Run-off: A strengthening picture
Both within Europe and across the Atlantic, the run-off market for insurers and reinsurers is increasingly buoyant, with the main drivers being new management, regulatory changes, and the need for capital efficiency.
In the UK, the legacy market continues to be busy with transactions. As a result of the increase in mergers and acquisitions (M&A) activity, new management is often quick to distance itself from existing business that is performing poorly. There is also usually a revision of goals and strategy, where certain classes no longer form part of future plans. Legacy portfolios can be seen to be an unwanted distraction to the rest of the business.
Specialist run-off insurers have astutely capitalised on this, providing the expertise required to manage the run-off portfolios efficiently with dedicated resources. The return on capital for specialist run-off companies in the London insurance market has generally been very attractive. This explains the relatively high number of run-off portfolio transactions in recent years, with interest continuing to grow.
The difficult underwriting environment experienced in the last few years, combined with the depletion of reserve margins in prior underwriting years, has meant a focus on expenses as companies look to maintain profitability. Often, resources dedicated to legacy business are early casualties of the drive to cut expenses and streamline operations back to core portfolios.
Solvency II has brought in additional attention to legacy business, with management wishing to reduce the volatility from historical business that has an adverse impact on capital requirements. The risk:reward balance for run-off can be perceived to be poor in comparison with ambitious underwriting plans going forward.
The US picture
The US run-off market has generally had slower growth than that of the UK in recent years primarily due to excess capital, favourable overall reserve run-off, and low interest rates tempering the benefit of some proposed run-off transactions. However, similar to the UK, the impact of recent soft market pricing, M&A activity, and adverse development in reserves, have caused renewed interest in the management of run-off liabilities.
