Jim Moran assesses the changes in the run-off market after the last Cavell Rendez-Vous in Norwich last year.

When looking back over the last twelve months in the run-off market in London it is possible to list a number of changes and developments.

Many companies reviewing the last year might feel run-off has passed by like a ship in the night, but we at Cavell are starting to see taking shape the very developments we have been working hard towards for so long. We are not foolish enough to claim sole credit for these changes but we can feel pleased with the way we have helped our clients meet their aims. We have always believed in proactive run-off, whether in the field of commutation or in claims handling, credit control or inspection.

Vital episode
One of the most important developments in recent months is the slowing down of the London market excess of loss spiral. Commutation has been at the root of this, with Equitas leading the fight to cut out spiral losses by reaching global commutation agreements. This is a stance Cavell has supported first hand and even facilitated through the Commutations Rendez-Vous we organise in Norwich each year. This year is the fifth year of the event, with numbers of delegates growing each year until we now have more than 300 reinsurance figures from all over the world descending on the rural city of Norwich to discuss commutations and, in many cases, reach agreement.

What this means for Cavell's clients is that our staff do not have to travel to meet their counterparties, plus we have the goodwill from having organised the event, since it also helps every delegate's commutation strategy. The overall atmosphere is very positive towards commutation and the Rendez-Vous has become the marketplace for deals to be done.

A further closely-related development is that, thanks to the market-wide acceptance that commutation can be a positive thing, it is now possible to foresee an end to some run-offs. Most of these are schemes of arrangement that are moving closer to liquidation, but there are also solvent estates working towards a position in which a solvent scheme might be possible. Part of this process is usually to commute the reinsurance programme of the entity in question and the market is increasingly willing to support such a plan.

The recent insolvencies in Australia such as NewCapRe and ReAc have also given the commutation scene a boost of interest from those parties starting to be concerned about the security of their own reinsurance arrangements. The ultimate knock-on effect of the loss of full reinsurance cover is yet to be seen, but it is a safe bet that it will lead to more commutations. It is to be hoped the major cedants of the insolvent reinsurers have principal-to-principal accounting systems to allow them to recognise the bad and doubtful debt potential immediately; it would not help the market to have reinsurers still trading which are technically insolvent because a block of their reinsurance cover has disappeared. Such is the growth of run-off in the Australian market, both solvent and insolvent, that GIO Re has seized the opportunity by setting up a run-off services company, Cobalt, to tender for the work.

Market players
Of course there are players in the market which are reluctant to commute their inwards liabilities because that would not fit in with their investment strategy. These reinsurers look to reduce the costs of administering the business, while ensuring the settlement pattern is as long and smooth as possible. Their influence is growing and will perhaps be seen to a greater degree over the next twelve months.

Along these lines, one increasingly popular development is an exit from the market achieved by reinsurance with full claims control passing to the provider of the whole account cover, bringing an exit from the market and creating a significant block of run-off for the reinsurer.

Another important change in the field of reinsurance commutations is the most predictable of all. If the current commutation players all commute with each other, then in theory the possibilities for commutation would dry up. However, what we have seen over this past year is the introduction of a number of new companies into the market, all wanting to cut exposures, reduce costs and optimise their reinsurance asset. Those companies genuinely interested in proactive run-off must hope the newcomers continue to be attracted to the idea of commutation.

Bringing about change to any market involves overcoming the inertia that tends to keep things as they are. Perhaps the most important change over the last year has been recognition that self-interest often fuels that inertia. Change is possible but it requires a genuine effort by companies determined to be proactive. Perhaps by this time next year we will be reporting that the inertia has been overcome; that change is happening at a faster rate. Any physicist will tell you that if you want to get something moving, once initial inertia is overcome and a body is in motion, inertia is on your side.