As insurers increasingly classify more recent underwriting as legacy, run-off management is being highlighted as a ‘business as usual’ imperative more than ever before, say Nick Watford and Andy Ward of PwC.
The world of run-off is changing. Undoubtedly there is still plenty of focus on the traditional run-off liabilities (eg, US asbestos, pollution and health hazard claims) from owners of legacy business which have long been the cornerstone of the industry.
However, while these traditional run-off liabilities still occupy significant resources, live insurers are increasingly classifying more recent lines of business as run-off. Consequently the legacy market now comprises more recent books of business written in the last 10 years rather than several decades ago, including motor, employers’ liability and medical malpractice. In the most recent PwC Survey of Discontinued Insurance Business in Europe nearly 70 percent of respondents now classify business written since 2005 as run-off.
"Live insurers recognise that run-off is an era where costs can be controlled, operational efficiencies achieved and value extracted to recycle capital to support core business."
The UK run-off market was principally developed through restructuring tools such as insurance business transfers and solvent schemes. These tools provide a means to unlock value from run-off and have paved the way for many pure run-off entities to be closed down or assumed by the growing number of consolidators. The extensive activity in the run-off market during the late 1990s and 2000s has meant that remaining pure run-off entities of significant scale are relatively scarce.
Consequently the ‘future of run-off’ has been widely debated with some questioning whether a sustainable pipeline of future run-off opportunities exists to maintain the interest of run-off consolidators and service providers.
The current significant levels of activity and profile of run-off transactions in the market appear to answer this concern. The survey showed that respondents predict a very healthy level of activity in the global legacy market for the foreseeable future.
Drivers of run-off
What is driving the current high levels of run-off activity? Solvency II has certainly resulted in live insurers throughout Europe spending more time focusing on run-off business in order to restructure and optimise capital. It is likely however that we are only seeing the very start of the impact of Solvency II. As the framework becomes more embedded across the whole of Continental Europe it is expected to drive a continued focus on legacy portfolios.
The macroeconomic scene, soft insurance market and low interest rate environment continue to play their part, with some corporates also questioning the viability of established captive arrangements. It is clear from these developments that run-off is, more than ever, seen as a natural part of the insurance cycle. The approach to running off the business is being taken as seriously as the origination phase. Live insurers recognise that run-off is an area where costs can be controlled, operational efficiencies achieved and value extracted to recycle capital to support core business. This is being achieved through internal restructuring, whereby insurers set up their own run-off specialist departments, or through disposal to run-off consolidators.
The run-off consolidators themselves continue to adapt and improve in areas such as their data systems, claims expertise and operational functions. This enables them to acquire and efficiently on-board more recent portfolios of run-off business. The increased sophistication of the run-off market has attracted new investment from top tier private equity, banking and pension fund investors. This, in turn, reinforces the ever-growing reputation of the sector.
There is undoubtedly a real sense that a new age of run-off is with us. All of this is without even considering any further change generated by Brexit or increased activity in the US through the introduction of the Rhode Island Insurance Business transfer initiative. The management of run-off is now seen as a ‘business as usual’ imperative where the live market is expected to partner ever more closely with its legacy counterpart.
Nick Watford is a partner, actuarial services at PwC. He can be contacted at: firstname.lastname@example.org
Andy Ward is director, liability restructuring at PwC. He can be contacted at: email@example.com
PwC, London, UK, Nick Watford, Andrew Ward, Insurance, Run-off, Europe, Solvency II