Nick Eddery-Joel looks at the different approaches to run-off business across Europe
The run-off environment tends to differ somewhat across the various nation states of Europe. Due to the high incidence of discontinued business in the London market over the years, run-off is a familiar fact of life in the UK. Up until relatively recently, however, it was noticeably less prevalent in continental Europe. But in recent years, many European Union member states have seen a marked increase in mergers, acquisitions and portfolio restructurings, establishing run-off as an increasingly familiar phenomenon right across Europe.London's head start, if we can call it that, has established the City of London as Europe's leading centre for insurance and reinsurance run-off business. It is home to a growing cadre of professional third-party run-off providers, whose major players have taken on all or part of the management of discontinued books of business in the UK, and also - to a lesser extent - across the rest of Europe and beyond.The natural inclination of most insurance professionals is to work for an active entity rather than one in run-off. As a consequence, the skills required to act as an effective run-off practitioner are typically acquired through involuntary circumstance rather than out of choice. Today's in-house run-off is the hothouse for tomorrow's outsourced run-off professional.For the simple reason that London has had greater and earlier experience of run-off than other European financial centres, it is further advanced down this path. It would probably be fair to say that London is currently setting the agenda in terms of professional run-off management, and indeed insurance-related business process outsourcing (BPO) services in general which share many of the same core skills.
Dublin's emergenceBut if London stands out as Europe's leading run-off centre, that is not to say that its predominance is unchallenged. To the west, Dublin has emerged as an insurance centre of some significance, home to around 2,000 insurance, reinsurance and captive companies at the last count.With its attractive tax environment and stable regulatory regime, Dublin has a lot going for it as a base for insurance-related operations. It also has the advantages of great quality of life, a sound transport and communications infrastructure, and a good pool of appropriately skilled labour.The Europe-wide insurance regulation environment is the key factor that could work in Dublin's favour as a suitable base for run-off operations.As European member states introduce the legislation giving effect to the EU directive on the reorganisation and winding-up of insurers - EU Directive 2001/17/EC (WUD) - this has resulted in a situation in which the Republic of Ireland is one of only two countries in which permitted reorganisation measures will include schemes of arrangement under section 425 of the Companies Act. The other is the UK.Solvent schemes of arrangement are currently viewed as one of the most advantageous exit solutions for defunct insurance entities. With a special dispensation from the insolvency provisions of the European Insolvency Regulation (Council Regulation 1346/2000) introduced in June 2002, companies based in the Republic of Ireland and UK enjoy a distinct advantage. This makes Dublin an attractive location for European companies with portfolios in run-off, provided they are at liberty to redomicile from their original territories.It is entirely possible that other European cities could establish their own claim to the questionably prestigious title of 'run-off centre'. Though no other European metropolis has quite the same concentration of insurance entities as London, it is perfectly possible to image a city such as Paris, Munich, Hamburg, Zurich or Stockholm building a name for itself as a centre of run-off activity. Mainland Europe has seen fewer large-scale run-offs in the last 20 years, but we may soon see a reversal of that pattern as continental re/insurers struggle under the burden of past year losses.There are obvious limits to the extent to which London will be able to maintain or extend its current dominance of the European run-off landscape.Many European companies share a longstanding cultural reluctance to washing their dirty linen in public, preferring a discreet in-house solution.Currently, European insurers will often involve London-based service providers in specific aspects of the run-off process such as reinsurance collections or commutations. But even here - as more and more teams and individuals with the relevant skills and experience emerge from previous run-offs - they may be increasingly inclined to look for solutions from providers based closer to home.
Stringent regulationsA more fundamental limiting factor relates to the practical difficulties in transferring a run-off from one country to another. Many European countries have stringent labour laws that impose significant limitations on a run-off owner's ability to determine how, where and by whom the exercise is carried out. Staff issues are probably the second most important consideration in a run-off, after liabilities. One could even argue that without having the right staff in place, liabilities cannot be effectively managed. Given that staff costs typically account for a significant part of a run-off operation's total cost base, this could be an expensive area in which to make mistakes.In Germany and France in particular, workers' representative bodies wield a huge amount of influence and would offer vigorous resistance. In certain instances there can also be language barriers. Though English is well established as the lingua franca of insurance and - in particular - reinsurance, original records may, for example, be held on a system in the mother tongue of the country concerned. However, where the benefits of transferring a run-off are sufficiently persuasive, ways of circumventing these hurdles can usually be found.In the longer term, the likelihood is that the most successful of the London-based third-party providers will develop branches across Europe offering a common set of skills and services through a local infrastructure.In a small number of cases this is already happening. The objectives and principles of run-off are essentially the same anywhere in the world.The fundamental need to pay legitimate claims whilst protecting the company's assets and minimising costs holds good irrespective of geography. Nuances arise in relation to the specific regulatory, tax and accounting regimes of the individual countries concerned.Such variations are becoming less pronounced as Europe moves towards a level playing field through the application of the common standards such as those embodied in the Third Non-Life Insurance Directive. But it would be a rash operator who discounted the remaining distinctions.In some countries, for example, it is possible to redomesticate business by means of a relatively simple device; in others it is difficult, if not impossible. Similarly, business transfers are enforceable in some, but not in others. It is essential to understand the legal and regulatory framework of each individual country as it applies to insurance and reinsurance run-off to define the run-off strategy and determine the relative merits of a run-off based there or elsewhere.The regulatory framework in the UK is in many ways more stringent that in other European countries, particularly in terms of the requirement to report on run-off plans through a scheme of operations document, something that is not demanded, for example, in Ireland, where a minimum level of capital is the only major requirement. In time, the European Commission's Solvency II initiative will level the playing field. Since the UK has taken the decision to anticipate Solvency II by implementing Consultation Paper 190 (CP190), however, it is currently a little way ahead of the game, and run-off companies which meet UK regulatory requirements can be reasonably confident of satisfying those of other EU states going forward, with the common philosophy of identifying and managing key risk factors now clearly established.There is little doubt that UK-based companies will continue to play an active if not dominant role on the European run-off scene for some time to come. But it seems entirely possibile that other regional centres for run-off business will evolve as time goes by. The legal and regulatory distinctions that might otherwise prompt the relocation of a run-off to take advantage of the specific benefits of one country over another look likely to be eroded over time. Given this, it would typically make sense to leave a run-off and those involved broadly where the business started life - involving outside management or expertise to a greater or lesser extent depending on the cost benefits anticipated.Ultimately, the future pattern of European run-off will depend to a large degree on how adept today's and tomorrow's insurance entities become at anticipating, avoiding or managing the hazards that necessitate the discontinuation of their portfolios. Run-off is only one of a whole range of solutions applicable to books of re/insurance business which, to a greater or lesser degree, are performing poorly. The gradually blurring distinction between outsourced run-off providers and other specialist insurance service providers is significant in this context. Underwriting entities, wherever they are based, are always better advised to seek assistance sooner rather than later and thereby give themselves a wider range of solutions from which to choose.Nick Eddery-Joel is Director of Business Development, at Axiom Consulting Ltd in London.