23 Aug 17 09:46
With the UK non-life sector reaching maturity, legacy acquirers are looking to expand in the US and continental Europe.
Disposals of P&C business placed in run-off have been used as a restructuring instrument for some time but they have notably increased since the financial crisis. The UK has been a core market for legacy disposals given its favourable legal and regulatory environment as well as the clear need generated by legacy portfolios written by the London Market.
Schedule 2C transfers and the subsequent Part VII transfers were developed to enable rapid and legally binding restructuring of legacy portfolios for onward sale to a third party. With the UK non-life sector purportedly reaching maturity, legacy acquirers are reportedly looking to expand in the US and continental Europe, where the size of run-off portfolios is significant. Like Swiss Re, a number of the traditional run-off market acquirers have a foothold in one or both of these markets, so the opportunity exists where operating entities have a need to transfer portfolios.
NEW RISKS AND MARKETS
Traditionally focused on latent casualty lines, run-off acquirers have expanded into other liability classes such as motor, EL/PL, and professional indemnity as well as other personal and commercial insurance.
Some traditional run-off consolidators have also acquired live entities, expanding their business models beyond servicing discontinued policies. In some cases, the acquired portfolios have subsequently been closed and placed in run-off.
Alongside this trend has been the creation of specialist business units seeking to leverage their expertise in managing legacy portfolios for ongoing business.
THE CHANGING NEEDS OF THE MARKET
The reasons that bring portfolios to market in the future are evolving. Latent and legacy (non-core and discontinued) used to be the main drivers, but now we are seeing effective liability and capital management as the key drivers.
Insurers and reinsurers alike are under considerable and increasing pressure. Low growth opportunities, low investment yields and other factors are putting pressure on return on equity, forcing management to look carefully at how capital is deployed and overheads are expended.
It is expected that there will be considerable activity when companies either exit underperforming lines, or stop accepting business in entire branches of legal entities. Additionally, capital and operations deployed to service prior years of actively written portfolios will come into focus, and it could be concluded that these liabilities are better transferred out.
In many cases, portfolio disposals can be a quick and effective way to achieve an exit from business in run-off or prior year reserve segments. Capital may be redeployed to support new or expanded lines of business or returned to shareholders. Surveys continue to suggest that more efficient capital management remains the most influential driver of runoff restructuring activities.
Swiss Re stands ready to assist clients with their run-off and balance sheet reserve requirements. We provide reinsurance and acquisition solutions to meet such needs.
First published in "Runoff-Report 2017", Intelligent Insurer