Rethinking the legacy of run-off

Rethinking the legacy of run-off 768 256 Davies Group

//This article was first published by Insurance Day

The run-off and legacy market is growing and the potential for further significant growth from the US in particular is significant.

Looking to the London market the Lloyd’s decile 10 project has prompted increased activity in the reinsurance to close (RITC) market and while the Managing Agents have been revising their business plans the spate of merger and acquisitions has also created a demand for legacy and run-off solutions.

For many the key drivers are releasing capital, reducing costs and a renewed focus on their core business at a time when there is a general withdrawal from business classes that are deemed to be peripheral.

Brexit has also played a part with many in the UK and European markets looking at the potential exit scenarios and their impact. It has certainly provided a focus on how they need to restructure to operate in a new post-Brexit environment both in the UK and the EU. It is not an easy challenge and there remains some real indecision as underwriters and brokers alike await an indication on when and how the Brexit process will be delivered.

In Europe Solvency II and IFRS17 have enhanced the need for transparency and regulation continues to direct the market as it does with the live market.

What it adds up to is not only a growth in the legacy and run-off markets but a real complexity for many when they consider how they structure their future strategies.

US developments

Outside the UK and Europe there has been significant movement in the US. In recent months regulators in states such as Rhode Island and Oklahoma have been working to create new structures for the run-off and legacy market.

The US legacy sector is very much an untapped market and is of a size that is comparable to the rest of the world combined. Without doubt when the mechanisms for run-off in the US are established and proven it will prove to be an attractive market for many.

Taking a step back we have to remember that the legacy and run-off sector has fundamentally changed from its position and perception two decades ago.

Then run-off was a dirty word with implications of failure and negativity. Now you look at the run-off market and it is not only highly sophisticated but also an accepted part of the re/insurance business cycle.

It is now more creative, orderly and much more professional than in the past and with that it is becoming a more attractive place for talented individuals to work and create a successful career.

We see very respected and highly experienced practitioners who are creating successful businesses and there is an influx of capital keen to become involved in the legacy market.

Indeed, there is a view that clients have a better claims experience from business that is in run-off than they would receive in the live market.

Changing face of run-off

Run-off now comes in many forms as the sector reflects the changes in the re/insurance market and the way in which technology and new risks are changing the industry. No longer is legacy and run-off simply a case of long-tail liabilities such as asbestosis. Increasingly we see books that can be only two years old that are business that is no longer written or clients that underwriters and brokers no longer have.

As such we are seeing a growth of professional services, which are now supporting the industry’s efforts to deal with legacy issues. We are seeing a rising demand for such skills as brokers and underwriters seriously consider their operational models. These skills are not confined to the pure run-off sector.

There is a growing trend for brokers and underwriters to look to access expertise to examine their books to identify where capital can be freed and better utilised. Once the decision is made, they also see the benefit of not just seeking to offload the business; rather, they will look to in effect clean the book they are seeking to run off in an effort to make the book more attractive and with it more capital-efficient and desirable.

Brokers who are undergoing a process of M&A are looking for help to identify how best to deal with their legacy business. Indeed, if the legacy issues are dealt with before the M&A is concluded it can make the process a far more attractive one for both sides.

As the market grows there is now a move to take more action pre-sale to ensure that the benefits can be maximised and potential future problems can be reduced.

As legacy continues to be seen as a way of freeing capital, demand for support and skilled advice will only grow with it.

Leave a Reply

Your email address will not be published.