As the run-off industry in Continental Europe grows, what challenges lie ahead and is the market prepared?
There is a growing appreciation of the importance of run-off as an industry in its own right. Its significance was underlined on 20 October 2006 when Berkshire Hathaway, led by astute investor Warren Buffett, announced a $7bn reinsurance deal with Equitas, the vehicle set-up to reinsure and run-off Lloyd's 1992 and prior non-life liabilities. The $7bn in reinsurance is to be provided by Berkshire firm National Indemnity, while Berkshire will also take on the staff and operations of Equitas and conduct the run-off of its liabilities. That Buffett, the acclaimed "Oracle of Omaha", should choose to take on such a massive portfolio of long-tail asbestos liabilities demonstrates the value he sees in this business.
While markets such as London and the US have well-established run-off sectors, Europe is quickly catching up. This burgeoning market is now the third largest internationally behind the US and London, although exact figures are hard to come by. For 2005, insurance worldwide premium income was estimated at $3.4bn, with the US taking around a third, the UK 8.76%, France 6.49% and Germany 5.76%. Globally, run-off is estimated to account for 20% of all insurance and reinsurance liabilities.
This year, for the first time, the UK Run-off Survey, commissioned by the Association of Run-off Companies and prepared by KPMG, included a commentary on the run-off market in German speaking countries - namely Germany, Austria and Switzerland. It concluded that while run-off has long been regarded as an unhelpful management distraction in these countries, the need to deal with inactive portfolios proactively has finally been recognised. Commutation is currently the most commonly used method, but schemes of arrangement are sparking a lot of interest. Run-off business in these countries is increasingly viewed as an opportunity to realise greater business efficiencies and cost savings, if managed effectively. The survey estimated the size of the market in these three countries as being approximately €75bn.