The beginnings

In the late 1980's and early 1990's the full impact of asbestos upon the insurance and reinsurance industries became evermore apparent.  As a consequence, a series of insolvencies followed around the globe, leaving insurance markets, including London, in a state of disarray.

What emerged over the following decade was a new industry dedicated to bringing timely closure to troubled companies and finality to discontinued businesses.  This new sector is the run-off industry.

Types of run-off

There are several mechanisms whereby run-off can be achieved, the four predominant types being:

• sale
• reinsurance
• portfolio transfer
• schemes of arrangement

In practice, these are being used in various combinations, the most common being either a portfolio transfer or a sale followed by a scheme.  Indeed, the scheme is the instrument that has evolved to become the primary tool in dealing with the run-off of insolvent carriers and, more recently, solvent entities.

Schemes of Arrangement

A scheme is a compromise under English law between a company and its creditors.  For a scheme to become legally binding the majority of creditors, or class of creditors, are required to vote in favour of it and the English High Court needs to approve it. A scheme is bound by few statutory requirements and can generally be written on any basis that will attract adequate support from creditors and other stakeholders. Clearly though, it needs to demonstrate a clear exit strategy which is fair and commercially acceptable to all stakeholders alike.

One notable scheme which became effective in the 1990's was the KWELM Scheme. The KWELM run-off began in 1992 against a background of great uncertainty surrounding asbestos and pollution claims. There were limited expectations about the ultimate payout and the projected timescale extended beyond 2015. In the event, progress and payouts were faster and higher than expected, and by the end of 2006 creditors of the five KWELM insurers will have received average payments of 99.7%, equating to $3.4 billion in benefits.

The largest run-off

The largest run-off entity in the world, and the one which is familiar to most, is Equitas,  which was formed to deal with the massive losses suffered by Lloyd's. Effectively, it is a reinsurance of the liabilities of Lloyd's Names and was originally funded by nearly £12 billion of premium. To date, it has paid out over £17 billion, with over £4 billion spent on asbestos claims alone.   

The future

What is certain is that run-off has become a powerful tool, particularly with regard to achieving finality for long tail books of business. Finality solutions, as offered by proven entities such as KMS Insurance Management Limited, will ensure that schemes, together with other run-off instruments, will continue to be a considerable success. With the UK market for non-life run-off liabilities being around £40 billion, and growing, the demand for run-off services will continue to proliferate and is here to stay.  

Over the coming years there is no doubt that run-of will continue to be rightly regarded as the proactive option for non-core business.