The End of the Affair

Later this month, the Willis Faber Underwriting Management Pool Scheme of Arrangement is due to be considered by policyholders. If approved, this initiative could herald a flood of multi-participant schemes designed to close off London market underwriting pools in run-off.

This reflects the fact that the intrinsic flexibility of the scheme process - in effect, a statutory compromise with creditors - is allowing pool participants to take a tailor-made approach to tackling the inevitable complexities of a multi-party relationship.

For a number of pools, many of which are in run-off and encumbered with asbestos, pollution and health liabilities emanating from 1950s policies, the appeal of finality is obvious. However, far more important for stakeholders is the issue of maintaining pool unity.

For policyholders and cedants alike, a unified approach to an exit solution enables collection from one entity - the pool itself - taking a consistent approach to claims agreement and using common systems. The propensity for such pools to be populated by members with varying security ratings and overseas participants only further accentuates this need for unity.

By contrast, a complex, fragmented pool leaves policyholders with burdensome claims presentations to participants individually, potentially in a range of jurisdictions and which may adopt differing approaches to claims agreement.

Separately, the collection of reinsurance placed on behalf of the pool in such a scenario becomes difficult and inefficient for the pool members themselves.

The involvement of an insolvent participant further complicates the dynamic as the priority for insolvent companies is to maximise the return to creditors in the shortest possible time. This could mean considering the possibility of compromise earlier than would be the case for solvent companies. Indeed, for many pools - including WFUM, which comprises 16 participants, the largest of which is insolvent - it is the insolvent participant that drives the strategy towards an exit solution.

While each proposed strategy must be considered by stakeholders on its individual merits, the move towards a common solution for pools in run-off should be to the advantage of stakeholders. The alternative, the disintegration of a pool, could be prohibitively expensive.

- Mike Walker is a partner and head of insurance solutions, restructuring, at KPMG.