansive captive insurance products involving terrorism, cyber risk, and other unique needs facing the captive owner.


With this as a backdrop, the single parent captive mechanism is well suited to address pandemic risks prospectively. Certain reinsurers are developing parametric-based products to add to a captive’s current risk transfer programme to provide annual protection from pandemics in accordance to varying trigger events and need. The purchases could be modified annually to respond to a changing risk appetite and the levels of exposure.

A key feature of parametric insurance products is how they can meet the near-term liquidity needs of the insured—an issue that has moved to the forefront with COVID-19. Assuming a large Fortune 1000 entity were to buy an annual parametric product from a global reinsurer which would trigger a payout based on a World Health Organisation (WHO)-declared pandemic event by disease, that captive would receive a payout quickly to fund economic losses.

One global reinsurer is pursuing a traditional indemnity product targeted to large insureds that would be triggered based upon WHO and US Centers for Disease Control and Prevention-declared global pandemics.

The second product is a parametric-based product triggered by the declaration of an event or global mortality numbers. This product could be more mass-produced and serve as a substitute for event cancellation insurance that will be going through a tremendous cycle of company exits and capacity constraints. This coverage by predefined events would pay quickly, thus overcoming the limitation of event cancellation insurance and fill an immediate liquidity need.

Both these products seem particularly well suited for captives and the status of their development and rollout will need monitoring.

Tailored risk

In time, we will see more tailored pure risk transfer insurance indemnity products developed based on the pandemic risk. The issue is that there is a general risk perception that pandemics such as the Spanish flu of 1917 and COVID-19 are one-in-100-year events and that insureds may not want to purchase such cover well into the future (outside of the first five years subsequent to the pandemic event).

Other pandemics such as the 2002 SARS outbreak tend to be one-in-25-year events and they do not normally constitute enough of a risk to insure.

Nonetheless, there is an increasing belief that frequency-intense pandemics may be increasing due to climate change and other factors. The “new normal” will require ongoing pandemic insurance protection, given that the traditional business interruption model largely excludes this peril globally.

“The ‘new normal’ will require ongoing pandemic insurance protection, given that the traditional business interruption model largely excludes this peril globally.”

In terms of the impact to finality and legacy transactions resulting from COVID-19, the impact is less clear. From a carrier and reinsurer perspective, the financial impact of COVID-19 losses has been substantial (per public earnings disclosures).

Various lines of business (both primary and reinsured) such as property, excess casualty and D&O, have had COVID-19 losses. It is possible that some of these counterparties could seek to transfer some of these liabilities to run-off counterparties if there is still uncertain development.

As referenced earlier, the definition of run-off can have different meanings based on situations. Exit strategies are flexible and creative and are adjusted to each company, to every situation.

At the Association of Insurance & Reinsurance Run-Off Companies (AIRROC), we often say: “Once you have seen one run-off transaction, you have seen one run-off transaction.”

AIRROC members are the players in the run-off market space and can provide a great deal of expertise to captives. AIRROC is the only US-based non-profit association focusing on the legacy sector of the insurance and reinsurance industries.

Steve McElhiney is senior vice president and director of reinsurance at Artex. He can be contacted at: steve_mcelhiney@artexrisk.com

Carolyn Fahey is executive director at AIRROC. She can be contacted at: cwfahey@gmail.com