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To date, however, they have largely been used as a device to tidy up relatively straightforward books of discontinued business, although new ground has been broken with such initiatives as City General (where Ruxley delivered finality to an APH book in just one year) and Ruxley's Aviation & General (A&G) project which is using a combination of acquisition, business transfers and a solvent scheme to bring finality to an underwriting pool.

The key question now, therefore, is that of how solvent schemes need to continue to evolve if they are to provide a viable mechanism by which to tackle very large and complex books of discontinued business with hundreds of millions, rather than tens of millions of liabilities.

Perhaps the most obvious answer is that ever-greater skill will need to be brought to the process of early contact with policyholders. It goes without saying that the focus which policyholders are likely to bring to bear on unresolved liabilities worth tens of millions of dollars is likely to be very different from that which is applied to a process which is tidying up an outstanding sum of, say, $5mn.

Similarly, where large companies decide to propose schemes for some of their smaller subsidiaries, if the parent holds lines on the same risks or in other subsidiaries within the same group it may prove difficult to ring-fence policyholder negotiations to simply focus on the business within the books to be schemed. As such, policyholders may well ask for identical settlement terms in respect of all the lines within the group, even though some of those lines are not included in the schemed liabilities.

One way in which to circumvent such problems is, of course, to sell the discontinued book to a third party so, in effect, creating the necessary ring-fence by removing the run-off portfolio from its original corporate home.

Granted, the sale or transfer of discontinued business may have an immediate cost in terms of goodwill and investment write- offs - but with record profits still working their way through the system it can be argued that now is the time when risk carriers can afford to take such hits.

And, on the flip side, such disposals potentially have both an immediate positive impact in terms of release of funds previously tied up due to rating agency loadings for discontinued business and a reduction in ongoing expense ratios.

However, the issue of policyholder negotiations and the ability to ring- fence is only one of the issues of scale. Just as important, if not more so, is the question of speed.

Achieving finality in an appropriately timely manner is fundamental to the success of a solvent scheme as this brings the benefits of:
¡E delivering considerable savings in terms of legal and administrative expenses, so directly benefiting policyholders by releasing monies to fund payment in full of claims; and
¡E providing a prompt release of any surplus to vendors of legacy portfolios, so they can make better use of their capital.

While all this may seem extremely obvious, in practice, swift delivery of schemes requires high levels of specialist expertise - and the critical importance of that expertise is likely to grow in direct proportion to the size of the scheme being undertaken.

At its most basic, a solvent scheme of arrangement provides the legal and regulatory framework within which such projects take place. The real work is carried out in the engine rooms that power such initiatives.

A wide range of activities create the platform from which it becomes possible to deliver the core objective - that of an appropriate scheme structure underpinned by fair and transparent process which together deliver swift finality on the liabilities in question.

For a start, absolutely fundamental to the whole process is having not just the will, but also the ability and experience, to dissect existing and usually inadequate data so that policyholders can be tracked down to the specific individual responsible within each organisation.

In other words, one of the most important issues relating to schemes - that of the amount of work that has to go into ensuring policyholder addresses and details are correct - is one that does not even appear in scheme documents.

With A&G, for instance, Ruxley had to identify some 1,250 addresses and had to spend the time equivalent of one person working full time for nine months in tracking down missing policyholder details. Similarly with City General some 25 percent of policyholders had missing details that had to be identified.

And that is only the start. Widespread policyholder consultation and communication is another fundamental of delivering any scheme and happens through almost every form: advertising, letters, recorded delivery mail, phone, emails and face-to-face meetings. The A&G project, for example, involved some 10,500 plus mailings and over 200 face-to-face meetings.

Another key part of the process is that high levels of information need to be assessed by the engine room behind the scheme, so again requiring well developed processes for the transfer, analysis and management of claims information.

Again while this may sound obvious, in practice it is a far from straightforward process as sense needs to be made of huge quantities of, often paper, files where typical complications include policyholders being listed under as many as five different variations of their names.

Overall, Ruxley estimates the process of bringing finality to the A&G portfolio will have taken over 17,000 man-hours, and that was using highly experienced Ruxley staff who are very time efficient. As a result, it will be interesting to see how, with ever bigger run off portfolios seeking finality, the industry steps up to the challenge of making sure tomorrow's solvent schemes are appropriately comprehensive and yet still sufficiently swift to deliver their benefits.

When properly executed, solvent schemes offer a genuine solution to the legacy problems that have been a running sore for the sector, damaging the general perception of competence and viability of the industry as a whole.

What is more, given ever more stringent investor demand for sustainable and meaningful returns on capital, the cost of managing discontinued business, not to mention the capital cost in terms of rating agency loadings, are pressures that live businesses could well do without, especially when the market is softening.

However, senior management need to think very hard about how to execute initiatives to remove dead business from risk carrier balance sheets, especially if they are planning to tie up considerable internal resource to do so. That solvent schemes for such large books can be delivered, there is no doubt. But to do so effectively will require a level, depth and focus of expertise this is still relatively rare in the run-off world.

Solvent schemes have come a relatively long way in just under a decade. An evolution from the schemes that were originally developed in the early 1990s to cope with insolvent run offs, the first solvent schemes started to appear in the mid 1990s.

Since then some 32 different initiatives have come to the market (ie those where schemes have actually been issued) involving 44 solvent schemes.

During this time solvent schemes in themselves have also evolved significantly.

While the initial schemes were mainly relatively small "tidy up" exercises within much larger established companies, various of the subsequent ones have been more complex in terms of structure, content or scope.

Analysis of the various scheme structures to date shows that wide variations now exist on key factors such as time bars, discounting and so forth.

For instance, while seven of the schemes state that the time value of money will be taken into account when settling claims, some 29 explicitly state it will not. Similarly while seven state that the time period from the scheme becoming effective to the claims been timed barred is in excess of 90 days, nine provide for less than 90 days to bar date and 25 specify 90 days exactly.

Separately, 27 include a provision, so far unused, under which the scheme would revert to run off if for some reason liabilities significantly fail to develop as expected and some 10 of the 44 enable advisers to be remunerated on a contingent fees basis.

Such variations in structure largely reflect the fact that that one of the advantages of schemes is the ability to tailor the proposal to recognise specific issues that exist in respect of a particular book of business. For instance, the 29 schemes that state they will not discount for the time value of money are all dealing with short tail accounts.

By the same token, however, this flexibility means high levels of expertise are required when drafting such mechanisms in order to ensure the proposed terms are appropriate to the policyholder community affected.

The scope of solvent schemes is also developing. More recent initiatives, such as City General and National Insurance & Guarantee Corp, have dealt with the closure of APH books while others, such as Aviation & General, have used transfers of business to tackle the vexed issue of underwriting pools.

As such, the next stage in the evolution of solvent schemes may well be one of scale - ie dealing with discontinued books with gross liabilities of hundreds, rather than tens of millions.

Spring 2005

The scheming solution

Solvent schemes have fast become an accepted part of the insurance and reinsurance landscape. But more important, they are increasingly receiving board level attention as one of the few viable tools by which risk carriers can achieve finality for legacy problems.

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