Valerie Denney recently put some questions concerning the UK run-off sector to Peter Montanaro, a director of Lambourn Insurance Services.
Could you tell us a little about Lambourn Insurance Services - when first established, corporate aims, services offered, etc?
Lambourn was first established in 1993 to offer reinsurance consultancy, collection and run-off services to the market. In recent years we have become increasingly involved in the provision of technical and accounting resource to clients who either need to accommodate busy periods in the year without changing their permanent head count, or who wish to outsource specific functions on a long-term basis.
Our preference is to employ permanent members of staff rather than use contractors so that when staff are sent to clients' offices they have an incentive for their own development within Lambourn to do a good job.
Our aim is to build on the reputation gained over the last six years and work with our clients to improve our own performance, our clients' business performance and our staff's skills.
Compared with say, 10 years ago, how has the run-off service sector developed?
Ten years ago, the run-off sector was very immature in relation to London market insurance and reinsurance. The market was dominated by a very small number of large sized providers and buyers had little range of choice. The service offered was of a good standard, but with a lack of competition for business, there was little imagination given to providing clients with any solution for finalising their run-offs. The end result was that clients received a “run-on” rather than “run-off” solution to their accounts.
As competition for business has increased, service providers have offered more innovative solutions to the handling of run-offs. These include working towards set performance targets agreed with the client (and accepting the resultant rewards or penalties according to actual performance), actively commuting books of business, purchasing the run-off and most recently, solvent schemes of arrangement.
What exactly do third party run-off contractors have to offer as opposed to pro-active run-off?
A third party can use service-orientated staff to perform suitable roles, and can improve quality and introduce efficiency savings. Service contracts for run-off accounts generally have built in year-on-year cost reductions to reflect the diminishing liability. This can be used to incentivise the service provider to commute liability as otherwise they will be left with reducing income for the same workload.
Setting demanding performance targets is an important facet of achieving the true benefits of using a third party. Service quality can be measured and cost visibility is instantly achieved. Additionally, it is a lot easier to penalise a third party or terminate their contract than to deal with under performing staff.
One of the problems for a company retaining its own run-off is staff development and motivation. If the run-off is managed well, workloads will diminish and even for companies who have written a long-tail book, staff will see their roles slowly disappear. Inevitably, the better staff look to leave and, with prospects restricted, the company may have to resort to increasing salaries to encourage loyalty. For the staff of a run-off services company, the motivation to do a good job are the prospects of winning additional clients as a result and personal development within the service company.
For those companies where only a portion of their book has been put into run-off, staff motivation is also a factor as employees' preference will inevitably be for an association with the live, ongoing part of the business.
Will there be enough business to go around in the future? We know about the large number of run-offs in recent years, but is this trend likely to continue?
Most of the run-off work in the immediate future is likely to come from companies that elect to cease underwriting particular classes of business and focus on perceived strengths. The challenge for the service providers is to create packages that appeal to a company considering outsourcing part of its business. The package needs to define a clear strategy for finalising the run-off of one class of business while protecting the company's reputation as it continues to write other classes.
There are, however, still companies within the London market that are recognised run-off targets for service providers. The challenge to the service provider remains the same. The successful companies of the future will be those that can offer innovative approaches to a company's run-off.
In what ways has the run-off process in London changed in recent years?
The huge advances in technology have affected run-off as much as they have everything else. Better quality information has enabled more efficient administration of accounts and allows companies to get closer to the companies they do business with. Additionally, the advanced systems for modelling losses and projecting recoveries through reinsurance programmes have enabled the best companies to commute liability at a far earlier stage than was previously possible.
The market is more receptive to companies seeking to finalise its book of business through commutation. Although there remain companies who will not commute under any circumstances, these are becoming the minority. Many cedants now adopt a more pragmatic approach and view the benefits in terms of reduced administration and finality alongside the dangers of increased exposure.
What are the respective merits of commutations and solvent schemes of arrangement?
It is early days for solvent schemes. While service providers have been actively pushing this solution for some time, I am unaware of any significantly sized solvent scheme in place. While the setting up time and costs seem considerable, the end result is a solution that should deal with the whole book at once. It remains to be seen how the market will respond to a solvent scheme. While cedants are bound by the agreement, it would be naïve not to expect some problems. Certainly, collection from reinsurers may be an issue, which means that a solvent scheme is unlikely to be a final solution to a run-off.However, a successful “large” solvent scheme could shape the whole future of run-off management. The problems encountered, solutions found and market reaction will be fascinating.
Solution by commutation will remain the preferred approach for those companies that wish to retain confidentiality over their deals or wish to commute on a contract by contract basis and with each counter party on its own merits.
How do you regard the future for Lambourn Insurance Services? For example, where do the opportunities lie?
The changing demands of the run-off and outsourcing markets offer exciting opportunities for a company of our experience. We can assume major run-off and outsourcing projects while still retaining the dynamic approach of a company in which management is not detached from the day to day business process. Our young but experienced management team has the imagination, drive and know-how to build on the success enjoyed in Lambourn's first six years.
Valerie Denney, co-editor, Global Reinsurance