The legacy market is expected to continue to thrive, but it faces challenges including the need to be more active in terms of how it is to attract the talent that will form the next generation, and the growing issues for MGAs.

The legacy market continues to grow and is not short of opportunities in both the short and medium term.

In the UK the major opportunities at present are in the Lloyd’s market, where its determination to rid itself of poorly performing business has left underwriters with some decisions to make about their willingness to continue or put into run-off books that have found their way into the performance directorate’s crosshairs.

This is likely to increase the number of deals we will see in the coming months and it is likely as the market continues to tighten its performance rules there will be further opportunities in the future.

Motor insurers have also recently been taking a much harder look at their portfolios with a view to closing certain books as conditions such as rising claims costs make profits more elusive.

In continental Europe it remains a seller’s market, with the level of competition increasing for the available legacy business. There has been an influx of new capital into the market, which has only exacerbated the pressure to get deals completed in the face of rising numbers of other interested parties.

For many, the US is viewed as the market where the most potential rests. The creation of the Insurance Business Transfer (IBT) scheme, akin to the UK’s part VII transfer process, in Oklahoma has also facilitated several legacy deals. It is expected to be rolled out to other states in the months to come and will make the ability to operate in the legacy market far easier.

North America potential

It is likely the US legacy market will become one of the world’s most important in terms of size as IBT and other tools are embedded. With changes to regulation governing the run-off sector in the US, North America is likely to see huge opportunities in the years to come.

The investment vehicles are being joined by the major re/insurance brokers, which are increasingly being asked to look at new ways to mitigate legacy risks and are now playing an ever more active role in the sector.

The market is buoyant and the short-term future looks extremely positive. The pandemic to date has had a negligible impact on the sector and the pace of growth has not been affected. Indeed, the move to a new way of working has seen companies looking to reduce their costs. The use of outsourced solutions is growing as insurers and brokers seek to reduce infrastructure costs including office space.

Talent challenge

However, the market is not immune to the challenges faced by the wider industry: that of talent.

There is a need for the run-off market to become more active in terms of how it is to attract the talent that will form the next generation. As an industry, re/insurance has always faced a fight to attract talented young people and within the industry there is now a collective agreement the legacy market needs to better highlight the rewards a career in the run-off sector can deliver. That includes the need to promote greater diversity, bringing with it different perspectives and a wider skill base.

While there has been a degree of success, the lack of available staff is becoming ever more acute and as such there is now a growing trend for legacy players to seek to poach staff from rivals via enhanced salaries and benefits packages.

There is also now an increasing discussion about the legacy issues for managing general agents (MGAs). As many mature or results dip the decision must be made as to whether they wish to carry on or change direction, which leaves a legacy issue to be managed.

They, in common with several investors, lack infrastructure. Many of the investors have the capital but not the staff to manage the investment once the deal has been completed and all too often the books acquired do not come with the staff needed to operate them. They, like the MGAs, are looking for options in terms of claims, cost control, actuarial expertise and policy administration.

Legacy business is not immune to the rising costs affecting the wider market. However, this comes against a backdrop of a sector that is buoyant and shows little sign of its momentum slowing.

Interestingly, while the opportunities exist today, the legacy sector has to plan for the future. This includes ensuring we have the necessary expertise in place to make the most of future conditions. To do so we need to have a clear understanding as to where the legacy sector is heading and what the legacy operators of the future will look like.

If you would like to continue the conversation on the legacy market, get in contact with Insurance Services Director, Steven Goate on steven.goate@davies-group.com.