18 June 2010
Insurance Day
Insurance Day
(June 2010) Time to rethink APH reserving?(October 2009) Scottish Lion shock decision will be appealed, vows PwC(September 2009) Legacy industry debates ramifications of Scottish Lion ruling(August 2009) Ruxley on the hunt for APH run-off business(July 2009) Industry Matters: Solvency II The Clock Is Ticking(June 2009) Cavell Rendez-Vous: Back to reality in run-off pricing(Summer 2008) Legacy Leaders - The Norwich Rendez-Vous rountable(Spring 2008) Time to reconsider reinsurance
OUT of sight, out of mind: this age old adage certainly fits the low profile the issue of asbestos, pollution and health hazard (APH) has had in recent years. During the late 1980s and early 1990s, APH presented insurers with an enormous challenge that led to the complete overhaul of Lloyd's and much of the way in which insurance business is transacted. However, for many of today's newest senior insurance managers and leaders, APH simply represents the stuff of history.
This lack of awareness could, however, be encouraging insurance business leaders, both run-off and active, to continue to carry liabilities and capital that could be released and a significant profit achieved.
When the magnitude of the liabilities and timeframe involved in the APH problem erupted in the late 1980s, a sense of crisis gripped the insurance industry. This initial panic was followed by a flurry of activity to mitigate the situation and put the industry back on track. Since the establishment in 1996 of Equitas, which closed the book on all Lloyd's liabilities pre-1992, the topic has slowly dropped from mainstream industry discussion.However, as recent events in the Gulf of Mexico illustrate, the long-term impact and costs of pollution are never far away.
So while the issue is current, it is perhaps worth considering the ongoing costs associated with retaining old APH are two-fold. First, there is the capital cost of retaining the necessary reserves – likely only to become increasingly onerous under Solvency II. Faced with the prospect of near-death 20 years ago, insurers reversed their previous under-reserving of APH by over-reserving. Today, given the progression of APH claims, some of those reserves look excessive and opportunities exist to release capital and realise value from old liabilities that have beenonthe books insomecases for 25 years or more.
Second, the cost of administering these complex, often open-ended claims is significant. Effective administration requires an experienced team with an excellent understanding of the liabilities and legalities involved, and ability to identify how much capital is needed to support them.In addition,these are American liabilities requiring American legal advice, and it is unnecessary to spell out how costly US counsel can be.
Experience will become increasingly important with the recent announcement Berkshire Hathaway, following its purchase of Equitas, is transferring its claims-adjusting operations to the US. As the main market leader, Equitas maintained a good flow of information to the following market; from now on, obtaining sufficient information mayprove difficult and expensive.
If these cost savings prove insufficient an incentive to transfer APH liabilities, perhaps the potential to realise a profit may be. Recently, a number of APH liability transfers have resulted in a profit for the insurer, as liabilities are transferred for less than the value for which they were historically reserved. These successes are encouraging insurers to better understand the value of their APH liabilities and reserves, given the real possibility of realising an “instant” profit through a transfer.
The ongoingmarket orthodoxy – that APH is a low-level problem slowly resolving itself, with manageable cost implications – is denyinginsurers theopportunity tomaximise thispotential sourceof capital release and the cost savings achieved by relieving the administrative burden.
More specifically, factors such as Solvency II, and even the relocation of claims adjustment by Berkshire Hathaway, require insurance leaders to reconsider the cost of retaining these sometimes ancient liabilities. By focusing on APH again, both active and runoff players will be able to achieve a profit, while simultaneously reducing their expenses, releasing capital, achieving finality and most importantly, rather than dealing with legacy liabilities, focus on future business development.
Juliette Winter is director and general counsel at Ruxley Ventures Ltd