A changing landscape

The run-off market is growing rapidly and the landscape is becoming more sophisticated and nuanced as different companies discover the appeal, Arndt Gossmann, chief executive officer of specialty run-off insurer DARAG tells Baden-Baden Today.

The run-off market in Europe is changing at a pace. In addition to the number of deals and their size increasing exponentially, new and different types of business models and players will emerge in this space as it becomes more topical and sophisticated.

That is the view of Arndt Gossmann, chief executive officer of specialty run-off insurer DARAG, who believes different companies will position themselves in the sector depending on their strengths and areas of expertise.

“In a market that is growing as fast as the legacy market has, particularly in the past two years, and given that new run-off liabilities are constantly developing, we expect to see new and different types of business models and players emerging,” Gossmann says.

“From advisors, brokers or claims specialists to consolidators adopting a live to legacy model, there will be growth and diversification of run-off players around Europe and other territories. Yet experience, structuring expertise and the ability to see the ‘bigger picture’ from an insurer’s perspective, will drive decision making.”

He adds that he believes the common denominators of success will be the capability to extract capital, to optimise cost structures and business models, as well as to attract and maintain experienced and talented people.

It has been an exceptional year already for this market. Gossmann has predicted a transaction volume of over €4 billion ($4.4 billion) in 2016 and the first in a series of run-off deals worth more than €1 billion ($1.1 billion) as the market reaches a new peak.

He attributes this to many of the bigger insurers finally executing pre-determined strategies on how to handle closed books of business and best manage their capital now that Solvency II has come into effect.

As a pioneer of run-off and capital management solutions in Continental Europe, DARAG will benefit from this growth. So far it has concluded 22 run-off transactions in 12 countries, a track record that, Gossmann says, stands alone in the region.

“This is not where we stop, quite the contrary,” Gossmann says. “Our group is now domiciled in Germany, Italy and Malta with operations across Europe. The run-off potential in the Continent is still untapped and undeniable.

“So is the development of innovative capital management solutions that will respond to today’s challenging environment and the industry’s disparate needs. We intend to be in the front line of finding new ways and tools to create and deliver value, deriving from legacy business, to our clients.”


Taking the lead

When it comes to innovation, DARAG has always fostered a pioneering approach. In 2015, it launched R-pad (Run-off pad), the first sidecar for run-off business to be created within the EU, using a protected cell company in Malta. The structure allows third-party capital to access the run-off market by investing in specific portfolios without having to worry about operational issues. Under this arrangement, the management of the portfolios, including claims handling, would be done by DARAG, who would also take a minimum 10 percent stake in each deal.

“The R-pad allows third-party capital to access these risks managed by us, while we keep our costs at a healthy level,” he says. “This could be especially useful for some of the larger deals we are seeing.

“The first cell within the R-pad was approved four months ago and it is being marketed to investors now. A second cell is also being created with a specific transaction in mind,” Gossmann adds.

The dilemma for DARAG now revolves around which deals the company chooses to work on; achieving a fine balance between growth, protecting its capital base and being realistic about the management time and resources each deal requires.

“Everyone understands this market has potential but is now growing in a very real way at a real time and the deals coming through are qualified. We started getting involved in bigger deals last year but we are also very conscious of our mid-sized nature. We will grow but in a measured and careful way.”

He believes the legacy business landscape will adjust over time becoming more sophisticated, more client-shaped and more diverse. And he believes that it will increasingly become part of the overall re/insurance strategy.

“The legacy business is part of the overall re/insurance business and should not be seen separately,” Gossmann says. “Technology is disrupting all areas of the insurance enterprise, from social and mobile to cloud and big data as there is growing demand for immediate access and use of information.

“The market, from the individual policyholder or the small or medium-sized company to the large corporation, expects to see a personalised and differentiated value proposition and approach. Regulatory requirements, geopolitical and economic conditions, harmonisation and globalisation of the insurance market will influence and shape future strategies.

“New emerging risks such as cyber, climate change, social media, terrorism, mass migration, etc, bring the question of where should the focus, the capital and the resources be—on the past/discontinued business or the future one?

Arndt Gossmann is the group chief executive officer of DARAG. He can be contacted at: a.gossmann@darag.de