What type of future are the legacy markets looking at?

The end of the year is always a good time to look back. Tom Booth, group chief executive officer of DARAG, visited Intelligent Insurer’s Re/insurance Lounge to talk about legacy business, how it fared in 2021, and how he sees the coming year.

“What we’ve seen this year is that it has been reasonably buoyant for the legacy markets. There was a bit of a slow start due to the overhang from COVID-19, however,” Booth said.

He admitted that there have been rough spots. “It’s been a little more difficult for some of the reinsurance brokers, who are good producers of this business, to get in front of their clients and to pitch these solutions.

“One of the things we have to remind ourselves about in the legacy business is that these tend to be discretionary buys,” he said.

Asked to name a few milestones for the market in 2021, Booth looked towards a handful of trends he saw throughout the year. The first was the recapitalising of others within the same segment. “At the end of 2020 and going into 2021 we saw the recapitalising of two or three of our competitors. That brought new capital into the business,” he recalled.

Other things stood out. “We certainly saw a continued maturing of some of the legacy buyers, which is a good thing for the industry. Overall, you’re seeing better-capitalised players, mature business models, and more confidence in this as a widespread tool for the insurance market,” he said.

“Some troubled cedants were looking regularly to tap the legacy market, going back into it with new portfolios, especially when there had been a change in management.

“It’s about getting a clean balance sheet going forward into an improved rating environment in order to recycle capital and put a lid on weaker underwriting in the past,” he explained.

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The need for face time

One theme of 2021 has been the impact of under-reserving. Booth offered a balanced, nuanced view.

“On one hand, it’s been positive in terms of flows of opportunities because I think some underwriting groups have been sitting on portfolios that have been bleeding either gradually or in an increasingly alarming manner.

“Those are the books that boards are going to want pass to the run-off sector, particularly if they have withdrawn from these lines. They want to have some certainty for stakeholders. There’s also operational drag on top of that. Removing discontinued portfolios from the balance sheet tends to be an attractive proposition,” he said.

“Equally, these underperforming lines are often still under-reserved and that tends to lead to more difficulties in agreeing on price.”

Despite a general positive trend for run-off business, some slowdown in 2021 has undeniably been due to the fact that intermediaries have been unable to meet prospective clients, particularly when selling a mainly discretionary product, said Booth.

“It does need that face time, and these are very involved transactions. The execution is more difficult when people are not able to travel. It’s harder to get things across the line unless everybody’s in the same room, and that often relies on flying across continents. That’s obviously been more difficult during this year,” he said.

Another issue has been price. “There’s been a slight standoff emerging. It’s been more of a seller’s market but there’s increasing discipline coming from legacy buyers,” Booth explained.

“We need to monitor transactions, and we want to provide fairly priced solutions. But at the same time, we have to have a very robust process to ensure that we are pricing correctly, spotting under-reserving, and focusing on areas where it’s a win-win situation though improved focus and claims management.”

One area Booth is enthusiastic about is in how legacy carriers can embrace insurtech and digital data. He believes they offer a great deal for clients.

“There have been some interesting developments there,” he said. “It is essential for us to have a due diligence process we can rely on—that’s actuarial analysis backed with claims due diligence. We can use technology to spot where the claims due diligence needs to focus, because development patterns are the history but not necessarily the future.

“We can use tech to screen in a much better way and have systems to enable more-focused claims management,” he concluded.

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