Ask anyone in the re/insurance market today to calculate how much business is currently in run-off globally and you will get a variety of responses
"It's massive", "huge", "can't put a figure on it", "you're going to need a bigger calculator". In 2000, Swiss Re, in its report, "The run-off phenomenon" attempted to quantify the total value of the international run-off market, putting an estimate of $184bn on it, which the study claimed "represents more than 20% of the total liabilities managed by companies in the insurance sector and over 24% of the equivalent figure for the reinsurance industry." Over four years on from the publication of this report, would anyone like to hazard a guess?
"There is more London market business in run-off now, certainly coming out of Lloyd's, than there was pre-Equitas," says Richard Whatton, deputy chief executive at Omni Whittington. "So that gives you an idea of the size of the sector." A study by KPMG and the Association of Run-Off Companies (ARC), published in September 2004, put the figure for total liabilities of the UK non-life run-off market, including business written at Lloyd's, at approximately £41.1bn, representing 25% of the non-life market as a whole, with net assets or shareholders' funds of UK non-life business in run-off totaling some £3.8bn. The report stated that the UK non-life run-off market has increased by 6.2% over the year.
The run-off market has exploded in recent years and as the KPMG/ARC study reveals continues to grow at a phenomenal rate, as increasingly companies are willing to or are forced to hold their hands up to having written poor business in prior years which has become a drag on their balance sheet and which must be closed off. For many it was the creation of Equitas that saw the run-off market achieve a level of acceptability which it has built on in recent years. "When Equitas started commuting and closing things it suddenly became more acceptable in the eyes of the ongoing market to do that sort of thing," says Mr Whatton.
As with any market, the larger the growth the greater the interest taken by the regulator. However, as Mr Whatton explains, while in the UK, non-Lloyd's run-off business is treated in a similar manner to live business by the authorities, the regulation of run-off in the Lloyd's market is a different animal. Jeremy Pinchin currently heads up Claims, Reinsurance & Open Years at Lloyd's, and has responsibility for Lloyd's oversight of both the market's inwards claims and outwards reinsurance, as well as the Lloyd's run-off programme. Open Years Management is headed by Steve McCann and this team is responsible for the oversight and supervision of managing agents and service providers to run-off syndicates.
However, as Steve Goodlud of KMPG points out, this could all be about to change, following the recent release by the UK Treasury of a consultation document entitled, "Implementation of the insurers reorganisation and winding-up directive for Lloyd's", which if implemented would see the management of the market handed over to a Reorganisation Controller.
Talk of run-off will always raise the issue of reinsurance recoverables.
While reinsurance collections may be seen as a priority when dealing with a portfolio in run-off, such entities will often find themselves at the back of the queue when it comes to paying out, as there is no renewal incentive on the part of the reinsurer. Add to this the fact that the regulations on what credit you can take in your report and accounts in terms of delinquent reinsurance recoveries are getting much tighter and this can really start to hurt.
"What you have to do is make your reinsurance technician responsible for that process," explains Mr Whatton. "So you send it to the broker.
You then chase the broker - have you presented it to the reinsurer, has the leading underwriter agreed everything? If he hasn't, why not? What is the query? Give us the file back. And they have to be very proactive about that."
But as re/insurers globally continue to scour themselves of any unsatisfactory or under performing business, will we see a time further down the line when the industry shines in the light of impeccably clean portfolios?
"Everybody assumes that tomorrow is always going to be better," says Mr Whatton. "Systems are better, controls are better, business is better, rates are better, brokers are more professional, reinsurers are more professional.
I guarantee that in 10-years time we will be having the same conversation and we will be talking about companies trading today who are going to find themselves in difficulties."
- Nigel Allen is editor of Global Reinsurance.