Leslie-Ann Giovnilli assesses the results of a recent survey into the London run-off sector.
Last month saw the launch of the UK Run-off Survey, commissioned by The Association of Run-off Companies (ARC) and produced by KPMG LLP. The survey is the first of its kind and collates information from regulatory returns submitted to the Financial Services Authority (FSA), audited statutory accounts from Companies House and uses `Bests Statement File Non Life - UK' product.
The survey identifies several areas of interest and provides evidence of the market size for those of us with an interest in the numbers. One thing, however, that it has not attempted, is to identify how many people work in the run-off sector. Initial plans for the survey included a questionnaire for businesses to complete that would cover this aspect, but this has been left for possible inclusion in subsequent years as the number production for the first survey proved difficult enough.
The Insurance Institute of London (IIL), a branch of the Chartered Insurance Institute (CII), is reported to number about 13,000 members, and its new president Derek Thornton said at the association's recent AGM that he believed it ought to have closer to 50,000 members. Of this number, how many of these potential members are working in the London run-off sector? Certainly, the CII does not know because it is a question it does not ask, though one perhaps it could determine using membership applications and renewals. If, for sake of argument, 28% of London insurance market employees work in run-off, that would mean about 14,000 individuals are employed in the London run-off sector. That figure of 28% is not plucked out of thin air; it is the same percentage as that of the total run-off liabilities in the £119.4bn which makes up the UK non-life company market.
With such potential size of run-off personnel there is a huge area of training and qualification that lacks a leader. ARC, the run-off trade association, considers that run-off has several unique aspects that do not feature in the live market. Consequently, it has started to run its own training courses for staff to study commutation negotiation and liquidation management, as well as providing textbooks on these subjects written at a practical level plus other areas such as inspections of records. It was hoped to do this in conjunction with other respected associations, but efforts have been hampered by the absence of employment statistics.
The UK Run-off Survey does estimate that in excess of 2,000 people work in dedicated run-off service vehicles, with Equitas employing around 600 staff, R&SA around 100 in its own in-house run-off section and the run-off [broker] company ReSolutions employing 250 staff. Most of these are concentrated in the London - Essex/East Anglia region and provide a very concentrated work force in what the survey reveals to be a growing sector of the insurance business.
Of the 600 businesses currently authorised to carry on general insurance business in the UK, about 400 were included in the survey. These 400 provided publicly available information on which the research was based. Financial information for those businesses that have UK branch businesses and are headquartered in the European Union (EU) is not readily available. Neither is more than limited information available about Lloyd's of London syndicates in run-off. All Lloyd's pre-1993 run-off business was reinsured into Equitas, and there are now 98 syndicate years in run-off from after the formation of Equitas.
It is apparent from the data readily available that there will be increases in the percentage of run-off liabilities to total UK liabilities if the remaining 200 firms, UK branch offices and Lloyd's numbers were included. Identified run-off liability is already almost one third of the market and with the improvement of available data - aside from companies going into run-off - this is set to grow.
One reason, among many, that the run-off liabilities are so high is the prevalence of asbestos, pollution and health hazard claims from the US coming into the London market from the 1970s and 1980s. By the late 1980s, underwriting had almost eliminated the comprehensive general cover that was involved, and more recently the production and methods of manufacturing have almost eliminated the causes of claim. However, as these policies were written on a losses occurring basis, actuaries estimate that large numbers of high value claims could still be presented 20, 30 or even 40 years from now. This same underwriting `technique' means that medical problems not previously identified, or considered for insurance cover, such as tobacco-related illness, can become a valid claim in 2003 on a 1979 policy, leaving the more mature run-off company very susceptible to deterioration. If they are lucky, companies can find the funds to increase their reserves/surplus; if not they become part of the insolvent run-off market. In the UK, both Chester Street and Independent are insolvent companies with a large book of employers' liability business. Neither is affected by the shadow of US liability business, but both still are victims of the long-term nature of liability claims.
There is concern in the live market that London is not moving fast enough, that the electronic age is not being greeted with enthusiasm, and delays in paying claims and processing data make London ripe for replacement as the global insurance centre. Of course London can still hold claim to maintaining a high level of financial control, and this has been perhaps one of the deciding factors that meant run-off can exist and does so in London. Companies have been going into run-off since the early 1960s, and several are still paying claims in full ten or more years into their run-off.
Certainly, run-off could be a more efficient model as the majority of the losses are London market spiral and a central focus for claims settlement could speed the process along. Cooperation in the market for matters such as Kuwait Air, Exxon Valdez and Flying Tigers in producing an agreed method of paying the losses would indeed speed up the process and reduce legal costs for all concerned. Of course, the problem with early settlement is the production of funds and run-off companies' apparent reluctance to part with them.
Current poor returns from stock market investments have lead to concerns that funds available to pay claims are lacking. But given that companies must have an adequate solvency margin to operate, why the reluctance to pay? In most cases we come back to the poor cooperation and coordination in the London market. If one company owes another funds for premiums or a disputed claim, then the second company holds off funds from other unrelated matters until the first matter is resolved. Not very productive, but unless someone breaks the deadlock it is a real and major problem holding up the process of run-off.
The survey indicates that Equitas has succeeded in reducing its gross liabilities by 50% since its inception in 1996, although the rate of reduction has eased recently. This is possibly due to the aggressive stance Equitas has taken over the resolution of claims. Always a leader in the area of commutation, after seven or so years of preparing and negotiating commutes, there are now only the smaller or more difficult deals to complete. Equitas does, however, remain untypical in its ongoing pursuit of claims resolution or litigation. Unlike the fairly unrippled waters of most run-off companies, Equitas powers through the market with discounted offers for early resolution and reciprocal payment of reinsurers' own spiral losses. Do other run-off companies follow Equitas' example? Seemingly not. Most are quite put out at the speed and stance of Equitas, and many seem to disagree with any settlement offer on this basis alone.
Interestingly, no run-off company has yet `run-off'. Attempts via the solvent scheme have closed some small and low profile businesses, but the real big closure has yet to be made. The dogged insistence of the FSA and the US bankruptcy courts that there must be substantial proof that funds exist for settlement of possible claims many years in the future for the protection of policyholders makes closure almost insuperable. However, this barrier must eventually be overcome if `run-off' is ever to be more than just a market catchphrase.
Leslie-Ann Giovnilli is Secretary of ARC and Director of AMS (Reinsurance) Services Ltd. For further information visit the website: www.aroc.org.uk