Investment in run-off businesses is set to boom but reputations are at risk, says Elliot Lane

' Run-off is going to be big business this year, according to Barclays Bank head of insurance Des Potter.

The bank is making a concerted effort this year to try to beat Royal Bank of Scotland as the largest capital provider in the insurance market.

Speaking at the Association of Run-Off Companies (ARC) annual lunch last week, Potter said that Barclays was in talks with a management team which wanted to raise £300m for a run-off venture in the Lloyd's market.

"We believe there will be many opportunities this year in the non-life area as it follows the regular underwriting cycle," he added.

In other words, more insurers this year are going to find it difficult to juggle their claims management against dwindling reserves. The Lloyd's and London markets will see a number of syndicates hanging the "closed to new business" signs on the underwriter's box.

But when one door closes, another usually opens. Private equity firms, such as Gresham and 3i, are already sniffing around the insurance market for short-term investment opportunities. The run-off business also gives jobs to lawyers, actuaries, consultants and accountants.

Barclays looks for a number of factors to invest - it prefers UK books of business; the business should be solvent and stay solvent (not always easy); the management team should have an exit strategy (or Barclays will give them one); the team should also take an equity stake in the business to keep the mind-focused on the business; and it should have good relations with the regulator.

This last point is the trickiest area because the majority of Lloyd's and London market run-offs in recent years such as Cotesworth, Goshawk, Trenwick and Euclidian, have all had their hand forced by the regulator or have upset the regulator through spectacular operational failures. Underwriting the cargo of an ill-fated space shuttle in the case of Goshawk was a case in point.

Run-off will make the banks and the ancillary specialised firms needed to keep the company ticking over, a lot of money in the coming five to ten years. The Catch-22 scenario is that one of the reasons why run-off is so popular is also its Achilles heel. Reputation.

Companies want rid of long-tail or awkward short-tail claims to free up the profit and loss account so the company looks attractive to investors and shareholders.

But then run-off business is about making sure disgruntled claimants are kept happy and claims are paid. If the claimants don't get paid, the reputational risks increase.

This is the reason Lloyd's has put the idea of schemes of arrangement on hold in the market because it can't take another reputational hit on the much maligned Central Fund.

Run-off is big business but a huge minefield too. IT