Run-off management is as international as the live market.
Traditionally, the two biggest reinsurance markets in the world have been the US and London, with both then retroceding liabilities to a wide spread of countries all over the globe. The timing of run-offs has pretty much coincided with this flow of business; London and the US had the first major players to stop underwriting, and the rest of the world has now started to follow suit.
If London and the US are truly models for new trends in run-off, then perhaps we can expect them to develop run-off industries of service providers with efficient techniques for hard-headed run-off. It seems unlikely, however, that any of the existing markets are big enough to support a competitive group of such companies. Run-offs are almost always administered in-house or in a service company set up solely to run off group entities. Those that sell third party services as well tend to offer only problem-solving, case-specific resources rather than a general facility that would take away a run-off completely.
Most accounts in run-off are simply that - accounts rather than whole companies. With the rest of the company continuing in place, more often than not still underwriting direct insurance, there is already an infrastructure in which the work can be carried out. This creates economies of scale in non-technical areas. By keeping staff and processes in place, the owner of the run-off can retain control and enforce the chosen strategy for the run-off.
The uncertainty inherent in these old reinsurance accounts means that protecting future results is paramount and commutation is seen as an ideal way to reduce the chance of deterioration.
However, this tactic has worked almost too well, particularly for smaller companies: often, where the reinsurance account was ring-fenced into a new company, the financial position of the reinsurers improved considerably. Commuting at levels well below those reserved in the companies' accounts has contributed significantly to those profits. As a consequence, remaining cedants see a highly solvent reinsurer and refuse to commute cheaply. Added to that, much of the remaining business will be made up of small relationships, too small to justify visits abroad to negotiate with counterparties.
If the smaller run-off operations cannot easily and efficiently reach the majority of their cedants to negotiate commutations, then their run-offs will be significantly prolonged.
Thus, instead of working to a plan of aggressive commutation followed by closing of the account by solvent scheme, some of them might have to accept that they will never reduce their exposures sufficiently to give a scheme a better chance of being accepted by the creditors. Reluctance to commute on the part of cedants is only part of this issue; the non-recoverability of commuted amounts is also responsible for slowing down commutations activity generally. In these cases, sale of the ring-fenced reinsurance operations, or business transfer of the in-house reinsurance accounts, might become the preferred option. Sale to a fund that already has a number of risk carriers under its wing would allow the bigger player to make use of its economies of scale to accelerate the run-off, while giving the previous owner a release from the uncertainty inherent in the reinsurance portfolios, and perhaps even the release of some capital.
There is a range of exit strategies available to reinsurance operations, from the partial to the complete, depending on the technical issues involved and on the legal constraints of the territory in question. Business transfers and solvent schemes, for instance, are not valid in every territory. Some countries insist on funds remaining in the country if ownership of a reinsurer changes; this reduces the chance of finding a buyer for a risk carrier, since potential purchasers foresee their assets being tied up in a way which is detrimental to return on capital. It will be necessary to work closely with the local insurance authority whenever there is a change of ownership and moving assets abroad can be achieved.
Where the portfolio or company in question covers risks outside the territory of domicile of the risk carrier, the local authority is less likely to object. Similarly, where the account is treaty reinsurance only, with no insureds being directly affected, the local authority's duty to policyholders will be less of an issue.
In summary, trends in international run-off therefore are likely to rely heavily on how easy it proves to be over the next year or so for small companies to achieve good progress with commutation strategies. The new Cavell Commutations Rendez-vous at the Hawksmere Bermuda Congress in October this year will provide an opportunity for these companies to meet their US cedants. If progress is blocked or made prohibitively expensive, then more sales and transfers will take place, increasing the share of the market controlled by the professional service companies and exit strategy vehicles. This can allow smaller run-offs to progress cost-effectively towards closure, in a way that would never happen in a stand-alone operation.