Time to dispel run-off myths
Paul Corver of R&Q highlights how the captive insurance run-off sector has evolved, and why risk managers should take another look.
“Another opportunity to look at run-off possibilities comes when there has been a merger or acquisition at corporate level.”
As risk managers’ roles evolve to take on greater strategic responsibility, professionals may want to look again at the opportunities offered by the run-off sector.
There’s a common misconception that run-off is all about distressed business, failure and end of life, but there’s been a shift in emphasis. Today, it is about how legacy solutions are becoming a mainstream problem-solver. It’s actually quite a forward-looking service. It can protect the health of your company and in a competitive market a leaner and fitter business has a clear advantage.
Run-off has evolved into a strategic part of the assessment of your ongoing business plan. It’s a case of ‘out with the old’ to be able to bring in the new.
This can be a hard concept for many regular insurance companies and professionals who have been working in the sector for decades, let alone the captives space. But we are seeing a shift in perception in the US, more so than in Europe.
There is an element that is about managing closed books but these days it’s more about getting better efficiencies on both capital and governance by strategically and regularly reviewing your portfolio. Businesses can determine if there is a benefit to disposing of old years or of certain classes of businesses or jurisdictions or territories that were written.
A growing sector
This more strategic outlook is a part of the insurance sector that is growing significantly. A pool of entities are willing to take on old run-off liabilities, which gives benefit and potentially extended life to the parties that are disposing.
We’ve seen it in the commercial insurance market over the last two decades. Twenty years ago there was very little activity other than with distressed books of business. Now there’s a lot more activity, for example from very large companies such as Zurich, which has a very active programme of disposing of portfolios of discontinued lines.
R&Q has worked with AstraZeneca, Unilever, Virgin Atlantic and Northern Foods, among other household names. The larger the company, potentially the larger the captive, therefore there may be greater opportunity to gain efficiencies by trimming out dead wood.
Risk managers and the directors of a captive will be very experienced in their field, whether that’s retail or transportation or energy, but not necessarily totally au fait with what goes on in the back end of the insurance cycle.
So it’s important to raise awareness of the possibilities. Run-off can enhance capital efficiency because there are a number of opportunities that captive owners can take to improve their capital position.
For example, many captives will be holding collateral for the benefit of the front company. By disposing of old years, the collateral obligation passes to R&Q thereby freeing up the captive’s collateral to be recycled to support new underwriting.
Moreover, if the front company has changed there may be more reason to dispose of an old front company’s policies.
New lines
New lines of business, for example cyber, could potentially be put into a captive. Risk managers can assess whether this change could be financed by disposing of some of the older lines that are already in the captive.
There are generally many companies out there that have captives that are no longer used. They may not appreciate that there is a route for them to exit that arrangement by selling the captive to one of the run-off acquirers.
Another opportunity to look at run-off possibilities comes when there has been a merger or acquisition at corporate level and companies find they have a number of captives because both organisations have their own.
R&Q recently transacted with a company in Canada on the disposal of a large operating division which retained the liabilities for that operating division in its captive. The firm had no interest in that, so R&Q provided reinsurance to give them the economic finality on those liabilities and they knew they weren’t going to receive any surprises.
Other events that can impact captives include anything around tax or regulatory changes.
New substance rules are coming out for some of the offshore territories, so it’s worth considering them and whether they will give rise to concerns for owners of captives. There is then the option to address that with some sort of restructuring or disposal.
There has been a general trend towards a greater understanding and appreciation of the benefits of proactive run-off management and the drivers that could lead a captive owner to consider some sort of restructure or disposal, whether that’s from M&A, legislative shifts or to protect against volatility.
Run-off services can assist with restructuring and obtaining greater capital and governance efficiencies by removing legacy liabilities. Isn’t it time you considered the positives?
Paul Corver is group head of legacy M&A at Randall & Quilter. He can be contacted at: paul.corver@rqih.com and on Stand 109 at Airmic.
