Traditionally, management of run-off has been outsourced rather than books or business sold. But the desire for more finality is growing, finds Ralph Savage
If the cliche "one man's misfortune is another man's gain" had been written for the insurance industry, run-off would be its inspiration.
The specialist run-off management sector is enjoying a steady growth curve. It profits largely from the outsourced management of discontinued lines, an increasing fact of life in insurance, but a number of other factors have also played their part. There has been a thaw in opinion among insurers and reinsurers, which previously associated run-off with damage to reputations and a resulting tendency to keep discontinued lines under lock and key.
The third and biggest change has come from recent developments in regulation such as the UK Financial Services and Markets Act 2000, which has enabled liability transfer across borders. This has opened up foreign markets where solvent and insolvent insurers reside, many of which would rather not be running off decades worth of claims.
The market's highest profile players number around half a dozen companies, including Axiom, Randall Group, Omni Whittington, CMGL and Capita in the UK, as well as Wasa Insurance Run-Off in Sweden. All have achieved business wins through a variety of solutions offered to insurers wanting rid of liability portfolios.
Nick Eddery-Joel, director of corporate solutions at Axiom Consulting, says the volume of run-off liabilities will probably rise but most of it is still on insurers' balance sheets. "The large majority of liabilities in run-off are still within the companies that own them. For example, Axa Liabilities Managers does all of the group's run-off created through Axa's acquisitions over the years.
"The recent change in perception from insurers is the need for finality - taking the problem away from the owners. Run-off is a threat to their balance sheet and it may not be a core part of the business. Another reason could be that they want to untie some capital set aside or get rid of some staff. We can acquire that book of business - its technical reserves, gross and net - in exchange for paying a proportion of the company's net assets."
The large majority of run-off consultants' revenue is earned through management fees and outsourcing arrangements. Capita Insurance Services has a significant business in this area, managing £2bn in claims reserves for the likes of the Independent Insurance run-off company Aurora and Hill House Hammond's claims portfolio, among others. But as Mr Eddery-Joel explains, books of business can be acquired for a lump sum and in a growing number of cases, entire companies are bought up.
Key proponents of this strategy, such as Omni Whittington, Randall Group (under its subsidiary Cavell Management Services) and Wasa, have all made acquisitions in the past 12 months.
Omni Whittington bought Reliance National Europe in late 2003 - to the untrained eye, the burden it picked up was jaw-dropping. For the princely sum of £20m, Omni took on £240m in gross liabilities. "We were prepared to take on some things that others might not," explains Stephanie Mocatta, director of Omni Whittington Insurance Markets.
Two thirds of Omni's business is still in outsourced management and for this, Ms Mocatta concedes: "We are probably at the expensive end of the market but - no offence to run-off consultants - we have regulated boards, premises, staff and all the things that go with offering a fully outsourced service."
Ms Mocatta adds that Omni's main source of growth is now in the acquisition of insurance companies rather than outsourced management. "I suspect over the next two to three years our business will change to a ratio of 50:50."
Wasa Insurance Run-off has a unique model as it was set up by Lansforsakringar, Sweden's largest insurance group. Its parent had run-off liabilities of its own in the UK (Wasa Insurance International UK) so, using the Part Seven transfer law within the FSMA, it was able to transfer these back to Sweden in order to cut the cost of running them off away from home.
WIRO then purchased Stockholm Re UK in March of this year, also repatriating the business back to Sweden.
"There is a big interest for this in the market, and we hope it will provide new and interesting business opportunities when companies start to understand the cost savings possible from transferring run-off portfolios out of the UK," says Johan Lagerwall, executive vice-president of WIRO.
More recently still, the Randall Group agreed to purchase the Transport Insurance Company from Great American Insurance Company of Ohio, announcing the deal early last month. "Transport represents a significant addition to our operations in the US and is part of our core business of offering exit solutions to discontinued insurance companies," comments Randall Group chief executive officer Robin McCoy.
The largest market for run-off insurance liabilities is obviously the US, followed by the UK and Europe. However, Ms Mocatta adds that there are "a lot of players in the UK looking at the same market", so Omni Whittington is looking further afield. "We are particularly interested in the South-east Asian markets, such as Hong Kong, and also Australia. Ideally if a country is English-speaking and has a legal system based on English law, we can work with them. Perhaps the country with the most potential is South Africa. If you had asked me 10 years ago, I would have dismissed it as unviable, but it has an insurance market much like our own and the same problems as anyone else."
The UK general insurance industry has endured tough periods in recent times, often due to crippling liabilities on foreign soil - as was the case with asbestos and Royal and Sun Alliance. So should more insurers be considering divesting responsibility to expert hands? Ms Mocatta warns that it will never be a simple choice: "For whatever reason, an insurance company might not want to sell its run-off liabilities. They might have to recognise their reserves, or they might have system conversion or staffing issues, which make it not worth the risk."
There also remains the problem of reputation, which companies fear the most. "Companies that are continuing to trade may see sale of the run-off entity as damaging to their reputation," concludes Ms Mocatta, "particularly as they will lose control of the claims handling. This is particularly true of insurance companies that deal direct with the public."
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