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.
Claims manager at Partner Re and roundtable chairman (France)
Dr Axel Biagosch
Arbitrator and former executive board member of Axa Konzern (Germany)
Director general of CMGL Europe's French division (France)
Managing director, Wasa Insurance Run-Off Co (Sweden)
Head of claims, Global General & Reinsurance Services (Germany)l
Managing director, Optimum Risk Research International (Guernsey)
Director, KPMG (Germany)
Dr Kai Hasselbach
Partner, corporate /M&A, Freshfields (Germany)
Dr Detlef Huber
Head of claims, Alea Europe (Germany)
Managing director, Compre Nordic Oy (Finland)
Stevan Corbett: Welcome to the first European Continental roundtable on run-off. We are concentrating on "Continental Europe, the way forward", not the easiest of subjects, as we shall no doubt discover. Discussions will focus on the development of the run-off sector, looking at where we are now and where challenges lie ahead.
There is, as you know, a growing appreciation of the importance of run-off as an industry and the challenges posed by managing a discontinued business versus an ongoing business. What is run-off? How large is run-off? These are not easy questions.
The source of liabilities is the acceptance of contractual obligations in return for a premium. Traditionally we calculate run-off at about 20% of liabilities of insurance and reinsurance. London, I am told, is around about 20% to 23% on the non-life side and on the life business it is supposed to be 14%. The US is apparently 40% of the total industry. Now these markets are well established, but where is the rest of the world? Where is Continental Europe?
Firstly, are we happy with the definition of run-off? Run-off is, in a sense, such an obvious word. You write a piece of business and then from day one it is in run-off, it goes into run-off as the liability comes through. Obviously in our profession we have given several shades of meaning to the word run-off and I think perhaps the best way to start is if we ask what you think of the word run-off itself. Are you happy with the word run-off? It is an English word. Is this of any difficulty in your own languages?
Robert bisson: Run-off is a good word to use in France because if we translated it we would end up with something that is not very positive and so I think run-off is the best expression we could use.
Kai Hasselbach: One thing that is important is that run-off is not the same as liquidation. My experience when talking to people in the "active" insurance industry is that having part of their business in liquidation is very close to being in insolvency. So I think the translation issue is very important. It needs to be plain to people that run-off is part of your active business and that it is not a failure of part of your business - that is the important thing from the German perspective.
Axel Biagosch: Because there is no German translation for it, nothing can be translated better than run-off. The only thing that was difficult for me to understand is that all the questions are concentrated on the European markets. In my opinion a run-off should be concentrated on a company or perhaps on one market but there will never be a European market for run-off. Therefore my proposal would be - let's talk about the different problems of run-offs but don't try to discuss a European market for run-off.
Stevan Corbett: That is a very good point. One of the questions we will get to is, "Does Europe really care or not, or should it be interested in run-off?"
Francoise Gelot: Can I object to the argument of Dr Biagosch in that there is some form of existing European run-off initiative - the one that was started by Cologne Re in Germany? This group of sophisticated European companies involved in the UK and the US APH [asbestos pollution and health] market have gathered together for more than ten years, have twice-yearly meetings, which are full of the latest developments in the run-off market in the UK and the US. This group gathers participants from all European markets including Russia and now also the UK, so this is a European type of initiative which could possibly develop into something bigger.
Charlotte Boij: Some comments on the Scandinavian or Nordic view to run-off is that in the Nordic countries run-off is a good word because the Swedish alternative isn't all that helpful. I am a member of the run-off society, I work in run-off. But it is more than that. People see it as a challenging thing now. I think that is partly because the Nordic companies were the first to be actively involved in run-off and to work with commutations as a strategy. It was felt that run-off was something that you could work on and run-off is something that can provide profits for the company. Most of the Nordic reinsurance companies went into run-off in early 1990s and have been very active with commutations since then. I think that the fact that this part of the world is a long way into run-off is something to bear in mind.
Stevan Corbett: I think the main thing is to be positive, to keep creating value, bringing assets in.
Heikki Saalamo: Generally I would say that nowadays a run-off is a normal part of an insurance lifecycle and everybody understands what that is.
Arndt Gossmann: Getting back to the German market, I think we are at some kind of turning point. There is no specific word for it, you mentioned you have looked for another expression, we have done the same and we haven't really come up with a better word. However I remember that three to four years ago when we started providing services in that area I made a tour around Germany to see a couple of companies. Whenever I raised the question, "What about run-off, is that a topic for you?" in particular to life companies, the reaction was that it was almost offensive and people wondered why you were asking the question.
Today, run-off has been accepted in Germany and we are just about to publish a survey on this. The perception is more open, everybody understands that it is something which cannot be avoided but I think we are still a couple of steps away from the situation where it is really understood in terms of being a business process, being the end of the lifecycle. I think that is where it has to go. Larger players, the really big ones, understand that. But it is not generally accepted and if you were at a small mutual insurer and you asked the question, I am sure you would get the same answer as three years ago.
Thomas Freudenstein: I can support that. We have had exactly the same experience - the larger players in Germany have no problem with run-off and the smaller companies actually prefer the German word "abwicklung" even though it does not comprise the same thing but they associate run-off with liquidation and insolvency.
Francoise Gelot: I assume that all the discussion relates mostly to reinsurance run-off versus insurance run-off because the characteristics are, in my opinion, quite different. My own experience is purely related to reinsurance run-off and what I wanted to say is that the connotation of the word run-off is changing.
Initially it started with the major loss accounts and treaties due to APH business. It was a disaster type of portfolio but due to changes in the market structure taking place at the moment, changes in the treaty structure from year to year and also mergers and acquisitions, we also have some good business in run-off - business that is cancelled, but can be profitable. The initial run-off idea was a very unprofitable type of business. The current run-off business has a mix of long tail, loss making contracts but also some good business that has been cancelled due to restructuring factors.
Stevan Corbett: Fair enough. Let's find out if we do have some sort of market there. The first question is, "How developed is the European run-off market and how much of a disparity is there between the various run-off markets within Europe?"
Detlef Huber: I agree with what Dr Biagosch said - there is no such thing as a European run-off market. There are different markets. I would say that the most developed markets would be the German-speaking and Nordic markets, perhaps followed by France and then not so developed in the Italian, Spanish or Portuguese markets. When you get to the level of what consultancies exist in the markets or which lawyers specialise in reinsurance or in inspections, you will find these companies in Germany and in the Nordic markets. You will find some smaller ones in France but in Italy you would have to look very closely to find a good reinsurance consultancy. It is mostly international or UK-based companies that provide services. So there is no such thing as a Continental European run-off market - they are markets with a lot of differences and the stage of the development is very different from market to market.
Stevan Corbett: Do you think Continental Europe wants to be a run-off market?
Detlef Huber: I do not think so. This goes back to the initial question: "What is run-off and how is it viewed?" I think there is another word for run-off - discontinued business. Let me put it this way - you have tendency for more and more companies to start dealing with run-off. When you look at Converium, that is about to or has established a commutation department, you have got Hannover Re with its run-off solutions department, you have got new consultancies for run-offs, there is growing activity in the market. But I wouldn't say that Europe or European markets want to become a run-off market. They see that they need to address the issue, they see that you have to deal with the run-offs or discontinued business proactively, but that's about it.
Arndt Gossmann: I agree with you that today there is not a common market because basically the speed and development is so fragmented that it is rather difficult. There are a couple of cross-border topics, which are nevertheless right. At the end of the day I believe that there should be a common marketplace because it is going to be the only way in the long term that companies will understand run-off as a proactive approach to manage the liabilities which they have written. So if we start off that once we have written business, it is more or less in run-off. For an efficient market there must be some type of marketplace and I am sure there will be in five to ten years. I think the target should be, for the sake of the industry, that there is a common marketplace and tools for this.
Charlotte Boij: I agree but I also think that maybe the question is phrased in the wrong way. There is not necessarily a need for a run-off market but there is a need to handle all the discontinued business in a proactive way. I think that might be a difference. I think that what we need is to take care of the possible problems as Francoise mentioned but also to make sure we can make all the profits that are there. If we want to do that we have to be very proactive and we need to have a professional set of tools to do it. One of the most important things is that you have a dedicated staff, as Arndt said, you have to reinforce the reinsurance or the run-off portfolio, you cannot just have it mixed in with the live business because it will never get full attention. You need to have people working on it who have it as their first priority. I think that is the most important lesson to be learned in Continental Europe if you compare it with the Nordic countries and the UK where you have dedicated people for run-off.
Axel Biagosch: I am not the biggest expert in run-offs but what I have learned came from the UK. And probably the one reason for that is the UK, or the British insurers and reinsurers, had the biggest part of American business and therefore they needed early run-offs. Therefore, I'm not saying that run-off markets may not level up on the Continental European side but the experience we had - and we will discuss schemes and the different forms of run-off - came from Great Britain. I am very grateful that we had that experience. We have to learn a lot of things and we will come back to the question of the reputation of run-offs. If I had spoken about run-off 20 years ago I would not be part of the reinsurance community. Nowadays it is quite another thing and I think what you said, we will be obliged to learn and we must accept that run-offs are part of our reinsurance business, nothing else.
Stevan Corbett: This leads us to the question: "What are the practicalities behind conducting a successful run-off in Europe?" I am going to slip in a second question there: "Can we integrate the word run-off into the risk management global view?" It is probably something where we can literally switch from the old word into something very positive because what are the risk managers trying to do at all levels? It is the problem of the risk itself? It is the run-off from day one, so before, during and after.
Thomas Freudenstein: I think the main issues of running run-off are fundamentally the same as everywhere else. You have got to manage your claims, protect your assets and collect your reinsurance but the big difference, or the big question in Europe, is diversity. We have learnt from the earlier discussion that we do not see Europe as a common European market. And as long as we have separate insurance and reinsurance markets with different styles we will probably have separate run-off markets. You have to know the different languages, cultures, the different kinds of wordings and the things associated with that. I think diversity is very important; you have to be able to cope with that.
Stevan Corbett: OK, what about the risk management side?
Thomas Freudenstein: That probably would be a very good twist to improve the acceptance of run-off. Maybe, one should address the reinsurance buyers in the German market. They usually do not want to have much to do with run-off. But maybe if you asked the finance managers or risk managers and try to make it clear that they have a heavy risk on their balance sheet, they would not have a problem with admitting to faults they have made in the past - and to look to the future.
Detlef Huber: Sorry, I have to disagree on the risk management side although I would really like to have this twist, especially in Continental Europe, to get away from the word run-off or discontinued business to risk management. You have different companies dealing in the market so consultants, for example, would love to talk about risk management but when it comes to companies that do their run-off in-house, it is doing run-off. We are just closing down our company as soon as possible depending on the strategy. I find it a bit unrealistic that we will get in the next, say, three to five years, this talk not about run-off but about risk management.
Arndt Gossmann: I think at the end of the day it is not a matter of what the market will accept or about the wordings. Risk management is definitely much too short-handed. Run-off must be understood as a general management process - it is not only about reducing risk, it is also about reducing costs, it is about improving profitability and it is about improving capital and the capital base. What I recommend is there must be somebody who is looking after the liabilities, which are in run-off. We need to see somebody like a chief liability officer taking up the liabilities once they appear on the balance sheet with a really broad view. This is a management task and not the task of a single separate risk management team
Axel Biagosch: I went through the minutes of the last roundtable [Global Reinsurance Run-off Roundtable June 2006] and I was impressed with what Nick Bentley from Riverstone Europe said. He said, "What you need is a dedicated management, a run-off entity and specialists running it." I did it the other way round for many years. I just ran round like a rabbit desperately looking for help for what we now call run-off. I needed the lawyers, I needed the claims managers, I needed the accountants, I needed whatever. Therefore I think you are absolutely right in saying that if you are obliged to organise run-off activity - and nobody will escape nowadays because they will always be part of the operation - then you will need a dedicated unit. Although I think my experience was a little bit of what we all need. First we thought we could arrange it without any special knowledge but nowadays I am 100% convinced you need a specialist for run-off activities. And one man is not sufficient, you need a department, you need a run-off entity.
Francoise Gelot: Yes I fully agree with you Dr Biagosch because I think the idea of having a chief liability officer links to the current management concept of compliance. Today we need compliance officers in companies and they cannot work on their own, they have to work with associates in the different sets of expertise. Professional reinsurers are definitely operating with distinct teams of underwriting, claims, actuarial accounting, legal etc. In a run-off situation you have to gather all this expertise together. Of course, creating a dedicated unit is going to be more costly than operating the run-off on the back of active business but this is the way forward. And operating with the sense of compliance is really the name of the game - also including the auditing of accounts to make sure they comply with the contractual terms and conditions.
Charlotte Boij: I must both disagree and agree with Francoise. I disagree on the mentioning that it could be more costly to have a dedicated team because I think it is quite the opposite. I think you can save a lot of money if you have a dedicated team with the right expertise who know what to do and who have a strategy for run-off. I think that is important. I am happy to agree with Dr Biagosch, who said that dedicated staff are the crucial thing. You just cannot run-off business efficiently without that. I think that is key. I also think that all the things that you mentioned before about risk management, for example driven by all this too, is also something that will force European companies to regard their run-off in a different light and to see that run-off is something that you need to focus on. It is not something that you just undertake as a matter of course along with the live business, it is something that you need to monitor in a particular way with separate strategies.
Heikki Saalamo: I agree it is really down to teamwork and of course that is a big challenge for the top management to retain the necessary staff. Of course if the portfolios go down and there is less work to be done however much you need these people, they will leave, so it is a real challenge for management.
Stevan Corbett: The next question: "What advantages are there to conducting run-off in Europe?" And if I can latch this to Solvency II. I thought I had better read something about solvency and I noticed the word risk management everywhere. It occurred to me that one of the things they are worried about is run-off and the whole point of being solvent. So put Solvency II and run-off together, there must be a way of doing it and adding risk management in there.
Axel Biagosch: I was impressed when you said it will be very difficult to operate run-off on the back of the operating people. They are not interested at all because run-off just disturbs them in their active and daily business. Let's just talk a little bit about the questions you have before deciding whether to run-off or not. These include: where the bulk of business to be brought into run-off comes from; which legislation should be applied; is it European, German, Italian or US legislation? And then do you need external advice or not? Because normally you are not very experienced within the company to discuss run-off. Are there any legal or linguistic problems because, in my experience, run-off has a very special, linguistic approach. It is not active business, it is not a handshake business - it is very legal. Are there any run-off providers locally? These are all questions you must discuss upfront - should there be run-off, should there be a run-off in-house, should there be run-off with professionals? Because if you don't know the right answer to all these questions, it will be horribly expensive for you and for your shareholders - that is a practical approach.
Stevan Corbett: I think the point is what I said at the beginning - you get a premium, you get something for this and you have a liability. In the risk management sense of the word let's try and worry about now, instead of just underwriting and then worry about it later. What we are trying to do now is bring in the idea of the worst case scenario right from the very beginning. I would turn to all these traditional words and give it a more positive spin. And that is a European thing, and that's why it occurred to me while I was re-reading the question "What advantages are there to conducting run-off in Europe?" Apparently Brussels is asking us to do something about it, that is the way I see it.
Arndt Gossmann: The most important benefit seen by insurance companies is final exit in a relatively short time - that is the most often quoted reason. The second is removing liabilities from the balance sheet, which affects Solvency II, capital base etc, and the third one is administrative cost reduction. All the rest are more or less minor points, like focusing on core business, short term release of surplus capital, rating improvement etc. Those are elements that are mentioned but are much less important.
Thomas Freudenstein: We can actually see one of the big advantages of the European run-off market at this table. We come from various countries and we can all speak English. So it is important that we build the run-off expertise and have experts who can read the local wordings because this is something you do not find in the London market, for example, at least not to this extent. I can also agree with the argument to exit in a short period of time. I sometimes think that in London the trend is to perpetuate the business, to have a self-perpetuating job model, and I think European companies really try to get out of it and not extend their jobs and professions for as long as possible.
Stevan Corbett: Does that mean you feel we should be creating an industry on the Continent?
Thomas Freudenstein: I think it is difficult but it should be the goal, yes.
Detlef Huber: I think there is very much an industry on the Continent or within the different markets but coming back to the question, "What is the advantage of conducting a run-off in Continental Europe?" You would have to ask for whom it is an advantage. Possibly for a UK-based company that hasn't got branches in Continental Europe but its European book of business is a nightmare. For service providers within the Continent that have got different branches it is an advantage to have to deal with different languages and different EU frameworks. For a run-off company like Alea it is probably an advantage that the Continent is less litigious, for Mr Hasselbach it is probably a disadvantage. So I wanted to point that out that you can't say there is one advantage or not, it really depends on which side you are looking from.
Stevan Corbett: There is the other argument - just send it all back to London.
Detlef Huber: You can't just send it all back to London, although you could try and indeed we will be trying that. You can do that easily with your English book of business or even with business that has been placed by English brokers. You could even think, and we will think, about doing this Part VII transfer of Continental European business. But when it comes to the business that is not European Union it gets very difficult. You are stuck with green card business from Russia or with your business from your Singapore branch for example. You can really conduct that from somewhere else but the more languages involved, the more legal frameworks, the tie on your shares, the more difficult the run-off gets. But I am sure that we will find a way in the next few years to deal with this and as the European Union expands we probably won't have this problem in Eastern Europe any more, say in ten years' time.
Charlotte Boij: Just a small thing but what we need in the rest of Europe compared to what exists in the UK is a legislation that is more helpful to structural businesses. For example, we need a Part VII transfer equivalent to the one in the UK where you can move portfolios, taking the reinsurance protections with the portfolio. We also need, maybe less so, schemes of arrangements in the other countries, even though it is quite an expensive thing to do. But it would be helpful to have that kind of final closing tool. I think we should gather together all the legislators and all the regulators in the different European countries and have them talk to each other, talk to the Financial Services Authority [FSA] and other people, and see if we can export some of those good tools that exist in the UK.
Detlef Huber: I totally agree. The problem I see is that the FSA is ahead of us, so the London market will attract all of these businesses. And by the time we have convinced the German or Swiss regulator, for example, to push through something like a solvent scheme of arrangement within Switzerland and the EU, London might have developed half the solvent scheme and half the Part VII transfer. We really are some steps behind London and I am not sure whether we will be able to do something on the Continent unless we are very creative and very fast and that is probably not realistic within the different frameworks.
Stevan Corbett: That is an important point but I think in many classes of business London is very creative, it is the magic of London isn't it? That actually leads us to the fourth question. "What challenges are posed by the differing legal frameworks and regulatory requirements in different European countries? Are some jurisdictions more conducive to run-off than others?"
Kai Hasselbach: From a German perspective it is not so much that the legal framework is not there, but that the mindset and the community of people using that legal framework is not there. The developments in London, to a very large extent, simply come from the fact that you have something like 1,500 to 2,000 people looking at these issues every day of their lives, whereas in the German market there are probably just 20 to 50 people looking at run-off issues. And you have a regulator that doesn't really feel any need to look into these things because the German companies have been dealing with that themselves, in-house without any major run-off transactions. I think the main development we need to work on is getting the various participants working together and getting the regulator on track moving these things forward. You can do a lot within the existing legal framework.
Robert bisson: I recently moved from Riverstone, where I was involved in the arrangements framework, and I recognise that most of the matters which have been developed here are exactly the same for us. I am now working with CMGL, which is more a service provider for both insurers and reinsurers. We are probably servicing more French insurers than reinsurers and then, while the basic questions are the same, the question of the finalities is slightly different. You are not in front of the professional you are in front of private individuals and that is significant. In some life portfolios we have claims over 25 years and there is no way to shut them down. That is an issue. If we agree that we want some legal move to find some finality then we have to appreciate these two separate markets - direct and reinsurance.
Stevan Corbett: I think some of the big insurance companies in France are doing their own thing; they might not want us to go to the authorities. The small to medium-sized companies might feel they should, so there is a question of lobbying there.
Charlotte Boij: In the Nordic countries there is very different legislation but Sweden is largely unregulated. There is not even a reinsurance law as such, it is all analogies from the insurance law and there is definitely no regulation at all concerning run-off. But it works quite well anyway because the regulators are very flexible and if we say that, for example, in the UK they have certain legislation working well there, our regulator talks to the UK regulator and then copies it. They said, "OK, if it is fine for the FSA then it is fine for us, so we copied it". I think that most Nordic companies work a little bit like that but we still need, as we said before, the mechanism to transfer business with its reinsurance protections intact - that is the most needed change and also it would be nice to have some kind of solvent scheme of arrangement equivalent.
Heikki Saalamo: In Finland the situation is pretty much the same. But I think we make things too complicated because now when we talk about schemes and things like that they are quite common and then we face this legislation framework. And we haven't mentioned the word commutation so far. I think that is an excellent tool, which was very successfully introduced in Finland in the early 1990s and was actually the weapon by which the liabilities came down heavily. You can commute business quite easily nowadays in Europe, independently of the legal framework. It is up to the companies to make the deal and I think we still have to pursue that kind of thinking. Of course new products come onto the market like schemes, but commutations are still there and they are needed. One additional point - when talking about run-off and finality what do we actually mean by that? Finality for the market or for the company?
Stevan Corbett: Commutation is definitely, in my own personal experience, the strongest tool. The trouble is with certain markets like the US is they just don't want you to commute. If you have got good security they will commute with what they call the buy-back level. They do a lot of buy-backs, but when it comes to the good old insurance company, they don't like to commute with good security in Europe because they want them to continue paying these enormous claims. It is definitely the best tool so far. Just to take France, I don't think there have been any problems there.
Francoise Gelot: I would say that the black sheep of reinsurance run-off across Europe relates to automobile portfolios. Those are impossible to commute, very difficult, very long tail and they all refer to specific legislation whether it be in Germany, Sweden, France, Italy, or the UK. I know of an initiative started by Swiss Re on a very large French automobile portfolio, which failed after enormous work. All the following market were hoping that Swiss Re would be able to achieve this commutation. That was two or three years ago. It didn't fly with the French ceding companies and I have noticed that this is the same in other countries. Even after doing some audits, it is extremely difficult unless you pay an extraordinarily high premium.
Stevan Corbett: I think the point there is price, not the legal framework. Why commutation works well is because it is a commercial contract between two consenting parties. The problem you have brought up is the money and it is true, price quite often explodes the whole thing up in the air.
Detlef Huber: It is not only the price, especially in France and in other southern European countries; it is a lack of understanding of what commutation is. It is just a different attitude. They say, "Let's see, we will do this business and if we run it off, we haven't got a problem with it." Sometimes when people do not understand what you are proposing, they will not make a decision rather than running the risk of making the wrong decision. I still feel there is a lot of work to be done in a lot of countries, including Eastern Europe, to explain what a commutation is. I had a discussion last week with a company we had commuted and it turned out they thought we were commuting the reserves only and were asking for the unpaid balances. And although I agree with Mr Saalamo that it is a very good tool, the sexiness of a solvent scheme is that you do not necessarily need the other party's agreement and the sexiness of a commutation or a Part VII transfer is that at last for you the liability is gone and this is why we do it.
Axel Biagosch: I think we all agree that the framework in all European countries exists for commutations, but not for schemes. But if we consider the question of a commutation and especially hear what Francoise Gelot said, commutation is like cherry picking. If there is a weak reinsurer I would be interested to commute but where there is a strong reinsurer I would not. I would probably never commute with GenRe, Munich Re, Swiss Re or companies like them. But I know, or knew, a lot of companies with which I wanted to commute as quickly as possible. Therefore it is a kind of cherry picking. And that brings us to a question. I do not know of countries other than the UK and Ireland offering the final solution of a scheme of arrangement?
Charlotte Boij: On what Heikki asked, "Is it finality of a certain company or of the market?" I think the answer is we will never talk about finality for the whole market because there will always be new run-offs. For example, if you merge two companies you find that something you have got when you bought the other company was not exactly what you wanted to keep and you put that in run-off. There are other reasons too - solvency, cash flow, administrative costs, whatever it is. You will always have new run-offs and that is good news for all the people in the industry but it also makes it very important to keep on developing the tools. I can't agree more with what has been said about commutation, it is a beautiful tool and the beauty of it is that it's such a simple commercial agreement between parties. There is no legislation in any part of the free world against that kind of agreement and it will always be the primary solution I think.
Arndt Gossmann: But adding to that, I think if you combine all this, commutation is very much the first stage tool that you can apply relatively easily. I think the aim is not really achieving finality for entire markets. At the end of the day if we want to have a good working process to reduce our liabilities, we will not avoid having tools like schemes of arrangement or comparable things. We need to have some type of general common marketplace in terms of somewhere you can bring the liabilities that you don't want to market anymore. However that has to work within the legal framework. If you look at the banking industry, there have been tools developing over time, so it may not necessarily be a scheme of arrangement - there might be other things coming up, hybrid tools to use. But we will definitely need this otherwise we will be cherry picking and muddling around as before.
Detlef Huber: Are you are thinking about Cologne as a common marketplace? Do you really think that an insurer or reinsurer from Madrid or from Rome or from Milan will come? Is that realistic?
Arndt Gossmann: Not in terms of the marketplace being one city or one geographic place but rather in terms of some type of commercial availability. We don't have the tools so far but if I look at the futures market and what exists there, I can imagine other things - like simply copying schemes of arrangement.
Kai Hasselbach: I was going to say something about this scheme of arrangement issue because it is always brought before the lawyers, with clients asking, "Why don't we have this lovely thing that we have in the UK in other countries?" As far as I know only the UK and its former dominions have this type of thing. It exists in Australia and New Zealand, for example, and a couple of Asian countries have similar schemes, but none of the European countries have it. There are basically two issues. The first is whether or not you can use UK schemes for non-UK companies. In practice it has been tried various times in the past. It is theoretically possible but in practice, as far as I am aware, nobody really ever did it. It is difficult for regulatory and legal reasons with uncertainties remaining in the process.
The second issue is whether you use existing local legal tools to achieve the same effect. This is important insofar as that schemes of arrangement are a very typical corporate law tool in the English legal system, which is simply incomparable to everything the non-common law jurisdictions have. We have totally different legal systems in many other countries, so just saying we must introduce that for run-off purposes is not likely to ever happen because it would be such a big change for the legal system. I think it is much more likely that we will get the tools; we have portfolio transfers, which we have in every European country. We need spin-offs into separate entities to improve these a bit more. So that you can in a portfolio transfer, for example, transfer reinsurance which you cannot do in Germany at the moment. Or you can do a spin-off without necessarily having every creditor demanding security for their liabilities, which means in practice that it doesn't work. I think that is what we need on the legal front to make it happen, to try to influence legislation and to get the existing things working. Waiting for the scheme of arrangement to arrive in Germany will not work.
Charlotte Boij: I think that the only way of achieving finality apart from commutation in most European countries today is to sell the portfolio. This is very easy if it is a company that you want to sell but a bit more complicated if you want to sell a portfolio within a company, because of the problem of the reinsurance. But nevertheless it is a very easy and well-functioning solution that exists today.
Stevan Corbett: Well that leads us to the whole point, is Europe geared up for this? How geared up is Continental Europe, in terms of the legal side and providing a viable run-off market, which could be in Cologne, it could be in Paris?
Charlotte Boij: Nothing against Stockholm, Guernsey and Jersey but in terms of service providers, because we do have one or two here, and the ability to tap a pool of talented and experienced staff, professional know-how etc, does this ability vary between markets?
Thomas Freudenstein: I think there is plenty of talent and know-how in Europe. Commutations have been done in Germany for more than 20 years but mostly in-house, so I think the number of people that only do run-off for a living is still relatively small compared to London, but the number is growing. Before our company went into run-off four years ago I had not really thought very much about this as a subject and I think we made the transfer from underwriters to run-off people. We are also entering the service market through learning by experience. There are lots of people in the German market who know the subject very well but still prefer to work in a live company and handle the run-off like that.
Detlef Huber: We are based in Switzerland but it is much the same there. You definitely have talented people in Zurich and a lot of reinsurance companies there. It is much more difficult on the Continent because of the different languages. In Switzerland, speaking three languages is normal - if you speak less than three languages in Switzerland you are probably not Swiss. If it comes to France, where my experience is that people prefer to speak French, we will just not develop into second London market. It will probably be in different centres within the different countries. If you look at Spain for example I can't think of more than one law firm that specialises in reinsurance and that is part of a larger UK company. If you go to Germany you have several companies that will deal with the business but you have to pick out the specialists. I am not sure how it is in France or in the Nordic market. This is really the difficulty and in the mid-term these people will stay in their markets and work there. Some of them - a lot of them sitting around this table - will do cross-border business, but it will be a minority.
Stevan Corbett: What do you think on the French side?
Robert Bisson: In Paris I think we have plenty of opportunities to find some talented people and it is not an issue. On top of that, based on the French law, when you move a business you have to move the staff with it too which is a good way, in most cases, of keeping the history of this business.
Stevan Corbett: I think that is a very good point. In France the people go with the reserves so you have got the talent going with the reserves and the portfolio and, with a bit of luck, the computer as well.
Charlotte Boij: It is the same in Sweden. We need to offer the staff the opportunity to follow the business wherever it goes. On the other hand, if the business goes to Stockholm maybe your staff are not all that interested in moving there. I think the important thing is to have focused run-off management. We have a lot of talented insurance and reinsurance people in all the different European countries but we need them to be focused on run-off.
Heikki Saalamo: There are certainly differences in different parts because Europe is a big place. Some countries are more developed and have been dealing in run-offs for longer. Right now, for example in Finland, we have staff who have been involved with run-off for more than 50 years, so we are very well geared-up. Perhaps what could happen in the future is that these developed service providers could sell their products to Continental Europe from places other than London.
Francoise Gelot: I just wanted to remind everyone that there have been several attempts to organise service providers locally and all these entities which were managing run-off for third party companies disappeared. Why did they disappear? First, I believe they started early when the run-off concept was not well accepted in the market. But they were trying to attend to the urgent loss making contracts such as APH, which were looming at the end of the 1980s. The other reason is that they did not have a top class reputation and I think from a European standpoint reputation is essential. The people who would be the motors of the new service providers must be top-notch executives coming from the professional reinsurance industry if possible. There is an enormous pool of talent in Europe due to the fact that almost every country has or has had a professional reinsurer, which organised run-off in-house. In the next year or so there will be an enormous pool of professional experts available in the market so the old initiatives have lost ground but we are in a new market.
I believe that there are opportunities but I do not see any particular country that could be the home of a central organisation. The language aspect is also very important and Germany would have an advantage because people are more bilingual there than in any other country in Europe, although Switzerland could be the other place obviously.
Axel Biagosch: What we need desperately is an excellent knowledge of the portfolios going into run-off. A service provider is not a priest, he can't do everything for you. You desperately need the information, you need historical files, you must perhaps go back to microfiches from 50 years ago and therefore you need a lot of experience, even if you are using the best service provider, because he needs your information. One cannot do the job without the other. The service provider can be extremely helpful but you must prepare the marketplace for the service provider with the best information that you can give to him.
Arndt Gossmann: I share your opinion in terms of not being worried about people. In terms of whether there will be a central marketplace or hub in Europe will, in my view, heavily depend on European legislation. If there is one country in Continental Europe that can move ahead offering an acceptable progressive way of having similar schemes of arrangement or something beyond, this is going to be the place. And we are all going to follow.
Stevan Corbett: Let's just say, hypothetically, schemes of arrangement have become a practical solution to early closure of run-off businesses. How attractive are schemes as a solution in Continental Europe and what are the main challenges to consider? Try Germany for example, is that a useful thing?
Arndt Gossmann: Yes absolutely. There are a variety of players in the market wondering about the UK schemes. There are lots of players who believe it is great for them but nobody really wants to go first. So presumably if there was somewhere closer - let's say France. If France had an open policy in terms of there being no link to French business but it would be possible to make a scheme of arrangement across Europe, I am absolutely sure that certain players would do it.
Charlotte Boij: I think that what Kai said before is very true - we can't sit around and wait for this legislation to happen. If for example France started the scheme arrangement and changed its legislation, we would still have the hurdle of not being able to transfer an entire business because we need to start with the business transfer rules, so that is key I believe.
Stevan Corbett: Well let's include business transfer rules because many of us work for companies across borders. I used to work for a huge company, with staff everywhere. We were forever worrying about whether we could transfer everything we had to London. I won't mention the name, but could we get the whole empire and send it all to London? Obviously we couldn't, it was just blocked everywhere. If it wouldn't have to go to London, we could decide if it goes to perhaps Brussels, as head of the European Community. Is that worth pushing, depending on the size of your company obviously?
Charlotte Boij: I think another important issue is the taxation because you want to move it somewhere where the tax regime is favourable. Switzerland is one obvious example. You don't want, in my opinion, to move it to the UK because they have this penalty tax on reserving which is horrible and I hope it won't spread across Europe. Another important thing is to talk to our government about ensuring the level of company tax is harmonised maybe or to find a tax haven.
Stevan Corbett: Now that comes to the question of, within this question, is it going to stay in Europe? It could go to other islands couldn't it where they have the language and cultural skills? There is talk about Bermuda becoming a centre as well.
Kai Hasselbach: The one difficulty I think we would still have if we move outside the European Union is a regulatory framework. I mean it might just take ten years to convince the German regulator that you could move any kind of business from their control into the Channel Islands or Bermuda or even say Sri Lanka. Even if you could move theoretically on a legal basis, they would probably find a way with some general clause in their insurance framework to say why you can't. They don't understand that you are not doing this because you don't like supervision or because you don't want to pay taxes or whatever, but that it's just a simple business reason behind it all. My feeling is if you look at the Continental European jurisdictions I put quite a lot of faith in developments which we could see from EU legal levels - the possibility to transfer companies across borders, the possibility to merge companies across borders, the possibility to launch with ease in various countries.
One good example that we have seen in Germany is this European court decision about the possibility of English limited liability companies operating in all European jurisdictions. As a result, the legislator started to look at local corporate law and say, "Well there are many things which we now realise are simply no longer the state-of-the-art which we need to change to make our system more competitive with the English system." I think the same thing might happen in many other areas if people realise they can transfer an insurance portfolio to the UK and then do a solvent scheme of arrangement. Then the legislator and even the regulator may understand that they need to do something in their own system to keep the business where it is.
Heikki Saalamo: I think it is quite interesting to follow what is happening in Norway right now with Oslo Re and their scheme plans. The Nordic countries talk to each other and are aware of what is happening, what tools are there in the market. I think it is extremely interesting to see how they are succeeding in Norway and of course I think that the regulators would be very pleased to see these liabilities run down in a professional way. They are under good control so that basically I think the regulators might agree with these schemes in order to get it properly done.
Detlef Huber: Do you realise that all these discussions are going in only one direction - we are trying to think of how we can copy London, what can we do here, how do we harmonise and that we will logically follow the London market. I don't think it is the right focus. Why does it have to be that we have reinsurance liabilities forever? Can't we go out to the market and look for the continued use of cut-off clauses on different sizes of business just to ensure that this does not happen anymore? Then we will probably end up in a discussion about contract certainty, which does not exist in my personal opinion. Shouldn't we go over the contracts and ensure that we have finality at a later point in time? If that happened, the run-off industry would look totally different in 20 years time and we wouldn't have to talk about transferring 40-year-old French motor business, for example, to another entity.
Arndt Gossmann: It depends heavily on how schemes are structured. More and more, schemes with the type of short expiring period stuff are really not pleasing the policyholders, nor certain courts. So if it is considered fair to cut off certain things I think everybody will, perhaps not immediately, but everybody will get used to it. But if it is played as simply as a tool to exploit and to extract out the last cent, then we can definitely expect opposition.
Stevan Corbett: That is obviously part of the challenge. How likely is it that Europe could at some point become a leading market for run-off and serve as a best practice benchmark for the rest of the world? Some of you have said we want to be leaders, others feel that we don't want to be leaders; I don't know in France, we haven't decided yet. Perhaps we don't need to make a decision, you don't have to be a leader, you don't have to be a non-leader, and you can be in-between.
Robert Bisson: Personally I don't think the French market or a European market has to become leader on this because we have some specifics in our markets. We have to cope with this and that specific regulation. We have managed to build up the best services for the market players and that is it. I don't think we would need to become a leader.
Stevan Corbett: Who wants to become a leader?
Detlef Huber: No, I don't want to become a leader. I think this question is two-fold: will Europe become the leading market of run-off - I don't think so because of all of what we have said. The second question - could you serve as a best practice benchmark for the rest of the world - I think yes and we have to. I repeat myself, come back from thinking of schemes and commutations, we should just try and go out into our respective markets and see that we do not commit the same error again and again. In Continental Europe, as it is not really a broker-driven market, I think we have a better chance to achieve this than in the US or the UK.
Stevan Corbett: Germany?
Axel Biagosch: Sorry I can't speak for the German market. But two points. First, as I said, there very probably won't be a European run-off market. It will be national markets with their experience and legal framework but I 100% expect that we should try to enter into a dialogue with the regulators because clients as well as regulators should understand that a scheme of arrangement is better than a bankrupt company. That is a bit of our problem because you said we receive premiums but we also received engagements for which we never received any premium - think of the asbestos claims, pollution, problems over the cover. There must be a fair compromise and there should be, I would call it a win win situation for very difficult cases. I want to pay my engagements but if there is no money left there must be something else other than a bankrupt insurance or reinsurance company.
Arndt Gossmann: I absolutely agree. Getting back to the question of who is going to be the leading country, again I believe it is going to be the one that is going to be quick in implementation. For Germany the advantage is that we have, according to our analysis, something like ?60bn in liabilities which are discontinued and not managed at all at the moment. That is a substantial volume, which would give reason enough to look at this topic. Nevertheless if there is a favourable legislation in Malta or Italy which would be suitable for all European countries there is going to be some development at this location. If not, I absolutely agree we are going to remain with our national frameworks, so who moves first is the question.
Thomas Freudenstein: And even then it would probably still be national rather than European. It would then be everything moving into France or into Germany or into Finland. The marketplace would not be European, it would be Finnish or German wouldn't it?
Arndt Gossmann: But if there was a suitable place for running down certain things, with a positive tax regime, that would definitely be some type of hub - or perhaps two or three hubs across Europe - where service providers would gather around. The business nevertheless is not coming from those hubs, it is coming from elsewhere.
Kai Hasselbach: If indeed you could find a way to do a very useful finality exercise in, say Finland or Italy, my impression is that the local regulator of the jurisdiction where the respective company is located would very quickly (certainly after the second of these things) try to block it or force you to do it at home. That is very clearly my impression. I think it is not likely that we will have one or two centres in Europe but there will be a development gradually in the various jurisdictions which will make it easier to do these things where these companies are located.
Charlotte Boij: I think the question is hard to answer because it depends on whose perspective you look at it from. If you look at the insurance companies that have reinsured, I think that Europe is perhaps already leading compared to the UK. If you say leading run-off market as in the fastest to run-off it is obviously the Nordic markets because we are already down to 5% to 10% left of the reserves compared to the early 1990s when we stopped the run-off. Leading as in size, that would be Germany probably. So it really depends how you put the question.
I also agree with what Detlef said about not being so broker-intensive. It makes it so much easier to have good quality information - you can find the old files because you have them yourself, you don't have to find some old broker who has merged with another and disappeared and the rats have eaten the files (which is a common excuse in the UK). I think that is really something that is on the plus side when it comes to the quality of run-off in European countries.
Stevan Corbett: The quality of the database is really part of competence. We have discovered in some of our own run-offs that in certain sections there are no computers, let alone any files.
Francoise Gelot: A good example is SCOR in France, which has created a worldwide IT system known as "Omega". They use it in the US, Bermuda, France and in Germany to connect and centralise all the information but very few groups have been able to do that. I did work with another large French company with offices all over the world and we did an inventory of all their run-off accounts. They have decided ultimately that systems were not more beneficial and they left each country to deal with their own run-offs. But the example of SCOR is one that should be highlighted in terms of good management - being able to access the same information from any point in the world.
Stevan Corbett: After all it is part of best practice, isn't it, having a decent database. I find London is quite good at that. Onto another question, how is the reputation of run-off changing and will this aid the development of the European run-off market?
Francoise Gelot: I would say that huge financial deals are now done in Denmark for the run-off industry. The two recent deals involving Berkshire Hathaway are a case in point but they are not the only ones. The sale of the Equitas liabilities and potential recovery of some money for the Names, which were involved in a non-limited basis, is quite an extraordinary deal. We see the banks and financial groups, now with tonnes of money, offering their services to buy run-offs. So I would say that we have left the first phase of the run-off industry which was really geared towards addressing APH problems essentially. We are now beyond that because we realise that there is good and bad business in the run-off world and these financial institutions are addressing the good side of it and trying to save money on the old account. So I think we are in generation two of the run-off industry and the problems have to be addressed differently with schemes of arrangement and portfolio transfers and a much more sophisticated approach to run-off.
Charlotte Boij: I think that sometimes maybe there is a little bit too much of a glorious shimmer around the run-off industry now because it was very grey, dull and shameful as Arndt was saying. Now it has changed so much, even the hedge funds and others want to be in there and play. They buy reinsurance run-off portfolios for often stupid amounts of money and what is that going to do with the industry. The reputation has definitely changed.
Axel Biagosch: About 20, 30, even ten years ago, run-offs were not very reputable but we face a situation that is a little bit comparable to the economic consequences of the globalisation. We must accept that the reinsurance markets and the reinsurance world have changed completely. We must face the problem that run-offs have become unavoidable and therefore reputable, that is a fact, nothing else.
Thomas Freudenstein: I think it is definitely changing. When Gerling Global Re went into run-off about four years ago, I had one client on the telephone who was actually yelling at me saying, "How can you do this to us?" But now we have people calling to ask us for commutations so I think there has been quite a change. We also see a growing interest in the Commutation Rendezvous that we host in Cologne in December, so it is getting more positive.
Arndt Gossmann: Perhaps getting to your argument Charlotte, I think there is some glamour on the horizon. I believe it is perhaps a good thing because the power to change the industry will be influenced by external money, by hedge funds etc. It helps to question things because they are often going to be turned upside down by players who don't have a clue what this is about, who just heard that you can make money. That is the way it is. I think the key challenge for the industry is in terms of proving that this is the right place. It merits a certain glamour as you said.
Francoise Gelot: We seem to be forgetting one aspect, and I am wearing my old reinsurer's hat to say, that ultimately the concept of reinsurance was to carry all liabilities up to extinction and this is still available in a number of old wordings. I don't know about today's wordings. We have changed from all occurrence policies to claims made policies, so that has changed it. We have spoken from a reinsurance standpoint but what about the insurance world. Whatever brings finality to one's contract brings continuation and ongoing run-off and growing run-off on the insurance field and that is another aspect. We are a little selfish as reinsurers to try to close our portfolios, we are just passing the buck back to our ceding companies with probably a little cushion of money.
Detlef Huber:It has also an advantage on the other side. How many statements of account do you get for $2.50 and how many hundreds of people are sitting in insurance companies? The costs of sending the statements and employing these people are much more than just cutting it off for a certain amount that both parties, if you talk about commutation, believe is the fair value. And coming back to the premium it is not only that we have to pay claims for the premiums, we carry the risk and this is what we have done for years and years, carrying all this uncertainty. When you come to a point where we can find a fair price, what is the problem in doing this and also helping the insurer to get rid of the administrational costs?
Stevan Corbett: I agree with that. We accept a premium for the liability that will always have to be with us We are there to help the insurance market and you can't pass the buck to the retrocessionaires, they seem to have disappeared anyway.
Detlef Huber:Another comment regards helping the insurance market. Because of the way run-off has been conducted in Continental Europe in the last few years, the insurers really noted that this is an issue and now they have even started to proactively handle this business. This would not have been the case if run-off consultancies and run-off companies weren't in the market and pointing out these problems.
Charlotte Boij: I think that the consolidation in the European market means there is no choice about run-off. It will still be there and it will just be a question of handling it the European way with a lot of respect for tradition, for cultural differences. It also needs a lot of respect for the reinsured because it is a way of not trying to shy away from responsibility but of making sure that all the claims that are paid are valid claims. That sometimes is something that has been missed in the past. It has been a "follow the leader" culture which has not always been correct.
Stevan Corbett: Thank you. I think we can end on that very positive note, let's keep it in the European tradition.