Doom and gloom are in fashion again. Bad weather, earthquakes and plane crashes are having a detrimental effect on reinsurance results and, once again, capacity is leaving the London market, some with its head held high, some with its tail between its legs.
Cynics might say the run-off market, in the form of service companies which take on the administration of run-off reinsurance accounts, would be jumping for joy at such news. The fact is, however, that it is not news to them; they knew it would happen because it has happened so often before. It is the reinsurance cycle. Rates go down, companies make losses, some of them withdraw so capacity becomes scarce, putting up rates, bringing profits and, in their wake, fresh capacity. When enough new capacity has reached the market the cycle starts all over again.
“Now who is the cynic?” I hear you ask. There will even be those who say, “That is all very well, but what about doing something constructive about it, instead of just profiting from the misfortune of others?” And that is exactly what run-off specialists intend to do.
It is not for administration service companies to tell other companies how to invest their money. If they want to use their capital to underwrite reinsurance business, that is their affair, but service companies can offer them a way of reducing costs while they do it and a way out again if they fail to ride the cycle successfully. One of the newest offerings is a start-up package to make it as easy as possible to begin underwriting and support the company until it is big enough to become autonomous, if that is what it wants. If, however, the cycle turns before the client can cope with the turn, it will want to close down all its liabilities as soon as possible. In that case, the service company will arrange the sale of the company or the portfolio withdrawal.
Can it be that easy and, if it is, why has it not been done before? The answer lies in the reason some companies have not ridden the cycle successfully in the past: control. Control is what every shareholder wants but few get. Historically, the underwriter has been allowed to run the show, reporting infrequently to a board, perhaps without full details of the exposure, and often too late for the board to act in a timely manner.
With greater transparency about exposures many underwriters would have been more responsible in their underwriting. With more control over their subsidiaries more shareholders would have been able to intervene before matters became so bad that retreat from the market became the only option. This sort of control requires state-of-the-art information systems.
Nowadays, service providers can offer the systems from an independent base, systems which were initially developed for writing business and then adjusted to cope with the different priorities involved in run-off. Service providers with a number of clients are used to working for differing interests simultaneously, so providing services to competing reinsurers is nothing new to them. The clients need only employ underwriters to take on the business; all other facilities and services can be provided right down to the provision of suitable accommodation. Claims teams and credit control staff, secretarial and accounting resource can all be provided, down to installing the rating systems if necessary.
Underwriters will be able to control their exposures by territory and hazard at any given time, using the same systems that give them their placing information for their own reinsurances. At every stage in the process the underwriters will see what is happening in the company but so will the shareholders. Wherever they are in the world they can have access to the same information through their computers. They will be able to see the same premiums and claims going through and check on every aspect of the business, inwards or outwards, principal to principal.
Premiums will be booked and chased to comply with terms of trade, claims will be adjusted and processed efficiently, recoveries will be calculated and collected by teams experienced in recovering money in the harsher world of run-off. The service company will compile the accounts and balance sheet, Financial Services Authority (FSA) returns and all other reporting. The new player in the market will have the most efficient set-up possible but with none of the baggage that usually comes with it. The only employees will be the underwriters; the rest of the work will be provided under contract, with service levels controlled by agreement.
Logically, if a number of new reinsurers wanted to follow this path, they could all be put together on one site to provide extra temptation for brokers to visit. Cavell's version of this site already exists in the London Underwriting Centre (LUC) and, in fact, the whole idea can be seen as a natural progression of the LUC principle. Having brought an array of corporate risk carriers into the same building, in the way Lloyd's has always grouped its names' interests, the next step could be to have many of them using the same systems, accounting and claims-handling facilities.
Eventually the new company may well prefer to go its own way and employ all its own staff. Another benefit of up-to-date systems is that they are easily portable to another owner, so the service provider should be able to make that process as efficient as possible too. But experience shows that some will not remain for long – Liberty Re lasted only one renewal season before it left the market. More often, an owner will sell up to another investor and leave quietly, but they still leave. Doom and gloom are at large and they do not take prisoners.
Vision is essential. Being innovative becomes a habit. Once you have tried it a few times it is as easy as riding a cycle. Jim Moran is a director of Cavell Management Services Ltd. He can be contacted at: +44 (0)1603 599 340. Website: www.cavell.co.uk