Six predictions for run-off in 2017

2016 has been an unprecedented year for run-off, both in number of transactions and volume. For last year, DARAG had predicted a transaction volume of over 4bn euros in total, and the first in a series of run-off deals worth more than 1bn euros. Notably, the industry witnessed non-life run-off deals worth approximately 4.4bn euros, not including those whose value was undisclosed and the first 1bn euros worth of run-off transactions, followed by some nearing this amount.

So what does the future bring for the run-off sector in 2017? Arndt Gossmann, Group CEO of run-off specialist DARAG, sees the industry’s interest in run-off being more relevant and topical than ever as he embarks on his six predictions for insurance companies in Malta and global companies for the year.

Prediction 1: The run-off boom
‘For this year, once again, we foresee a new peak. We expect the total volume of non-life run-off deals to reach 8bn euros within 2017 and to see the first 1bn euros worth run-off transaction that comes from the mid-market. This increase in deals is not surprising given that Europe’s biggest insurers are entering the run-off market all at once. Many of these companies had already put in place their strategies and plans for transferring closed books of business in areas that will offer maximum capital relief, yet waited until the SII regulation was finalised and in force before going forward with them. The mid-market is bound to follow. All this creates an explosive market of opportunities. However, most run-off is driven by Solvency II requirements. It will take a bit more time until it is widely acknowledged as an efficient capital management strategy. Still, we are getting there’, he concludes.

Prediction 2: The Continent is taking off
‘We are seeing a significant increase in run-off opportunities and transactions coming from the Continent. More and more (re)insurers are classifying business as run-off, mid-sized players are discovering the appeal of capital management/run-off and legacy management is increasingly being viewed as an ongoing strategic initiative rather than an ad hoc emergency measure. According to the latest run-off study conducted by PwC in 2016, this year has seen a stabilisation in terms of European market size, at 247bn euros. I anticipate that Continental Europe will be the one riding the legacy wave the most this year and having established a first mover advantage will provide a lead-in”, he says.

Prediction 3: There will be more, they will be more diverse and price aggressive
‘Given the rapid growth of the legacy market, particularly in the past two years, and that new run-off liabilities are constantly emerging, we are expecting new conditions to arise. Aggressive pricing will be an entrance point. In 2016 we did see some pricing which did not make any sense. We expect this to continue in 2017 but our strategy has always been to focus on quality rather than price. We believe that it will be proven experience, structuring expertise, sophisticated claims handling, the ability to see the “bigger picture” from an insurer’s perspective and experienced and talented people that will ultimately drive the selection of a run-off partner in the future’, he adds.

Prediction 4: The (new) consumer: key, front and centre
‘The market – from individual policyholders and small or medium-sized companies to large corporations – expects insurance companies not only to come up with new, more topical products that fit lifestyle needs, but also to adopt a personalised and differentiated value proposition and approach. As millennials enter the playing field, the insurance marketplace is becoming increasingly fragmented, with an ageing population at one end of the spectrum and a hard-to-attract, engage and retain younger generation at the other. One thing is certain: client reach, engagement and loyalty have levelled up. So, to what extent does this relate to legacy business? Well, to a rather significant one. Efficient legacy management strategies enhance focus and untie resources and capital. This can have a direct positive impact on the company’s operations, capital allocation and reputation”.

Prediction 5: Insurance industry disruption
‘Technology is disrupting all areas of the insurance enterprise, from social and mobile to cloud and big data, as the demand for immediate access and use of information grows. The interconnectivity between insurance technology and consumers’ lives is on the rise. The harmonisation and globalisation of the insurance market, regulatory requirements, and geopolitical and economic conditions all influence and shape future strategies. Run-off is and should be viewed as an innovation enabler that unlocks capital, time and internal resources by providing a fast and efficient solution for discontinued business. I believe that more and more enterprises will be harnessing legacy and capital management solutions to spur innovation within their company’, he notes.

Prediction 6: Alternative capital is here to stay
‘Alternative capital has permeated all aspects of the (re)insurance business and run-off has become increasingly appealing to third-party investors. Run-off investments offer uncorrelated returns with low volatility – a sought-after strategy today. This current investment trend correlates positively with the run-off industry’s constant need for capital. The average transaction size has jumped from 20m euros in 2014, to 200m euros in 2016, while some single deals amount to up to 1 billion euros. Obviously, third-party capital is necessary for bigger and smaller players alike if they are to meet market demand, diversify their capital base and offer attractive and sound pricing. In 2016 we saw structured solutions involving multiple players. Our approach has been to employ and channel alternative capital within our own structures, such as DARAG’s Protected Cell Company (PCC)/R-pad’, Gossmann concludes.

The legacy sector is influenced and shaped by the regulatory, political, societal and economic trends surrounding it. Recently, the insurance industry has been presented with various challenges, some – like Brexit – rather unexpected. One thing is for sure: change is an absolute certainty. For insurers, structured solutions for inactive business are key to successfully responding to uncertainties resulting from such a dynamic environment. DARAG is confident that the run-off market will gain strength in the coming years as the (re)insurance industry embraces the advantages offered in its quest to succeed in an ever-changing competitive landscape.