Managing legacy business has become a business in itself. When an insurance or reinsurance company stops underwriting a certain type of risk, it outsources the management of the relevant portfolio to legacy management specialists, generally for two main reasons.
Focusing on core business
Legacy management is traditionally seen as a source of problems. It is a business activity with a potentially significant downside risk on the earnings of an insurance or reinsurance company. When not carried out by professionals, legacy business diverts the attention of management and teams from the company’s key business activities.
Furthermore, companies generally no longer possess adequate internal skills to efficiently manage legacy business. They therefore remain exposed to new risks due to staf departures, difficulties in accessing contract data, increasing credit risk, and latent exposure.
Delegating a business with strong upside potential
Legacy management is an increasingly important activity for insurance and reinsurance companies. Because of its significant upside potential, rating agencies, regulators, analysts, and auditors are heightening their scrutiny of this business.
Meanwhile, the volume of legacy portfolios under management is growing, due to the rising flow of new business (resulting from M&A, strategic repositioning, and insolvency) and the deterioration of existing business (due to the need to recharge certain risks).
The services of a legacy specialist enables (re)insurance companies to exit low-profitability or low-growth business segments.
A fast-growing market
The non-life legacy (re)insurance market has expanded rapidly in the past few years. It continues to grow by an average of 4% per year.
The outlook remains positive. Several factors inherent to the current environment are driving the market’s growth.
The first is that regulatory rules are obliging insurance and reinsurance companies to meet higher capital requirements. They are thus forced to review their business lines and refocus on activities that require less capital, which creates opportunities for run-off players.
In addition, the development of increasingly sophisticated liability management techniques, based on portfolio value and risk, has led insurance and reinsurance companies to outsource their legacy portfolios in non-core businesses more quickly.
Emerging markets are another promising source of new legacy business. Lastly, a rise in major losses, such as those generated by natural disasters, is generating new business.
The legacy market therefore offers strong growth potential for the future.