Business Needs
After more than 70 years in business, a large workers compensation reinsurance pool decided to place its operation into run off. The pool needed a solutions provider able to deliver comprehensive reinsurance administration services, including performing case and IBNR reserve analysis, and ongoing processing of its long-tailed book of business. The pool also needed an ultimate winding down strategy.
Situation Analysis
The reinsurance pool had a very complex structure, with more than 80 open contract years, accompanying outstanding reserves, and over 30 pool members from different insurance groups participating at the time it went into run off, each of whom had an assumed share of pool reserves along with claim cessions into the pool. Moreover, the pool had purchased retrocession coverage for over 20 years of the pool’s business, and this reinsurance structure involved multiple layers and a large number of reinsurers (domestic and international) on the contracts.
Paragon's Actions
Paragon was selected as the run off pool administrator as we provided the pool governing members with a complete reinsurance administration solution. We analyzed the present status of the pool, its structure, and administrative costs. We prepared a detailed transition plan that would successfully close the office headquarters, transfer all files to our office, and also developed a process to provide ongoing reinsurance administration. We worked with the pool’s staff and benefit service providers during the transition to coordinate severance packages, as well as short-term consulting arrangements.
Paragon further identified and corrected reserving problems and rectified deficiencies in the pool’s database and systems, resulting in immediate process and operational efficiency gains. Our analysis of staff requirements for the run off administration resulted in a reduction of staff needs overall as we were able to provide a more efficient solution to the day-to-day administration. In addition, a commutation strategy was established and put into action for pool participant commutations, as well as retrocession commutations that had begun but were not completed.
Paragon’s responsibilities include claims processing, reserving for case and IBNR, administration of the pool’s retrocession program, and letter of credit management. We are also responsible for the pool’s overall administration, including tax preparation, pension benefits for former employees, audit support, and financial accounting.
Our key responsibilities and activities currently include:
- Fiduciary responsibility for entire pool claim reserves of approximately $500 million
- Regular actuarial review of reserves, along with stress testing for soundness
- Development and execution of pool member and retrocession commutation strategies, including actuarial assessment for commutation purposes
- Development and implementation of a new proprietary database allowing for more streamlined and effective claims handling
- Coordination and oversight of board and pool member meetings
Results
Paragon has effectively and efficiently overseen the entire reinsurance administration of the pool and facilitated an extensive commutation program with both the pool membership and its retrocessionaires. Specific benefits for this customer include:
- Identification of approximately $70 million in reserve redundancies
- Significant reduction in resources needed to handle the business
- Facilitation of commutations among pools resulting in the successful closure of more than 60 years of business, reserve reductions of over $300 million, and a more than 50% reduction in pool membership
- Facilitation of commutations with the pool’s reinsurers, resulting in successful commutation with a great number of reinsurers and well over $50 million in cash collected, with several more commutations pending finalization