In one of the first detailed assessments of the global run-off market, Robert Hardy finds a maturing market that is professionally managed and increasingly innovative

The rapid growth of run-off has generated many opportunities and challenges for re/insurers around the world. It has become big business, with some estimates stating that the liabilities attributable to portfolios in run-off are in excess of $180bn1 and are still growing fast.

However, with such large sums at stake, it is important that re/insurers protect the value and control the costs of managing these portfolios, as well as meet the objectives of their run-off business as a whole.

PricewaterhouseCoopers' "Discontinued Business Review" is one of the first detailed assessments of the key trends affecting the global run-off market. It highlights how re/insurers are managing and responding to the sizable and growing run-off market.

PricewaterhouseCoopers questioned a range of re/insurers from around the world about how they are managing their discontinued business as part of a benchmarking exercise. The total liabilities, under the management of the respondents (to the in-depth questionnaire), was in excess of $18bn.

The results of this exercise indicate that there are a number of emerging trends in the run-off market, including a drive towards exit.

Summary of findings

These trends can be summarised as follows:

- Run-off business is increasingly being managed separately from ongoing business;

- A key focus for management is cash collection and the effective management of cash flows;

- The outsourcing of core functions is now the norm rather than the exception; and

- A clear majority of respondents have an objective of accelerated exit with around 50% planning closure in less than five years.

The PricewaterhouseCoopers' review also highlighted several areas of concern for re/insurers, which have potential to undermine the ability of insurers to meet their run-off objectives. These include:

- Controlling adverse claim development;

- The effects on operations of legacy systems and poor data quality are pervasive within organisations;

- The impact of market and legal disputes is destructive and problematic; and

- Effective cash flow and investment management as reinsurance collections continue to be slow.

These issues show that management teams can no longer ignore these obstacles and need to implement innovative solutions to enable them to achieve their objectives. However, the results of this review are positive, suggesting that management are both open to adapting their approach as required and embracing the challenges this presents.

Emerging trends

As the findings show, organisations are keen to tackle the challenge of run-off in a decisive and, wherever possible, conclusive manner. Naturally the protection of assets is deemed critical, with cash flow management and the maximisation of reinsurance recoveries and commutations topping the list of considerations in setting run-off strategy (see Figure 1).

The minimisation of claims and administration costs are also seen as important overall priorities. Whilst the issue of accelerated closure ranked third in the significant factors involved in developing a run-off strategy, this provoked mixed views, with 55% of participants ranking it as their most significant consideration in setting their run-off strategy, while around one-quarter dismissed it as hardly being a priority at all.

Overall relations with policyholders, along with the associated areas of service and reputation, were not considered priorities in terms of the importance accorded to them by the respondents. Perhaps not surprisingly, maintaining reputation was ranked higher amongst those businesses that still have a live element than those where the whole business is in run-off.


An interesting trend is that almost all participants have sought to improve focus and control by separating their run-off activities from their live business. Nearly half have gone further by establishing a distinct legal entity to handle their discontinued business (see Figure 2). The move towards greater specialisation is also evident in the growth in outsourcing, which is now an integral feature of the run-off market. Virtually all respondents outsource at least one of their core functions and more than half outsource three or more, with IT, claims and credit control the most likely to be outsourced.

Cost control

Cost control is a key issue. Respondents' most favoured ways of curbing costs were finality schemes, commutations and 'aggressive' claims handling and around 70% were pursuing a combination of at least three cost cutting measures.

Although participants ranked reducing administration costs as a high priority, more efficient processing was not considered significant. It was interesting to note that the review highlighted that the same weighting was placed on the indemnity cost of a claim as the administrative costs although our expectation was that there would be more emphasis on the indemnity element of the claim.

Clearly claims are the biggest drain on resources and respondents to the review saw adverse claims development as the area that would be most likely to prevent them from meeting their run-off objectives. Therefore, it is surprising that the minimisation of claims costs was not ranked as the highest priority for the business as a whole by the respondents, instead being ranked behind reinsurance collections and cash flow management.

Other studies conducted by PricewaterhouseCoopers, including the 2003 London Insurance Market study2, have highlighted the same findings, suggesting that some companies believe the level of claims settlements may simply be beyond their control.

Outsourcing effectiveness

Outsourcing is another growing trend, with half of respondents outsourcing some, if not all, of their claims handling to one or more third parties.

Most are satisfied with the quality of service, which may go some way to explaining why more than half have no signed agreements with their contractors and a similar proportion have not audited all their providers in the last year.

It could be argued that there is an element of complacency in this laissez-faire approach. It is telling that the performance of the outsourcer ranked some way behind the performance of brokers in their reporting of recoveries to reinsurers in the list of threats to meeting the overall run-off objectives.

The strategy and management of reinsurance

Reinsurance is a valuable asset for many businesses in run-off and many respondents had substantial reinsurance protections in place when they entered run-off and around one-third have subsequently bought further cover. Managing this asset carefully and efficiently will therefore have a crucial impact on the cash flow and performance of the organisation.

Indeed, participants rated maximising reinsurance collections and commutations as their number one priority when developing their run-off strategy (see Figure 1).

Although the security of the reinsurer is clearly a key concern, participants appeared relatively confident about the quality of their own protection.

Surprisingly perhaps, only one said they had been affected by reinsurer default despite some well-publicised failures in recent years. Most also felt that the quality of their reinsurers was largely the same as when they entered run-off.

Proactive commutations

Reinsurance commutation is highlighted as a key element of the increasingly hands-on approach to cash flow management in the review. More than three-quarters of respondents are pursuing proactive commutation strategies with reinsurers to some extent, with around half of those that have adopted such a strategy indicating that the practice is wide-spread in their organisation.

Reinsurance collections

Businesses in run-off have often found themselves at the back of the queue for reinsurance collections. However, a new breed of run-off management is now taking the initiative to speed up recovery.

A live insurance business can generally use renewal as an incentive to encourage reinsurers to pay up promptly. Unfortunately, organisations in run-off tend to have less leverage and payment continues to be slow.

Respondents highlighted a range of issues they believe may be undermining the processes and performance of reinsurance collection. While the list was headed by the quality of data and reinsurance security, the scores for factors such as market or technical disputes and the performance of brokers in presenting advice were close behind.

Difficulties with delays and the desire for closure are also encouraging participants to seek more innovative ways to accelerate cash flow. Most now negotiate set-off deals where appropriate, often at a group level.

Such deals can streamline operations by minimising the number of transactions and help to avoid what can often be a tangle of debtor/creditor arrangements.

However, such arrangements may be affected by problems in securing adequate data. Debt assignments are also seen as a useful collection tool, often in combination with set-off.


The increasingly proactive nature of the market is demonstrated by the fact that the overall objective of the business plans of more than 70% of participants is a defined exit strategy. Indeed, around half of respondents plan to close in less than five years (see Figure 3). This is clearly a challenge as around 50% of all respondents are managing policies that have yet to expire. One interesting point was that the percentage looking to close in less than five years is the same amongst those that have unexpired policies as those that do not.

Among respondents that have been in run-off for less than five years, the proportion managing policies that have yet to expire rises to 85%.

Moreover, a large number of organisations are facing predominantly long tail liabilities, including a significant volume of asbestos and pollution related exposures, which until recently have been difficult to settle.

The existence of significant long tail liabilities does not appear to be a perceived barrier to finality with many of the companies facing these issues planning to close in less than five years.

There are a number of exit strategies which a run-off company can pursue, as follows:

- Wait for the business to run its course - This is the 'stay as you are option' but this should be an active rather than passive decision.

This requires the organisation to examine the effectiveness of the business processes and capital management to improve cash flow and increase financial benefit.

- Business transfers - That is moving the run-off business to another provider and includes:

- Part VII transfers. A regulated process for UK businesses; the principles are in the process of being adopted within Europe;

- Reinsurance solutions to transfer all or part of a portfolio of business;

- Sell the portfolios in run-off to the growing number of specialist investors in the market, many of whom are looking to leverage skills as principals that were developed as service providers. The value strategies of such buyers tend to depend on the ability to hasten closure and the potential for the release of capital.

- Business exits -

- Commutations. This is often the major activity of run-off businesses and the overall success will be dependent upon a robust overall commutation strategy supported by an experienced commutations team.

- Solvent Schemes of Arrangement. Apart from a sale, these are the only mechanisms for exiting a whole line of business/company and they are increasingly being used by substantial organisations. They are essentially wholesale commutations and are available for businesses with a sufficient connection to the UK.

Not all these options are appropriate in all situations and our experience is that whilst particular options suit particular organisations more than others the question is not 'if' but 'when'. However, whatever the route, the findings of the review showed that finality is increasingly the order of the day.

Potential pitfalls

The respondents were keenly aware of the factors that could seriously hamper the ability to meet objectives. Heading the list were adverse claims development, poor quality of data, adverse cash flow and poor investment management, IT failure and specific technical or legal disputes (see Figure 4).

Although staff retention emerged as a key issue for claims teams, it was not rated as a high priority for discontinued businesses as a whole.

This may reflect the relative maturity of the respondents' portfolios and the fact that legacy knowledge has been spread amongst the team performing the run-off. For organisations making the transition from live to discontinued business, holding on to the skills and experience of existing employees is clearly more important. Unsurprisingly, pay, bonuses and other financial incentives were seen as the best way to retain key personnel. Competition for the best people is clearly likely to heighten as run-off continues to develop as a specialised career in its own right.


Discontinued insurance business activity is increasingly seen as a market in its own right. The results of PricewaterhouseCoopers' review demonstrate that the market is more professionally managed and resourced by people who are dedicated to tackling the issues to ensure that value is retained and enhanced. This activity is demonstrated in the adoption of more pro-active approaches to activities such as commutations and closure strategies.

The bar continues to be raised to new levels for the management of all run-offs. In the future management will be encouraged to seek ever more innovative ways of preserving and ultimately releasing value.

1. Swiss Re, in the publication " The run-off phenomenon", dated 2000, stated that the value of the worldwide reinsurance market is estimated at $180bn.

2. For the last three years, PricewaterhouseCoopers has carried out an annual survey of the operational drivers of the London Insurance Market companies.

- Robert Hardy is a director in the solutions for discontinued insurance business group at PricewaterhouseCoopers.