London must get ready for new style run-off portfolios, says ARC chair

Legacy managers must expect to adapt to the demands of new-style run-off portfolios if the sector is to be genuinely perennial rather than merely a one-off, finite response to the London Market’s issues of the 1980s and early 1990s, ARC chairman, Philip Grant warned today.

Speaking at an Insurance Institute of London lecture entitled "The London Run-Off Market - Has it reached its peak?", Mr Grant said: “Whilst I am not suggesting we will run out of traditional APH/LMX-dominated run-offs in the near future, there are now the first signs of a slowing down, as illustrated by the latest KPMG/ARC Survey of the UK Non-Life Run-Off Sector*.”

Highlighting the developing markets in Continental Europe and the US as well as the growing focus on issues such as efficient use of committed capital, Mr Grant said while new legacy portfolios will always be created as business strategies change and business cycles continue to turn, those portfolios will not necessarily resemble the run-offs of old.

“Future legacy managers will have to learn a new style of claims management that combines the best practices learnt in the run-off arena with an approach to settlement that is sensitive to reputational concerns and thus resembles more the approach adopted in ongoing operations.”

Mr Grant stressed London has numerous factors in its favour for those ready to change including: a helpful regulatory environment; a geographically and intellectually concentrated pool of expertise; a history of doing business on a global scale; and, critically, a sophisticated capital market.

“As legacy management has evolved, it has become increasingly evident that to offer a complete service to those wishing to break free from their past underwriting, we must offer more than mere management of liabilities: we must also provide a mechanism that will transfer or extinguish those liabilities completely.

“In a financial world that is continually inventing new ways to package and structure risk, insurance legacy managers will be able to ally themselves with imaginative capital markets’ practitioners to construct mechanisms that offer capital release and balance sheet management to insurance groups whilst ensuring that the underlying risks, in contrast to the recent sub-prime mortgage debacle, are properly understood, evaluated and managed,” he said.