Nick Bentley: I used to say I've never met many people who chose reinsurance as a career, they've fallen into it. And I've met even fewer people who have chosen run-off as a career.
Paul Howick: Is that changing?
Nick Bentley: It's changing within areas. I can only talk about my own organisation, where we bring in graduates in Brighton and train them into what you want them to be. That to me is one of the key things about the dynamics of how you change people's perception of issues. It's no good having a claims guy who's done the same job for 25 years and what he learnt in year one he's done for the last 24. What you need is a different set of skills, and bringing in young blood who are motivated and see it from a problem-solving perspective as opposed to, "It's a claim. How do I deal with a claim?" One of the key things you need to do is to bring in new blood, not with the legacy of the old market and not with the legacy of the old company.
Martin Rebisz: The chances of achieving it of course have been enhanced tremendously because of the factors that we identified previously. This is a big industry which is here for the long term and at a minimum there's no run-off business being generated continuously. So from the point of view of this being a career path or not, I think any person considering whether they want to be part of a run-off reinsurance with those aspects in their mind would find it an interesting proposition.
Nick Bentley: Yes, and it's not as though there's a fantastic amount of security in the ongoing market
Tore Kalmeborg: That's very true indeed. One issue which ties very well into this is the outsourcing aspect. The market is not just the wholesale provider of run-off services, but also actuaries, lawyers and all sorts of other specialists. And one thing that we have not yet really seen is outsourcing to offshore locations in the run-off market. How do we think that's going to develop? Is that going to impact us in the same way as it has the live market? I know Lloyd's, for example, is looking at outsourcing and how you manage it.
Steve McCann: All the syndicates in run-off at Lloyd's have de facto got a problem, and that problem requires identification and a plan for solution, and it's not in any way similar to the business that the likes of Norwich Union and the Prudential etc are offshoring. They are offshoring low intellectual capacity jobs, rather than the business in the run-off field where we are keen to get a tremendous intellectual capital input to try and get these situations resolved. So I can't see that we would be looking at run-off service providers in Mumbai, for example, if there are any. Nick has spoken about getting the graduate talent in Brighton. I did the same in Worthing when I was claims director down at the Hartford operation there, and that was very good, but of course we sat them beside a London market veteran. So you had the bright youngsters learning from their grey-haired London market colleagues, but screening the information they were getting. And you need that sort of symbiotic relationship to actually build the expertise. You can't just take university graduates, be it in Mumbai or Beijing or somewhere like that, and say "you're cheap, you're bright, you'll do".
Lee Brandon: I agree with that entirely. Someone mentioned earlier that what run-off is about is problem-solving. The idea is to take a run-off, manage it down, de-scale the book, and try and determine the money to the policyholders and to shareholders at the earliest possible timescales. Outsourcing doesn't fit with the long-term ongoing process.
I think the other thing is critical mass. If you had critical mass where you had a huge number of people in your staff, would you consider outsourcing some of it? I still suspect not, for the reasons I've just said, but the other run-offs are coming along, and even the fairly long run-offs these days aren't hugely labour intensive.
Nick Bentley: But the run-off market in London has sorted itself out in terms of what services it wants to offer and how it's going to organise and structure itself into those buckets. From my point of view, I don't want to be a processing shop. I want to outsource the processing function to the cheapest possible competent service provider which can do that, and there are a number to choose from, but they are also trying to offer the commutation targets, inspections, and everything else. What I want to be able to see is the book, which I don't need clever people to deal with, it can just be processed through to the outsourcer.
You've got some extremely good skills within a lot of the consultants, but there are so many consultants out there. Anybody who's been made redundant in the last couple of years is now a consultant, and if you ever give them a business card they're on the phone saying they can offer you this exceptional service. My view is that for the real problem-solving things, if you haven't got the skills bring them in, but go with somebody who's trusted and who you can work with closely and make sure that they're looking after your interests and they're adding value to what you want to do, and then develop the skill yourself alongside them.
Mike Walker: But I wonder how much big ticket, for want of a better phrase, outsourcing is actually being done. Apart from Lloyd's, how many big run-offs are being outsourced in their entirety or a significant proportion of them? Paul, I know the FSA has to look at significant outsourcing contracts. I don't know whether they're coming across your desk like a poker hand at the moment.
Paul Taylor: I think not.
Mike Walker: Looking at a number of large service providers, they do a lot of insolvent run-off and a good proportion of their income is derived from the insolvent run-offs. So I just wonder how much really big outsourcing is being done at the moment.
Martin Rebisz: It's always dangerous to come up with specific examples, but in response to that, Eagle Star was a substantial run-off and NRG is a substantial run-off. So yes, there are sizeable run-offs that are or have been outsourced. NRG's run-off in the US is sizeable and has been outsourced. So there are a few examples in answer to your question.
Tore Kalmeborg: How have you tried to develop performance criteria for those? How do you monitor them?
Martin Rebisz: Everything should be geared to the specific run-off in hand and on that basis you determine what the specifics are. In managing any run-off - and I don't want to change the subject, but it's a point that I wanted to make in response to the earlier part of this discussion, also in relation to outsourcing - in my experience, especially in the cases that have litigation and arbitration potential, what is absolutely essential in managing those aspects of the run-off is historic know-how. You are absolutely nowhere without historic know-how. You just can't litigate, you can't arbitrate without it.
Ian Marshall: I'm not so sure there hasn't been any outsourcing of run-off business to India. I'm involved in a matter which is an investigation and the cedant claims that some of the records were in India. So just putting two and two together... (laughter). But I think Mike made the point earlier, that he's not sure that there has been, since Equitas, a very large scale run-off. And I suspect if one came on the market today, that someone would perhaps consider doing the processing in India, for instance, and the high level skill work will be done with experts in London. And that may be a very cost-effective way to proceed. In a large run-off in the early stages there are a lot of routine processing-type functions, and undoubtedly that can be done more cheaply offshore.
Tore Kalmeborg: You mentioned, Mike, the fact that you've been looking at the number of service providers, and it's a huge number, and even looking around this table there are quite a few service providers here. That growth has been as spectacular as the actual run-off market itself, in fact it's probably grown even faster. If you go to Monte Carlo [the annual Rendez-Vous de Septembre] there are more service providers there of whatever type than there are underwriters, which is a huge shift from six or seven years ago.
Mike Walker: Well one of the things that I've heard discussed regularly over the last year or so is that because there is this new capital, which we mentioned earlier, coming into the market, what you'll see is that the people who survive are those who've got the capital to buy run-off. There'll be less in the way of outsourcing generally - I can't speak for Lloyd's, but just for the company market - and it will become more difficult for people who don't have a line of finance to actually buy into run-off portfolios to actually pedal their wares. That's going to become a significant characteristic of the market over the next few years. I have heard that discussed.
Ian Marshall: I've seen the exact opposite, in that there is so much external capital looking to acquire business that if any of them are to be successful, they have no choice but to outsource to a service provider, whether or not that service provider is tied to the capital. We've had a number of conversations with organisations just on a deal-by-deal basis, but if they do that deal they will have to look to outsource the run-off. So I'm not sure the link to capital is necessarily critical, I think the key factor for me is just the number of entities out there with capital looking to buy into the run-off business. I think that in itself will increase the outsourcing opportunities.
Nick Bentley: I think the crowded market is causing some of the confusion, because people who recognise they want to dispose of run-off are confused about the options, since they get consultants bombarding them with solutions about how they can handle the run-off for them effectively. A lot of the capital is coming in to support the range of £30m to £50m of liabilities, which is straight into the scheme to get the quick return back, and it's going to be interesting to see if that occurs. But for the larger players as far as the longer term cash is concerned, it depends upon what their model is, whether they are asset managers or liability managers.
Paul Howick: It's horses for courses. There are a lot of providers and there were a number of years when everything seemed to be in the melting pot. But certainly within the last few years the sophisticated run-off operators have become almost the default option, while there may be other service providers which you might want to use for specific purposes. But there's clearly the great and the good now in the market, and that was much harder to define or identify five years ago.
Nick Bentley: But one of the other problems of that confusion in the market at the moment is that when you have a seller who doesn't want a scheme but a full sale for example, they are getting mixed messages. In my view there are no major deals being done because the gap between the expectancy of the seller and the purchaser just can't be bridged. Because when you've handled run-off you know that things tend to get worse so you price accordingly and the seller is looking for a large return because he's heard that there's new capital in the market getting returns and he believes that he can manage it or sell it to somebody who is going to get a return on it and he doesn't want to give that return away to somebody else.
Steve McCann: And that's something that we've seen a lot of in the Lloyd's market, because of course the conventional closure route for an open Lloyd's syndicate is third-party reinsurance to close. There are really only three players in the market and at last year-end hardly any deals were done because of the pricing levels that were being quoted by the traditional players.
Paul Howick: I think if run-off is seen to be a bandwagon, then it's going to be bad for every service provider.
Tore Kalmeborg: Just moving on slightly, there is an attempt right now, as far as I'm aware anyway, to Part VII transfer a syndicate out of Lloyd's and into the company market. Do you see that as opening up competition for RITC [reinsurance to close]?
Steve McCann: Well I hope it does. Lloyd's is very supportive, there are in fact two that we are supporting at the moment, one is a life syndicate and one is a syndicate that is predominantly UK and European motor, and we're supporting both of those, the managing agencies that are trying to get those Part VIIs away. We were quite distressed that that didn't occur last year and we are more confident that the little hurdles that tripped them up last year have now been overcome, and we are fairly confident that that will happen this year. Will it bring competition? Inevitably. But we are very cautious. We want to see how it goes, because at the end of the day we're concerned for our policyholders, we're concerned for the reputation of the Lloyd's brand and we're concerned to see what regulatory issues may or may not arise.
Nick Bentley: I think the tension which exists in Lloyd's is that if you have a solvent scheme and a policyholder turns up with a Lloyd's policy five years later, how will the Franchise Board respond? They're going to pay it. Because the brand will be important, dependent on the size and the nature of the claim.
Steve McCann: I would of course not associate myself with the comment "they will pay it" (laughter). It is a very good articulation of why we are being cautious - supportive but in a cautious way. Let's not throw the baby out with the bath water.
Tore Kalmeborg: How do you see that, Paul? Any comments from the regulator on that?
Paul Taylor: No (laughter).
Tore Kalmeborg: Okay, moving swiftly on. What are the most effective routes right now for finality, in terms of a run-off or a sale, and are there any significant developments there? Mike, you've been dealing a lot with this.
Mike Walker: Yes, obviously we've touched briefly on the scheme of arrangement procedure as being the one true finality product out there, while others you could argue are just like moving deckchairs on the Titanic. But schemes of arrangement do give finality. Certainly, since BAIC we've seen a series of judges interpret schemes that have been put before them in different ways to [Justice] Lewison's interpretation, and certainly very recently on NRG we saw an incredibly helpful judgement, where the judge pretty much said, "you just can't apply a judgement based on one set of facts universally across a set of facts for different cases". So whilst BAIC did cause a degree of fright amongst companies that were proposing schemes of arrangement as to whether they'd done enough to make sure that their schemes were in a shape that a court would see fit to sanction, that's been tempered a little by the series of schemes that have gone through the courts since then. We know for a fact that there are a huge number of schemes in the pipeline, ourselves and our competitors have and are working on a large number of schemes, but by the same token we're also aware of the fact that there is a considerable push-back. And as I mentioned earlier, there's currently a court case of "leave to convene" application which is being contested, and that's going to take a couple of days and may even run a little further. The issues of "are schemes fair to policyholders generally?" and "Are the classes constituted correctly?", which gets revisited every single time, appear to be problems which are popping up more and more, and companies proposing schemes of arrangement have to be cognisant of those facts. Was BAIC good for the scheme market? I would say it was. It has made clear, at the very least, that significant consultation needs to be undertaken with the market prior to proposing one of these structures and if, following that consultation, you don't think you've got support, then you don't promote the scheme of arrangement. So I think it's been good for the scheme market overall.
Paul Howick: I would agree with that. Obviously from a lawyer's perspective, the court is really doing what it is meant to do, which is to give confidence in schemes. Schemes aren't specifically about jumping over hurdles or ticking the boxes, they have to ultimately give the policyholder confidence that they're being looked at closely and they're an effective vehicle. And we mentioned from a run-off perspective, that schemes are the only guaranteed way to give finality, but I know that many policyholders say, "Well they give finality to our insurer, but we don't need finality, we've got a policy". That balance is very important, and I think the cases have gone a long way to restoring that confidence.
Nick Bentley: There are a couple of dimensions to it. In the past, I was always confused as to what the benefit of a scheme was, because I'd been told you would gain finality, but also you make money out of it. And if BAIC has done nothing else then it has stopped the second part of that, and it's perceived as being the way of releasing reserves, which ultimately you might pay to policyholders coming through. I think that's what schemes should be about - about closure and certainty for policyholders. The issue of policyholders, and US policyholders in particular, saying they've got a policy and they want to be able to keep that policy in place. They have no idea how to calculate an IBNR and to give a total loss to the policy. And just look at the premium on it, and what was anticipated when that policy was written 20 years ago. And the clever US lawyers will always grab anything they can as far as the liabilities are concerned. I'm pretty cynical about some of those guys who are there as regards the protection of a policy. I paid a premium which is totally disproportionate to what the potentially liabilities are because litigation's moved on and because the claims department has moved on.
Mike Walker: One of the things we tried to do with the KPMG and Association of Run-Off Companies survey this year was to work out how significant schemes are in terms of liabilities? It was problematic, because you can't pull out, for example, pools and small portfolios that have been schemed out of the company's balance sheet. But certainly for the companies where ostensibly the whole balance sheet had been schemed, it was £107m worth of liability in total of all schemes done to the year-end 2004. So versus the approximate figure for London market liabilities of £38.4bn, it's an absolute drop in the ocean. But, having said that, to the year-end 2005, and certainly the first quarter of this year, we've seen schemes proposed with, after a cursory look at the balance sheet of those companies, liabilities in excess of a billion dollars. So the figures are becoming more significant and it's almost corresponding with the amount of push-back that's coming from certainly the US policyholders, because the claims are becoming more significant and the liabilities which are subject to the schemes of arrangement are more latent and need more in the way of estimation. Some of the earlier schemes didn't have any estimation methodologies at all, and now it's the biggest stick you get beaten over the head with.
Ian Marshall: I think the sad part for me was that something like BAIC was even necessary, speaking as someone involved in the very first scheme in the UK. The earlier schemes bent over backwards to be creditor-friendly and, from my perspective, BAIC came about because the market moved and was not sufficiently creditor-friendly. You could look at some schemes and say, "Do I have a policy which is even covered by this scheme? How on earth can I submit IBNR under this scheme?" And I think we've now stirred up a hornet's nest and I'm not sure how big the hornet's nest is - maybe others have a view on that - from the US creditors, which may have been totally unnecessary had we kept in mind that at the end of the day the scheme still has to pay all the valid claims and bend over backwards to make sure that the creditors have a very good chance of getting those claims paid rather than trying to release as much reserve as possible.
Mike Walker: I think there's been a response to the criticisms that have been levelled at schemes, certainly over the last 18 months. For example, we've seen greater efforts to contact creditors via notification methods, rather than a bog-standard practice statement letter followed by an advert buried away on page 25 of a trade magazine. There's actually a pre-practice statement letter in some cases, and you've got significant notification in the Financial Times or the New York Times. There are much greater efforts made to notify policyholders, with longer periods between the convening of the meeting and the holding of the meeting.
Ian Marshall: In my opinion it was ridiculous that the bar date period became so short it was difficult for anyone to respond.
Mike Walker: And separately from that you've seen those move out as well - at a minimum you're looking at six months now for a claims bar date.
Paul Taylor: It's far longer than that in practice, as you know, there are practice statements, and pre-practice statements.
Mike Walker: I think there was a problem in 2004, where, more by luck than judgement, I'm sure, we ended up with a whole series of schemes which had bar dates pretty much in the same week, because they'd all gone into court, just before the court vacation, they all had three-month bar dates. And that was where there was a lot of concern. We just haven't got the time to deal with all these. So what I'm saying is some of those concerns are actively being addressed. The whole issue about adjudication and who should be the scheme adjudicator is being looked at very carefully, and certainly on the schemes that are currently being discussed in the high court, there's a panel to be chosen from, and concerns are being addressed.
Paul Taylor: I think you have to realise that people in the market do appreciate that these schemes have been an evolving process, and from a regulator's point of view, we were not getting complaints against schemes. And BAIC, I agree with Mike, has actually been very useful in helping schemes to develop further and the development over the last 12 months has been phenomenal. The FSA works very closely with the market, and there have been a lot of changes to schemes. But what I would like to say is that I urge people to look at the witness statements that are supporting all the schemes that are currently out in the market for an examination of the issues on classes, on construction, on estimation, on efficacy and on fairness. And there are now very cogent arguments, both from the proponents of schemes and from policyholders who don't like schemes, and I think we're coming to a cross-market agreement on where schemes are suitable and can be deployed.