Comment - Run-off is set for take-off.

(From Reinsurance)

Byline: Geoffrey Bromley, president of Guy Carpenter International (ex

Managing run-off is one of the fastest growing sectors of the insurance business. What began in the 1970s as a niche business has matured into a developed market representing GBP33bn ($59.9bn) to GBP41bn in run-off liabilities in the UK, accounting for approximately one-quarter of all UK non-life liabilities. On a global basis, estimates of run-off liabilities range from GBP121bn to up to GBP220bn, with the UK accounting for as much as one-quarter of the global total. The actual numbers may be even larger as these estimates do not fully reflect non-reported discontinued lines.

Although the run-off market continues to grow, one constant remains: companies with discontinued lines are searching for strategies to maximise assets, minimise costs and recognise economic value.

Many factors have caused growth in the run-off arena. From the 1980s, insurers began to recognise escalating liabilities from casualty and other long-tail exposures, including workers' compensation claims and products exposures. A competitive soft market, rising tort costs and class action suits played a role in causing unprofitable business. The ultimate costs for these exposures may not be known for decades. AM Best estimates there are further loss reserve increases in store, citing GBP11bn in unfunded asbestos liabilities and GBP13.75bn in unfunded environmental liabilities at year-end 2002.

Catastrophic losses ranging from Hurricane Andrew in 1992 to the terrorist attacks of 11 September 2001 contributed significantly to the loss in surplus and, ultimately, to the exit of many (re)insurers from active underwriting. Declining equity prices coupled with declines in interest rates placed additional pressure on company finances. Mergers and acquisitions also drove strategic decisions to exit unprofitable lines of business.

Pressures on capital from the regulators and rating agencies are also leading (re)insurers to re-examine their books of business in terms of relative risk-based capital charges.