Activity within the global non-life legacy insurance market is ‘buoyant’, according to a new note from AM Best.
The firm said that demand and supply side factors are driving high levels of activity in the legacy insurance market, with transaction volumes elevated throughout 2021 and into 2022. It also said that the segment had seen an influx of capital and entrants, making conditions competitive. However, challenges remain around inflation, shifting regulations, and impacts from the adoption of IFRS 17.
AM Best wrote: “Activity in the global non-life legacy (run-off) insurance market is buoyant. Over recent years, the sector has seen a steady increase in the number of transactions executed. Run-off is no longer seen as an option of last resort and indicative of failed operations. Increasingly, (re)insurers are using the legacy insurance segment as part of their capital and risk management strategies, often for long-tailed insurance liabilities.”
It added: “A multitude of demand and supply side drivers are fuelling the momentum. The current hardening conditions in the live market, demand for greater capital and operational efficiencies and an influx of capital deployed into run-off consolidators, are all significant factors.”
It went on: “However, competition in the segment is high, and pricing pressures have the potential to weigh on prospective margins. Additionally, uncertainties around reserve adequacy and the impact of social and wider inflationary trends on long-tail liability valuations present headwinds to those operating in the segment.”
AM Best said that the implementation of IFRS 17 will impact on the emergence of profit.
It wrote: “One area in which IFRS 17 will have an impact is the emergence of profit. Under the current standard, profit may be recognised on transaction completion, but under IFRS 17, profit will be recognised as services are rendered over the coverage period, with this coverage period being the settlement period of the run-off liabilities. IFRS 17 is required to be applied retroactively, which may result in significant restatement of opening balance sheets on adoption.”
The firm said that it expected the market to remain buoyant going into next year, due to the combination of motivated sellers and active buyers with capital to deploy.
