VATINS3405 - ypes of Insurance: Run off Services: General

The nature of these services can cause some difficulty in determining the correct treatment for VAT purposes. “Run-off” is a technical term applied to situations where an insurer has ceased to underwrite a particular type of insurance, a whole class ofinsurance or any new insurance supplies at all.

In each situation, the insurer will continue to have a liability to deal with claims or any other matters arising as a result of insurance policies already underwritten. Such policies (making up the class of insurance or the whole insurance business) are said to be in “run-off”.

There are a number of matters which the insurer has a responsibility for whilst in run-off, before the business (or particular policies) can be completely closed down. These include the following:

claims (which relate to the period for which policies were underwritten) continue to be received - sometimes for many years (although the insurer may have delegated its authorityto third parties to settle claims);

the insurer may need to obtain reinsurance cover to protect its exposure to such claims.The appropriate level of reinsurance cannot be ascertained until the likely level ofclaims is known or can be estimated;

premiums may be paid and received after the policy goes into run-off, thus necessitating administrative work in accounting for these sums; and

the level of risk against which the original policy was issued may change, which may require an additional or refunded premium. For example, a shipping company may take out a policy in respect of a fleet of a dozen ships. If the number of ships in the fleet is increased or reduces during the period of the policy, a corresponding increase or reduction to the size of the premium will be due. Such “additional” or “return” premiums must also be accounted for.