The run-off market is throwing off its chains and turning into an attractive business proposition Nigel Montgomery explains.
The run-off market is huge. Representing about £33bn in liabilities and tying up vast amounts of capital and personnel, it has led to demands by the insurance industry for new solutions.Insurers want finality, It is no longer enough to offer care and maintenance of a discontinued business. Old liabilities are a drain on resources and potentially damaging to an insurer's share price and credit rating.One solution was the reinsurance and risk transfer model. True finality was not given, but the business in run-off was protected by high levels of cover. This would ensure that the original carrier would never have to take a hit.But this kind of cover proved expensive, and the liabilities stayed with the original company and were vulnerable both to failure of the reinsurer and to claims breaking through the cover purchased.This led to two other solutions emerging: investors willing to buy discontinued business and the use of solvent schemes of arrangement.Today, one of the most prevalent transactions in the insurance market is the purchase of discontinued business, representing a logical coming together of those who want to get rid of their old books and those who see profit and capital return in running them off.In future, much of the run-off industry may well lie in the hands of professional run-off managers who actually have their own, or their investors', money at stake in the outcome.They will almost certainly also have an interest in closing the run-offs in no more than three to five years from acquisition, in order to satisfy the investment criteria of those who funded the purchase.What does this mean for the insurance industry?First of all, it is likely to increase the separation between those writing new business and those handling the discontinued market. This has implications for claims handling, as the new proprietor is likely to have a different take on reputational issues from the original underwriting company, as well as being more rigorous in claims handling. This is not to cast aspersions on those formerly carrying on run-off within companies, but it is very probable that the new breed of run-off professional will bring a stringency of approach and a determination to achieve progress that was not always present in teams that operated in-house.Secondly, the separation of discontinued business offers insurers a chance to operate more competitively in today's market, less encumbered by the drain of past exposures.It is the sign of a healthy commercial environment that specialists with intelligent solutions are paid to resolve discontinued business while the live market gets on with making a living from underwriting.David McGuigan, who chairs the Association of Run-Off Companies, the discontinued business sector's trade association, says: "The run-off industry has, by necessity, quickly developed into a professional and innovative market place that once again is making London a centre of excellence."It is obviously sad that this has grown out of the many company failures over recent years, but at least all of that valuable experience is not going to be wasted."The run-off industry can only grow and grow as the demands for superior returns by capital providers lead to more and more insurance company managers evaluating their less profitable books of business and determining that there is an alternative method of releasing or indeed raising capital.
How big is the run-off market?The Association of Run-Off Companies/KPMG run-off survey, which was published at the end of last year, indicated that the total liabilities of the UK run-off market amounted to £33bn, equivalent to approximately 28% of total liabilities of the UK non-life insurance market.This also equates to some £4.3bn of shareholders' funds tied up in UK non-life companies whose businesses are entirely in run-off - and that is outside the Lloyd's market.There are, it seems, more than 2,000 people employed in dedicated run-off service vehicles in the UK.
What services are provided in the run-off sector?Service companies dedicated to working in the run-off sector now offer services ranging from claims handling, through commutation to the purchase of business in run-off.Each of the 'big four' accountancy firms also provides significant services to the run-off industry, as do at least two other accountancy practices outside the four - Grant Thornton and Mazars.Add to this the range of consultants working in the market and actuarial practices and law firms and you have a sizeable industry dedicated to the London Market's discontinued business.