Box Under The Desk Scenario No. 2 Old Subsidiaries - 2009-11-16
A client sold a subsidiary 20 years ago and wrote a 100% reinsurance program to retain all of the old risks. In addition, the client took over the claim files and paid the claims directly. The sold subsidiary continued to process any reinsurance recoverables. After ten years a substantial balance developed.
The client spent considerable time and effort chasing the balances and collected a large portion leaving the remaining with its legal department. The files were put in boxes and stored in the legal file room for ten more years.
Gray Wolf received a call seeking help resolving the open LOCs issued twenty years earlier to secure the contracts. We took the boxes out of storage, reconciled all the data against original claims and open balances (none of which were recorded as open on the client’s books). We then contacted all the reinsurers to commute the contracts and close the books.
The result was collections of $100,000+, removal of an old LOC to the benefit of all parties (an LOC which presumably would continue indefinitely given the evergreen clause), and the termination of a set of 30 year old contracts.
Lessons:
1. If you have a book of discontinued business someone should be responsible for all aspects of the run off especially the reinsurance recovery part. Closure means deciding when the reinsurance contracts have run their course and actively commuting them.
2. Changes in claims handling often cause serious disruption, if not a complete breakdown, in the reinsurance recovery process (very important if you purchase a reinsurance to close or loss reserve capping contract that involves transferring claims handling to the reinsurer writing the cover).
3. It is cheaper in the long run to set up either an internal recovery group or a focused third party (like Gray Wolf) than depend on uninterested third parties.
4. Open LOCs should be managed appropriately and if no longer needed they should be closed. We believe this is part of the doctrine of Good Faith that exists between the parties to a reinsurance contract and, frankly, reflects simply common professional courtesy.
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