Many international insurance and reinsurance companies rank the effective collection of its reinsurance assets frighteningly low down on their priority list. Based upon my personal experiences within the UK and US marketplaces, I continue to be staggered just how often reinsurance receivables are not calculated and pursued - all too frequently neglected, unnecessarily allowing compromise arguments and time bar defences. The most common assets to slip down the priority list or even fall off senior management's radar screen are aged reinsurance debts. What are the options - using external resource - available to companies wishing proactively to address the situation? Just a few of the many scenarios...

1. Broker replacement

London brokers - pivotal within the reinsurance collection process - are widely-recognised as adopting a tiered level of service according to the status of their client. In other words, things may be fine if you are a blue chip client still placing new business with the broker who manages your aged debts. If you are in run-off or liquidation, however, the economics of survival mean that the brokers will allocate you minimal resource and provide a poor, ineffective service. Remedies inhouse require the setting up of principal-to-principal ledgers. Outsourced solutions normally involve rolling up many historical broker relationships into one paid-for replacement broker.

2. Portfolio closure

Often the optimum solution for the stakeholders of any business is closure of the book of business. This can be a whole company or a carved out portfolio of business. It can be sold to another company, the subject of a solvent scheme or even a Part VII transfer. These finality solutions are not always available, may take some time and/or are a target objective for some point in the future. Whichever, there should always be a strong management drive towards improved reinsurance asset management in the interim.

3. Reinsurance asset sale/incentive arrangements

Strongly identified with its popularity amongst creditors in insolvent schemes of arrangement and liquidations, the sale of reinsurance assets (or contingent reward structures) are a clear option for solvent companies and estates. Problems arise determining a fair value and hence price for the assets. Companies are often fearful of agreeing a deal which might, even if it has improved their balance sheet; generate a windfall profit to the service provider if he is particularly successful. The company may be left with the feeling (often irrational) that they didn't negotiate the best deal at the outset.

4. Recourse acquisition

Some companies are now adapting their services to remedy the historic objections to reinsurance asset sale. One company (Reinsurance Finance Management Limited - RMFL) is offering to acquire written down receivables on a recourse basis. The vendor can immediately replace non-performing assets with cash, shares in any amounts collected in excess of the price originally paid, and will have any uncollectible receivables returned by re-assignment. RFLM incurs the financial costs of providing the "collateral" and only begins earning if amounts collected exceed the book value of the receivables received.

5. War stories

There is no right or wrong answer. Perception can be more important than reality.

This Special item appeared in issue 108 of JTW News - September 2006

Author: Julian Ward - JTW