Vol 1 (2004) - Issue 3

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Run-Off - Causes for Concern

Mary Gavigan, Director, KMPG LLP, London, UK

Introduction

Both the life and non-life insurance sectors have been under increasing pressure in recent years. This article will review two different but related areas of change in the insurance industry:

- first, the growth in the number of insurers in runoff revealed by the KPMG/ARC UK non-life and life surveys; and

- second, the impact of regulatory changes connected with winding-up insurance companies.

The pressure that the insurance sector is under is reflected in the fact that share prices in the sector underperformed the broader equity market trends during 2003. Although this was the third successive year in which this occurred, some analysts are predicting that 2004 will see a break in this trend. We must wait and see. What has happened to cause this underperformance of the insurance sector? The causes are complex and inter-related. They include: escalating liabilities, especially with regard to asbestos in the non-life industry; uncertainty over future liabilities and bonuses in the life industry; poor rates of return in the current investment environment; decreasing reinsurer security and rising run-off costs. The regulatory environment has also become more demanding, in part, at least, as a reflection of these conditions.
These pressures have increasingly forced management to review the various types of business being conducted, and a common result of such assessments is the decision to cease writing certain types of business, often to enable management to focus on its core activities. Accordingly there has been a growth in the UK run-off market in both the non-life and life sectors. Should these pressures continue, the prospects of further failures will increase and, as will be seen, the new regulations will potentially have a significant effect on who will suffer most.

The UK run-off market (non-life)

At the end of 2003, KPMG, in conjunction with ARC (The Association of Run-off Companies), conducted a review of the UK non-life run-off sector to estimate the size of the run-off market. The research was drawn from approximately 400 organizations where there is publicly available information. These 400 companies represent approximately 66% of non-life insurance firms in the UK. Certain UK branches of companies based in other European Union states have been excluded from the survey, as has Lloyd’s business: this is because information is not readily available for those businesses.
The research concluded that, in 2002, total liabilities of the UK non-life run-off market were estimated to be some GBP 33.3 billion. This excludes business at firms regulated by EU states outside of the UK and business written at Lloyd’s since 1993. This accounts for a staggering 28% of total liabilities of the UK nonlife market. Each year the UK non-life run-off market has grown as more companies cease underwriting. The following table summarizes the position with regard to the latest available financial information.

	Total liabilities in GBP billion
	2000	2001	2002
Equitas (1992 & prior Lloyds)	9.6	8.1	7.6
Other solvent run-off	9.7	12.7	13.4
Insolvent	11.2	13.9	12.3
Total run-off	30.5	34.7	33.3
Live market	73.7	77.8	86.1
	104.2	112.5	119.4

Of the GBP 33.3 billion total liabilities in the non-life run-off market, GBP 26.1 billion (78%) are in respect of technical provisions. Technical provisions consist of notified but unagreed claims plus an estimate for incurred but not reported (IBNR) claims. The high percentage of total liabilities in the run-off market in technical provisions is connected with the profile of business that is typically in run-off. The run-off market is dominated by long-tail risks, mainly asbestos, pollution and health hazard (APH) exposures. The majority of these claims emanate from the USA, however there is an increasing incidence of such claims being filed in the UK and Europe.