"Run-off portfolio refers to insurance policies or reinsurance contracts terminated but for which the Insurer or the Reinsurer remains liable for until the final settlement and payment of the claims. It may be a business or a territory for which the Insurer or Reinsurer is no longer operating but where contracts or liabilities are still in force."
Runoff agreement is like commutation, but working in the opposite direction. Primary re-assumes the residual liability in commutation, Reinsurer does in runoff agreement.
I think a run-off agreement is both retroactive and prospective, right? Otherwise a company cannot fully exit a business.
If yes, then can i assume novation which is similar to run-off agreement can also be both retroactive and prospective?
My next question will be the reinsurance accounting for novation stated in wiki:
a novation may be eligible for reinsurance accounting treatment but not in these situtations:
- retroactive reinsurance
So a novation with only both retroactive and prospective nature is eligible for RI accounting? (what about run-off agreement?)
Yes, a novation with both retroactive and prospective elements can qualify for reinsurance accounting, including under run-off agreements. This is contingent on meeting specific conditions such as the complete extinguishment of the original obligations and ensuring there's no further exposure to loss on the novated business. Novations, if meeting certain criteria, can be treated as prospective reinsurance agreements.
commutation: ending relationship btwn RI and ceding company, ceding company re-assumes the liability previously ceded under the reinsurance contract, receive a payment from RI as negative paid loss and eliminate RI recoverable; RI make the payment and record as paid loss and eliminate loss reserve.
run-off: same thing as above, just that under this concept, the RI who pays is called "transferring entity" and the original insurer who receives the payment is called "Reinsurer"
novation: the original insurer had a traditional reinsurance contract with a RI1 (either prospective or retroactive) , then it has a novation with RI2, who completely takes its liability so that the original insurer is completely extinguished from any liability, the RI2 now becomes the new "primary insurer". The original insurer can treat the novation as a
new reinsurance contract that's still either prospective/retroactive, just that completely write off the liability
I'm still confused about above, pls clarify and correct me if I'm wrong
Let's clarify the terms based on your description and the information from the source material:
Commutation:
Your understanding is largely correct. In a commutation, the reinsurance relationship ends, and the ceding company takes back the liability previously ceded under the reinsurance agreement.
The ceding company receives a final payment from the reinsurer, which is recorded as a negative paid loss, eliminating any recoverable from the reinsurer. The reinsurer, in turn, makes the payment and eliminates the related loss reserves from its books.
Purpose: It’s essentially a full and final settlement that terminates the reinsurance arrangement.
Run-off:
The term run-off doesn't exactly refer to a relationship where the roles of ceding company and reinsurer are swapped as your description suggests. Instead, in a run-off scenario, the reinsurer remains liable for the risks they have already assumed, but no new risks are ceded to the reinsurer.
Key difference from commutation: In run-off, the reinsurer continues to be liable for any future claims arising from past policies. However, no new risks are transferred, and no final settlement payment is made immediately.
The reinsurer remains responsible for handling the remaining liabilities until all claims are settled, which is different from commutation where liabilities are fully transferred back to the ceding company.
Novation:
You described novation well. Novation involves transferring all liabilities from the original reinsurer (RI1) to a new reinsurer (RI2). The original reinsurer is completely released from all obligations, and RI2 assumes the full liability, essentially becoming the new primary insurer under the reinsurance contract.
Impact on accounting: The original insurer can treat this as a new reinsurance contract, either prospective or retroactive, depending on the timing of the events covered. The key point is that all liability is transferred and the original reinsurer (RI1) has no further obligations.
In practice, novation requires the consent of all three parties: the ceding company, RI1, and RI2.
Summary of Corrections:
Commutation: Focuses on a final settlement and end of the relationship, with the ceding company reassuming liability.
Run-off: The reinsurer continues to manage the existing liabilities until all claims are settled without new risks being ceded.
Novation: Liability is fully transferred from one reinsurer to another, and the original reinsurer is no longer involved.
I hope this clears up the differences! Let me know if you need more details.
Comments
Here's a definition of runoff:
"Run-off portfolio refers to insurance policies or reinsurance contracts terminated but for which the Insurer or the Reinsurer remains liable for until the final settlement and payment of the claims. It may be a business or a territory for which the Insurer or Reinsurer is no longer operating but where contracts or liabilities are still in force."
https://blog.ccr-re.com/en/what-is-run-off
Runoff agreement is like commutation, but working in the opposite direction. Primary re-assumes the residual liability in commutation, Reinsurer does in runoff agreement.
I think a run-off agreement is both retroactive and prospective, right? Otherwise a company cannot fully exit a business.
If yes, then can i assume novation which is similar to run-off agreement can also be both retroactive and prospective?
A run-off agreement can be retroactive, prospective, or both, depending on the parties' intention.
A novation usually replaces a party to the original contract. Retro/pros status depends on the underlying contract.
My next question will be the reinsurance accounting for novation stated in wiki:
a novation may be eligible for reinsurance accounting treatment but not in these situtations:
- retroactive reinsurance
So a novation with only both retroactive and prospective nature is eligible for RI accounting? (what about run-off agreement?)
Yes, a novation with both retroactive and prospective elements can qualify for reinsurance accounting, including under run-off agreements. This is contingent on meeting specific conditions such as the complete extinguishment of the original obligations and ensuring there's no further exposure to loss on the novated business. Novations, if meeting certain criteria, can be treated as prospective reinsurance agreements.
not sure if I understand these 3 terms right.
new reinsurance contract that's still either prospective/retroactive, just that completely write off the liability
I'm still confused about above, pls clarify and correct me if I'm wrong
Let's clarify the terms based on your description and the information from the source material:
Commutation:
Run-off:
Novation:
Summary of Corrections:
I hope this clears up the differences! Let me know if you need more details.