Rhydian Williams: Good morning and welcome to the Global Reinsurance London Market Run-off Roundtable. Certainly, run-off’s profile today is bigger than ten years ago. It is clearly in the market and growing. Is it expanding, or is it simply that the boundaries are being redefined? If it is booming, who is benefiting from this boom? Ultimately, will it last? Is this just a feature of where we are in the cycle, or will it continue for many years to come?

Lee Brandon: In my view it is booming in the sense that there is a raised of awareness and understanding of the issues. Overall, what is relevant is that run-off is better understood and is evolving. Certainly, there is a much better appreciation of the issues. It is much more acceptable. For instance, the Equitas deal, the various “Rendezvous events”, publications, and events like this, have all helped to raise the profile of run-off, and the KPMG run-off survey and others have increased understanding. Most big organisations now recognise that discontinued business needs to be professionally managed and we are moving towards where we need to get to which is that run-off is a capital management tool. I believe we are moving from just firefighting and clearing up some of the problems of the past, towards having a more professional way of managing part of the natural insurance cycle. However, it is not booming in the sense that the problems are being solved. A lot of it is helping one party to move business to someone else. The only way you really solve this is through extinguishing liabilities, such as through commutations and through schemes of arrangement. With acquisitions you are just passing it from one party to another. Considering the sheer scale of the problem, we have not even scratched the surface in terms of finding solutions, therefore you cannot regard it as booming in that sense.

Rhydian Williams: When I looked at that KPMG survey recently, the size of the market has been constant for the last four or five years at around £38bn to £40bn, which suggests it is stagnating rather than booming.

Maik Wandres: I think there are a number of issues. Firstly, I agree with Lee that there has been a boom and an increased focus on risk management and shareholder value. The rating agencies have also brought the issue of capital to the forefront of board directors’ minds. The London market has recently been very successful in closing down portfolios and there has been a stride towards a more proactive strategy. We have seen schemes of arrangement increasing both in number and size. I think another reason why the market has not grown is that much of the run-off we are dealing with originates from asbestos, pollution and health hazards (APH) that date back some time. However, in more recent years, there has been a shorter-tail run-off as well, which is a major influence.

David Vaughan: I would suggest that ten years ago many of the run-offs were with run-off managers. Indeed, there used to be a joke about London run-off that it was a club you could join but never exit. Indeed, that has been relatively true because until recently there were no run-off buyers because everybody considered it a high risk business. Now we have some tools that enable people to move on. Within part of the run-off market the trend is that those 1990s and earlier run-offs are going and reducing in scale, although there will be some tricky ones. In addition, as with all factors, there are a few new trends which people will latch onto, which probably stops some of the movement forward. In terms of schemes, there was first mover advantage, but now we are approaching a degree of stagnation there and people are looking at other routes. There have been no new major run-offs. Gerling was one from 2001 and PXRE was another vintage, but there are nothing like the run-offs that came with Equitas and so forth. There are quite a few new run-offs in Lloyd’s, and a few are lurking within consolidations of carriers, but they are not so visible to the outside market. I suspect stagnation is probably quite a good thing given that you are getting rid of a lot of legacy.

Tom Riddell: There is enough stagnation in the sense we might recognise the state as constant, but if there are things coming in and things being finished then there is no stagnation there. If you think about run-offs consisting of business being underwritten in the past, then we cannot underwrite more in the past because it has happened, so it never even boomed, it is just a question of it being recognised separately. For instance, there is still a lot of run-off in Lloyd’s which is not recognised. RITC [reinsurance-to-close] is a run-off being put into an unrecognised ongoing situation.

Peter Hughes: How do you measure your success in terms of run-off? Do you measure it through the growth of the aggregate liabilities or their reduction?

Tom Riddell: If you are a shareholder, you do not care whether it grows or gets smaller as long as you make money out of it. It can grow if you are acquiring more run-off, but if you are not closing anything you are unlikely to be making money.

Peter Hughes: I was actually talking about the aggregate market numbers.

David Vaughan: Those are very difficult to track. One of the trends in the London market is bigger size. In 1992 and prior to that many of the units in the subscription market were pretty small and those are the ones which we see as discrete run-off units, so you can say that is in run-off. Nowadays, in some of the bigger companies it is not so easy to define what is in run-off even though it is the same type of business, which makes it hard to track. The question is then whether the current owners want to own up to the fact that there is legacy business there.

Sean McDermott: It is a very good point that was made about pre-1990s and 1990s business and all the asbestos liabilities, and certainly there are some different issues that people are dealing with today. Moreover, I think some of the problems this business has had is the way the business was written then in terms of all the pools, the inter-relationships and the reinsurance. Unravelling that was extremely difficult. Even though we now have computers, the way the business is structured today is far simpler than it was.

Nick Stimpson: I would say that the early stages of the run-off was effectively just servicing policies inwards and outwards, and more so now with the development of finality solutions for capital providers who really want the problem removed from their balance sheets as far as possible. I sense that the staff within the market have learnt a great deal from effectively just servicing policies all the way through the work flow and they are now providing a more intelligent solution that should satisfy all the stakeholders, from policyholders through to capital providers. To that extent, it may not be a booming industry, but there is a realisation of the problem and that solutions exist.

Beth Rees: Picking up David’s point and perhaps Peter’s as well, one thing we have experienced at the FSA is that there still appears to be a limited understanding of what run-off means, particularly with regard to legacy items that are within my underwriting units. The message we have attempted to relay to the market is that any policy that has an unextinguished liability attached to it is a policy in run-off, and there is a legacy issue that has to be dealt with. In that respect, the run-off market per se has done a great deal to help relay that message across to the composites that perhaps have not recognised this issue before, but there is still a long way to go.

Ian McKenna: Speaking as a legal service provider in the area, I would not describe it is a booming industry, but it is a very busy area for lawyers who practice in this area. One only has to look at the inquiries we have seen in the recent past in relation to exit strategies and schemes available in the London market. In addition, there have been the recent

developments with Part VII transfers, with people looking to migrate run-off books of business to London and take advantage of the situation here. It is certainly very busy.

Maik Wandres: I agree in principle, although I would add a slightly different approach. I would define run-off as a portfolio which is discontinued and can be defined as to its peculiarities. The way that the run-off is affected is slightly different than if one always has the renewal in mind, and there is the influence of the underwriters.

Rhydian Williams: Then true run-off is when you no longer have that relationship and you are floating free?

Sean McDermott: But the focus has changed away from underwriting. Insurance companies primarily see themselves as underwriting businesses. The headcount is sort of split across insurance companies and you will find that the number of people they have in claims departments is relatively minor, whereas when something goes into run-off the emphasis completely changes, and I think that is right too.

Rhydian Williams: There is an alternative survey in the market from PwC that indicates we are looking at a run-off market of ?204bn within Europe. In fact, looking back over other information available, a Swiss Re Sigma survey quoted $230bn at that stage growing at 15% per annum. Do you intuitively feel those estimates sound right?

Lee Brandon: Firstly, I would like to reinforce what Beth said and offer a comment, which perhaps leads on to Europe. I think Beth’s definition of run-off is absolutely correct. It seems to me that run-off can be recognised as a mental thing. In other words it is when people actually recognise they have an issue and come up with a strategy to address it. That strategy may be passive due to client relationships that are very active. In my experience, the big issue in terms of Continental Europe is that up until now there has been a failure to recognise they have an issue that needs to be addressed. That is where London has made so much progress over the last ten years and has led the global run-off initiative.

Peter Hughes: Do you need to have a problem to put a portfolio into run-off? If you are managing an insurance company through a cycle, then you might decide that while you have made a lot of money in a certain portfolio of business, now is the time to get out of it, close it down and put it in run-off. It is not necessarily about having an issue, is it?

Lee Brandon: No, but I think that is where we will get to. I think it will be part of capital management and a natural part of looking to protect shareholders, reacting and dictating market conditions. In my view, ongoing companies should always be looking to reposition their portfolio if they see great softening and over-capacity. To avoid the collapses of the 1980s and 1990s, they should be cutting back their capacity and moving it, and once they do that, that business needs to be managed

Peter Hughes: Perhaps there is some sense in the continental approach, certainly with German companies who do not talk about run-off as being an issue. Their approach is to say, “We have this historical business so we are going to manage it in the same way as we have managed the rest of our business.”

Tom Riddell: It is only a problem if you do not manage it. It is all about liability management really, is it not? As you say, that is not necessarily a problem. It is a profit centre if you manage it, but if you do not name it as such in the market or do anything with it, then internally you are denying that it is a problem because your reinsurance drops off and your liabilities do not.

Sean McDermott: If you know what impact that is having on your rating and on your capital.

Beth Rees: Going forward, that is likely to become more of an issue with Solvency II. Efficient capital management, which I think by definition, will involve looking at your legacy portfolios, is something that the consultants around the table in particular are probably rubbing their hands together in anticipation of.

Mark Simpson: Run-off still has this failure tag to it, and maybe that is something people are not prepared to accept. Lee and I were talking earlier this morning about whether the term “risk recycling” really does encapsulate it because that suggests it is just moving it around. As Tom pointed out, it is about discontinued liability management and actively seeking a solution.