2004 (Industry overview)
2004 yearbook & directory of run off service providers
2004 yearbook & directory of run off service providers
(Oct 2007) Ruxley in landmark reinsurance-funded acquisition(Apr 2007) Ruxley in Generali run-off talks(Autumn 2006) Part VII business transfers - adding flexibility to the run-off equation(Spring 2006) Why we need a scheme monitor(Spring 2006) BAIC and after(Feb 2006) Solvent Schemes of Arrangement Conference(Nov 2005) Scheming for solvency(Oct 2005) A wake-up call(Sept 2005) Time To Wake Up(Sept 2005) Free Audio Conference: Rating the Raters(Aug/Sept 2005) Air Your Views(Aug 2005) Ruling could curtail solvent runoff schemes(March 2005) Tackling The Pools(Spring 2005) Selling like hot cakes(Spring 2005) The scheming solution(28/02/05) Influx of capital can impact premiums(Feb 05) Bringing finality to underwriting pools(Winter 04) Dangerous waters(04/11/04) Solvent schemes offer real boost(01/09/04) Buying Run-off(05/07/04) Run-off moves to another level(03/02/04) Run-off on a positive note(2004) 2003 A year of innovation(Winter 03) Ruxley buys Aviation & General(06/10/03) Ruxley takes whole of A&G(04/07/03) End of asbestos saga?(03/07/03) Ruxley closes APH book(Summer 03) Vulture Culture?
For sheer inventiveness and activity, the run-off market is probably (as a certain Danish lager brewer would say) the most interesting sector in the insurance industry today. Who could have said that with conviction ten years ago, or even five years ago? The main reason for what can only be described as a sea change in our business can be summed up in one word: money.
The fact is that where once run-off was seen simply as a drain on the live market?s funds and resources, it is now seen as an opportunity to make serious money, not just by the traditional service providers, who continue to ply their trade (more about them later), but also by professional advisers, investment houses and entrepreneurs.
Lest that observation be taken as a criticism, it is not meant to be. London has always rightly enjoyed a reputation as a centre of innovation and risk-taking: that its talents are now being applied to extracting value from discontinued business portfolios is a sign of vibrant health. Moreover, as with any properly regulated marketplace, the benefits flow to all stakeholders.
The end of the road show
Finality was very much a flavour of the year, with solvent schemes dominating the landscape. Exercising a little chronological licence, the starting point was the approval of the ?Seven Provinces? scheme (strictly speaking five separate schemes), which broke new ground in terms of size and complexity. 2003 also saw the approval of the Marlon scheme ? another carve-out scheme ? and of the ?Dunedin? scheme, notable as a scheme applying to pool business.
The interesting thing about these schemes is that they are extending the ambit of applicability of schemes to larger and more complex entities, making the solvent scheme increasingly the exit mechanism of choice.
It was good also to see a solvent scheme closing out: City General, owned by John Winter?s Ruxley, cashed out after successfully scheming its largely US APH book of business.
Clearly the ?finality? theme of this year?s ARC conference was a timely and relevant one.
Pass the parcel
Not everyone is prepared to wait for a solvent scheme to get their money back and there is a rapidly developing market in the provision of ?instant? finality to shareholders by means of sale and/or Part VII transfer.
Players have differing appetites: Berkshire Hathaway has demonstrated an appetite for the larger targets, whilst Ruxley clearly believes that small is beautiful, as it has shown with its recently-announced acquisition of Aviation & General. Somewhere in the middle are Tawa (which appears to be relaxing its size criterion), Randall & Quilter, Castlewood and, it would seem, LCL, the latest entrant to the market, whose acquisition of Trenwick International raised a few eyebrows in the market a couple of months ago.
Hot off the press is Omni?s acquisition of Reliance National. No details yet, but it would seem to be a major step up in terms of scale for Omni, which already has a couple of purchases under its belt.
It seems reasonable to forecast that the market for sales and purchases of run-off businesses will remain buoyant for the foreseeable future, at least until the competition in the market drives the prices above the buyers? risk appetite ? or until one of the acquisitions goes seriously pearshaped and scares away the investors.
Commutions initiative
One of ARC?s major initiatives of the past year has been to launch its draft Commutations Protocol. The protocol is designed to offer a way to resolve one of the intractable issues of the London market: to what extent can commuted balances be recovered from reinsurers?
The solution, developed by an ARC sub-committee with a gratifying amount of pro bono input by various professional firms, is a neat matrix of recoverability, to which insurance and reinsurance carriers are invited to commit in their commutation dealings.
As with all London market initiatives, it has been greeted with reactions ranging from unbridled enthusiasm, through caution to downright scepticism. The proof of the pudding, however, will be in the eating (or rather in the signing) and it will be interesting to see the extent to which the protocol becomes the actual or de facto standard for commutations in the future.
Measuring the market
It has always been difficult to get a handle on the size of the run-off market. There have been several attempts to estimate the volume of discontinued business, both in the UK and globally, but it has only been this year that a truly detailed exercise has been carried out.
The Run Off Survey, commissioned by ARC and compiled by KPMG with the assistance of AM Best and DLA, was published by Run Off Business in the autumn. It contains some surprising statistics about the dimensions of the UK run-off market, in both financial and human terms:
? ?4.3 billion of shareholders? funds are tied up in UK non-life insurance companies (excluding Lloyd?s and run-off business within live operations). That is not just a lot of money: it represents a huge opportunity cost, especially at a time when the market is hard and fresh capital is at a premium.
? More than 2000 people are employed in the UK in dedicated run-off service vehicles, including Equitas which alone employs some 600 people. That is not counting people engaged in managing inhouse run-off and those people in professional firms and brokers working on issues related to discontinued business.
? With ?33.3 billion of liabilities, the UK company run-off market makes up over a quarter of the UK non-life insurance market. With a little imagination, one can extrapolate that to a statement that one in four policies in the UK is with an insurance entity in run-off. That sort of statistic really hits home.
As the survey rightly notes: ?run-off has become an industry in its own right?.
Run-off goes global
Hopefully the next step for the survey will be to extend its reach to Europe and beyond, because arguably the biggest growth in the management of run-off over the next few years will take place outside the UK.
There have been some recent signs that the countries of continental Europe are coming to terms with the scale of run-off within their domestic insurance industries. High profile exits from the continental market, such as Gerling, can only have helped to raise the level of awareness.
Similar growth may be expected elsewhere in the world ? just watch the Asia Pacific region over the next few years.
Service providers
One of the characteristics of the runoff market in London is the profusion of service providers. run-off is very much an outsourced sector, a fact that ARC has long recognised but which was further endorsed this year by a change in its membership categories specifically to recognise the importance of outsourced service providers.
That central role is clearly set to continue, but there have been signs during this year that the FSA is taking a greater interest in the performance and professional standards of service providers ? not just in the run-off sector of course, but across the board.
Hitherto, it has been the practice to regulate the authorised entity (the insurer) rather than to have any direct supervisory relationship with service providers. In view of the importance of outsourcing in the discontinued business arena, it would seem that a more direct form of control will eventually be asserted. There has already been guidance on the form and content of outsourcing agreements; can regulation be too far away?
Per ardua ad astra?
So, it?s onwards and upwards for the run-off market. The exciting thing about our business is that it always has the capacity to surprise us, so the only thing we can say with certainty is that we will all need to be that much sharper and better equipped to deal with what the fates throw at us next year.
One of ARC?s key objectives has always been to inform and educate the run-off sector (watch out for the first ARC Academy event in 2004). Never has that part of its work been more important.