Dangerous waters

Winter predicts that the Aviation & General run-off, which had claims reserves of some £50 million when Ruxley acquired it in October 2003, should be completed in spring 2005. He agrees that represents an aggressive timetable, but points out that it is a solvent scheme and a single entity.

Winter adds: 'It would have been difficult, if not impossible, to have gone to the policyholders of Aviation & General and say, "we would like to do a scheme with 50 per cent of the liabilities". But because all pool entities had transferred to Aviation & General, we were able to say we were dealing with the full liability.'

In addition, Ruxley has a team dedicated to the project and sought policyholder agreement early on. 'We know that we need the policyholders to vote, so the last thing we want to do is irritate them. It's very much a consensual agreement with them,' he says.

As the Ruxley approach shows, both schemes and Part VII transfers can be very useful tools when running off pools. Winter describes the Part VII transfer as crucial for Ruxley and preferable to pool members agreeing to enter into a scheme managed by a common manager. 'We are hands on managers and in general I would be uncomfortable with that sort of arrangement. We would rather manage it ourselves as our liability.'

Finney agrees that a scheme is an excellent way of bringing finality to a run-off, regardless of whether it's solvent or insolvent. Timing, though, is very important in his opinion. 'You can't promote a scheme at a whim. It must be at the right time during the course of a particular company or pool run-off.'

Clarity and communication

Few pools are as straightforward as A&G, but that doesn't mean to say they can't be run-off. KMS, for example, has made steady headway since 1992 with running off the much larger and more complex Weavers pool, which includes the insolvent KWELM companies among others.

Over the last 14 years, KMS has assisted in the gradual consolidation of the Weavers pool. Initially faced with a situation where there was no unified management, KMS chose the next best option of communication, co-ordination and co-operation, says Finney.

This at least allows pool members and different run-off managers to pursue a consistent approach to claims and, most important of all, outwards reinsurance recoveries. On outwards reinsurance it is imperative that there is a co-ordinated strategy and approach, says Finney, 'because an easy excuse for any reinsurer not to pay a pool is to hide behind the fact that it is fragmented.'

A fragmented pool makes commutations harder too, since several parties will need to give their approval, all with possibly different strategies and expectations of the commutation value.

'Those companies still writing live business might not want to commute, because they want the reinsurers to be there to protect them for new business as well,' argues Finney. 'It can cause problems, which is why it is very important to have a clear strategy as to what the stamp is doing.'

Record keeping

Another challenge facing fragmented pools is record keeping, a critical aspect of any run-off, since accurate records underpin reinsurance recoveries. Pool members need to decide whether records are maintained separately or ­ as Finney believes is preferable ­ centrally, and in what format.

KMS is custodian of the Weavers records and spent several years reconstructing them ­ getting hard copies of treaty agreements from outwards brokers for example ­ before trying to collect money. 'We wanted to make sure we had a solid and sound platform to work from,' says Finney.

Walker agrees that unified records and common systems are vital for reinsurance recoveries: 'Otherwise how do you present your claims to the reinsurance market if you're not using the same credit control department or the same database or the same pool of information?'

Pool of experience Although running off pools affected by insolvency remains a challenge, the experience built up by companies like KMS is now available to others who end up in a similar situation to Weavers, says Finney. 'We think we can add benefit and value from assisting another pool if it were to go into run-off.'

However, the recent decline in the popularity of pools means that the problem may well diminish over time, anyway. As Walker points out, 'the old style pooling arrangements, with multiple participants and complex fronting over a huge number of years, are just not happening any more.'