Insurance M&A - Dealing with the past in the present

It’s no news that M&A activity has been high recently in the insurance market. The introduction of Solvency II, pressure on pricing, limited organic growth and the search for yield have all driven this activity, and when many of the larger deals are completed and integrated, it is expected that there will be a lot of legacy business in the consolidated entities that will not be core to the future operations of the business. One answer could be to quickly sell this business on to legacy consolidators, but this isn’t always the immediate or most profitable answer. Additionally, more M&A isn’t always on the agenda after the completion of a major deal.  So if you don’t sell, what do you do?

Why not consolidate all the legacy and work it out pending a final exit decision?

Some players in the market have already been doing this for years – ‘storing’ their legacy business in a single, centrally managed centre of excellence that is sometimes dubbed the ‘internal consolidator model’. This attempts to mimic some of the key efficiencies that characterise the large, profitable purchasers of legacy books. The strategy is to concentrate legacy expertise in one place, giving underwriters the freedom to focus on writing new and hopefully profitable business, as well as recycling capital to support new underwriting.

Is it really that easy?

There are many benefits once setting up an internal consolidator model, but there are some key challenges to get to that point. A key one, will be identifying a common definition of what constitutes legacy across the organisation. It is also critical to establish a core of expertise involved from the start including dedicated legacy claims specialists, actuarial resource and commutation personnel with experience of assumed and ceded settlements. With no limitations of what can be defined as legacy, a central legacy function will need to be flexible to cope with the demands and settlement characteristics of different lines of business across different jurisdictions. 

So what do I need to think about?

There are a number of structural and operational matters that will need to be addressed when setting up your internal consolidator model.

  1. Efficient, directed claims handling that works hand in hand with the legacy strategy;
  2. Designing and maintaining an active claims management process that can identify potential reserve overstatements or opportunities for commutations;
  3. Understanding the capital benefits and implications of transferring a portfolio to a central legacy function; and
  4. Proactively working with reinsurers to ensure maximum recoveries.

You can always sell in the future, but insurance is a business with a long horizon, so it’s worth reaping the benefits of an internal consolidator for the business that is ‘legacy now’ and that will be ‘legacy in the future’.

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Victor Nelligan | Manager in Liability Restructuring
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