Run-off promises to be the fastest-growing part of the US re/insurance market, but service providers are still finding business thin on the ground.
In 1985, the run-off industry was not exactly held in high esteem. As one observer puts it, many thought it was “comprised of sleazy old men trying to scheme their way out of business.” Certainly, in the event of a company going into run-off, the key employees tend to jump ship to ‘live' companies. However, the industry has come a long way since then. The largest areas of growth in the re/insurance market today appear to be in run-off and in developing exit strategies. Indeed, it seems there's more talk these days about creating exit strategies than there is about new products.
Figures relating to the run-off industry abound. It is estimated that the value of the worldwide run-off market is currently as high as $350bn of liabilities, growing at 10% per annum.
Of this global total, 85% is in five countries: US, UK, Japan, Germany and France. Swiss Re estimates that by 2006, liabilities of $505bn are on the cards. Some contest such figures, pointing out that a lot can change over the coming years – not least legislation – but the general consensus is that run-off liabilities are definitely on
Run-off is the dead – or should that be ‘undead' cert of the re/insurance market? Companies will go bust on a cyclical basis (the latest batch was on Australian soil), cut back on unprofitable lines in the rush to core competencies and pull out of markets. Thus, like death and taxes, run-off is inevitable. All new business is eventually cancelled and the policies and claims end up in run-off mode.
The American tale
On the face of it, the Reliance Group's high-profile descent into run-off and the US market's continuing penchant for consolidation must have American run-off service providers rubbing their hands in glee. It's not quite that simple, however. For all the recent talk about the growing proclivity of companies to turn to outsourcing, run-off in the US is still largely handled in-house, Reliance being no exception.
A major reason is size. As Stephanie Mocatta, a director of Omni Whittington, points out: “A lot of US companies are huge and can accommodate their run-offs internally. Take the Home, for example. It's very difficult to move something like that.”
Jim Moran, client manager at Cavell Management Services, adds that, unlike London, few standalone reinsurers have gone into run-off. “They have tended to be reinsurance departments of big insurance companies which have administered the run-off. So they have not had to look to outsource it.”
Other factors such as a conservative regulatory environment, a reluctance to admit the presence of ‘dirty linen', or wariness of losing control have no doubt played their part.
Ms Mocatta concludes that the US run-off scene “may be five years behind what we've done in the UK. Outsourcing run-off has been en vogue in the UK in recent years. It's only just getting there in the US.”
It will come as no surprise, then, that the US run-off services industry is small compared to the UK which, if anything, is oversubscribed. Among the roll call are CNA Global Resource Managers, Horizon Management and Risk Enterprise Management (REM), all of which started out as in-house operations.
“They're out in the market trying to take on third party business,” opines Mr Moran, “but from what we can see, there's not an awful lot moving.” The general view is that such companies are still heavily involved with parent company business.
Despite this, companies such as the UK's Omni Whittington and Eastgate are currently seeking to grab a foothold in the US. Remarks Ms Mocatta: “We think there's a really big opportunity in the US run-off sector, just because nobody is dominating the market.” Omni Whittington has made no secret of the fact that it has been looking to acquire a US company in run-off. It has now done just that. Subject to regulatory approval, the company recently bought New Orleans-based Americas Insurance Company from Marsh. It's a small run-off with only five staff, but it's a start. The plan is to carry out the run-off properly, possibly consolidating it along the way with other smaller run-offs, then approach the insurance commissioners with a view to discussing future possibilities at the smaller end of the market. “There's nothing better than doing something well,” says Ms Mocatta. “This business is all about building relationships.”
Albeit a limited industry for the time being, observers agree it is likely that more UK run-off players will follow, in addition to the prospect of new entities setting up from the accounting and actuarial communities. The ramifications of such a development could be far reaching. Increasing competition can only benefit the client, lending weight to the highly optimistic view that outsourcing of run-off books to specialist providers is becoming more common. Also, with the UK factor spliced into the equation, perhaps schemes of arrangement and commutations will make their mark.
“They're not quite so keen on schemes of arrangement in the US,” comments Mr Moran. “It's a very conservative market. All the different state laws makes it more cumbersome to perform them.”
“There's nothing equivalent to schemes of arrangement in the US, although we'd really like there to be,” adds Ms Mocatta. “Interestingly, (our) Americas (team) has about 400 live claims, around 380 of which we can wind up within a year or two. We've got a core of 20 or 30 claims involving tort, multiple injury, latent asbestos and pollution which are going to be very difficult. Something like a solvent scheme mechanism would cut the tail significantly, although we probably wouldn't call it ‘scheme' since that has negative connotations in the US. If you could make a breakthrough on something like that, then it may be the driver that makes people think about what they're doing with run-off. They might then look to give it away.”
As for the use of commutation – very much a buzzword in the UK run-off community in recent years – US players appear to have mixed feelings.
Many companies lack the enthusiasm apparent in Europe, while the likes of REM and CNA Global Resource Managers have a definite interest. Perhaps the growing fondness for finality will transform this situation; run-off practitioners on both sides of the Atlantic firmly agree that clients are demanding more finality for their run-off accounts. As Michael Fitzgerald of CNA Global Resource Managers points out, “Run-off managers who have the ability to acquire portfolios or who have access to secure reinsurance vehicles will capitalise on this demand. Due to regulatory complexities, this type of mechanism may become more common in reinsurance than in direct run-off. Excellent investment and portfolio skills will become very important in the run-off industry.”
Following the convergence of insurance and capital markets, run-off practitioners are also expected to offer more financial solutions, as well as a greater variety of services. The basic repertoire of skills which includes cash flow management, cost efficiency, IT expertise, collections, claims and litigation management remains paramount, but as in the re/insurance industry at large, innovation is key. Ask anyone working in run-off how they like to describe themselves and “solutions provider” invariably comes up. It's hardly surprising, then, that in late 1999, CNA Global Resource Managers changed its name from CNA Global Runoff Managers.
Critical mass to provide influence and negotiating strength will prove increasingly important in the coming years, leading to consolidation within the run-off practitioners themselves. Just last year, Omni Whittington acquired Bridgeway Management Ltd, immediately broadening the company's skill base. More such activity is expected in the UK, particularly considering the plethora of players operating in the market, but it will be a few years down the line before we see similar occurrences in the US run-off industry.
Summing up, outsourcing might be a buzzword in the US at the moment, but there's not a lot of it going on in the run-off field. Is this likely to change? Opinions are divided. Some observers suggest there would need to be a sea-change in the way chief executives consider the role of outsourcing – and they generally conclude this is unlikely. Others believe recent developments within the third party run-off industry, such as increasing competition and the push for ever more resourceful expertise, augur well. The fact is, only time will tell. Certainly, for those companies willing to acquire portfolios or entire operations, there is potential at the smaller end of the market, as Ms Mocatta can testify.