Getting regulators up to speed with legacy

The legacy market has made great strides forward in the last few years, with billions of dollars in liabilities passed to the sector by mainstream re/insurers.

That success has also attracted heightened scrutiny from regulators on the market, with more attention being paid to the types of deals on offer as well as companies’ ability to meet the often long-term nature of the liabilities they have acquired.

On top of increased evaluation of the companies themselves, a changing investor base with more short-term focused firms such as private equity entering the mix has also raised questions.

How can the market adapt to the changing regulation it faces and will this have an impact on the ability to transact business in future?

A group of senior legacy industry executives  met in the  Re/insurance Lounge, Intelligent Insurer’s online, on-demand platform for interviews and panel discussions with industry leaders, to debate how the shifting regulatory environment is affecting the market.

Paul Corver, group head of M&A, Randall & Quilter Investment Holdings, said the success of the sector in attracting billions in new assets over the last few years had inevitably caused regulators to sit up and pay closer attention to developments in the market.

Given that many of the liabilities in question concern long-term policies, regulators would naturally be concerned about the ability of companies to meet those obligations over a similar timeframe, Corver said.

“It’s not a surprise that regulators are taking a greater interest when you think of the numbers. Over $7 billion was transferred to run-off acquirers last year and $5 billion so far this year,” he said.

“That’s a lot of dollars. A lot of underlying policyholders are now facing a different insurer group, so it’s inevitable that they’re going to be focused on that. Areas such as operational resilience and the assessment of the run-off carriers for their capabilities for the life and duration of those liabilities is something they’re now focusing on.”

The executive emphasised the heightened regulatory scrutiny of newer entrants to the markets such as private equity funds which operate on shorter investment horizons than established players.

“Looking at the incoming investors in the sector, you see the private equity funds and others who perhaps have a shorter timeframe for their plan than the liabilities would naturally carry.

“Inevitably, the regulators are thinking: ‘How’s that going to pan out when the liabilities are going to be around for 30 years, but these investors normally have a five or seven-year period in which to play?’.

“It’s a challenge, but it’s one that the market will rise to. We have to make sure that we continue to maintain a good reputation to work alongside the main carriers.”

James Bolton, director at run-off specialist Quest Group, said that for his company, current regulatory issues mainly stemmed from the splintering of jurisdictions with differing regimes, which underscored the need for equivalence.

“We’re operating in just under 10 jurisdictions, and as the run-offs of each of those declines, we’re looking to close down and reduce costs as much as possible, and get more of a light touch. That’s difficult with the current way the winds are blowing, with most jurisdictions pushing for more mind and management in a local jurisdiction rather than less,” he said.

“The economies of scale don’t really work for us. In that sort of environment, we have to convince regulators that outsourcing back to a UK hub, where we’ve got expertise and competence, is satisfactory for them. We’re getting there.

“We have very good relationships with all of our regulators. So that’s going to be a continuing challenge.”

Bolton highlighted the impact of the IFRS 17 accounting regime, which he said could pose difficulties to several of the company’s balance sheets, particularly where it has conducted part VII transfers.

“The second issue that concerns me is IFRS 17, what it might do to some of our insurance balance sheets, where we’ve done a number of part VII transfers, and we’ve taken a premium surplus to profit,” he said.

“As far as I understand IFRS 17, you’re supposed to add that back effectively into the balance sheet and amortise it over the lifetime of the liabilities. That could make quite a challenging change to some of our balance sheets.”

Stephen Roberts, chairman and board director at the Insurance and Reinsurance legacy Association (IRLA), said the regulators retained a central role in ensuring that all policyholders’ liabilities are in secure hands, but warned of the potential to make transactions more difficult to complete.

“Regulators have an important task to fulfil to make sure that policyholders have their claims met in full. And there is always a risk that the regulator will add burden in the transaction,” he said.

Mark Everiss, partner at law firm Cooley, added that a challenge going forward for the industry will be finding a common route back to a safe environment that enables people to transact business face-to-face once more. The industry perhaps needs to consider whether to continue with the present hybrid model, he said.

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Section 166 worries

Roberts pointed to proposals earlier this year to increase the use of the UK Financial Conduct Authority’s section 166 reviews which would have entailed further hurdles for would-be acquirers to prove their ability to handle the business in question.

He says that despite initial concerns over the transaction and time costs this could impose on run-off carriers, the regulator had given assurances that the mechanism would be used only for particularly large or complex cases rather than on a regular basis.

“There was a worry earlier on in 2021 in relation to potentially increased use of section 166. When a piece of business is coming into the run-off space, there may be a requirement to prove the acquirer has all the skills and all the governance in place to enable that business to be run off successfully,” Roberts said.

“The market was concerned that the 166 could be a tool that would be overused. When the 166 was originally introduced, it had a patina of failure attached to it, ie, the regulator was coming in because it had been noted that something wasn’t being done properly in the governance of the business that required to be investigated or improved.

“We were concerned that overuse of the 166 could add time delay and disproportionate cost into the run-off process. We’ve discussed that with the regulator, and we believe they want to use it very rarely and proportionately, in cases where perhaps a very large acquisition came on to a balance sheet, and they wanted to ensure that everything could be dealt with sensibly.

“That was certainly a concern for our members,” he concluded.

To view an excerpt of the Re/insurance Lounge session click  here