Insurance & Reinsurance Runoff CAS Annual Meeting Chicago, Illinois November 14, 2007

1. Insurance & Reinsurance RunoffCAS Annual MeetingChicago, IllinoisNovember 14, 2007 Dave Ostrowski, FCAS, MAAARiverStone Resources

2. 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

3. Death Throes • Underwriting changes • Rate level • Expansion • Coverage • Retention changes • Cutting expenses

4. Relationships • Brokers • Reinsurers • Underwriters • TPAs • Auditors • Regulators

5. 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

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

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

8. 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?

9. Breaking the Law! • All those 1.0005’s add up • Exposure-based methods • Asbestos / pollution • Low frequency / high severity • $100 claims • Combining heterogeneous classes

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

11. 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

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

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

14. 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?

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

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

17. 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?

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