R&Q’s Corver: Due diligence critical to managing social inflation as urges “buyers beware”

Acquirers of prior-year books of liability business – particularly US casualty portfolios – must undertake thorough due diligence to accurately estimate reserves and exposures as social inflation continues to impact claims management for legacy specialists, according to Paul Corver.

Speaking to The Insurer TV as part of #ReinsuranceMonth, R&Q’s group head of legacy M&A said the firm was very conscious of the need to carry out thorough due diligence to properly understand exposures in terms of where claims are arising from within portfolios, and also to “get a real good feel” as to how claims are being managed.

“These claims need to be kept on top of, they can’t drift,” Corver said.

“They can’t be allowed to run up spurious amounts of legal fees, ending up in a court position of a jury deciding a multi-million-dollar verdict – they need very close monitoring and close handling,” he added.

Corver said legacy acquirers needed to assess the claims management in place when looking at a portfolio, or if a cedant outsources to a third-party administrator to also factor in their performance.

“So proper due diligence but also a thorough arrangement of how claims handling will be managed going forward is needed.”

He stressed that the onus was on the buyer to get the full picture of the book they are potentially taking on when entering discussions with an insurer seeking to transfer a prior-year portfolio.

“I think the main phrase is buyer beware,” Corver said.

Active pipeline

But despite some of the challenges faced by the sector, Corver said demand for run-off business continued to reach new heights, with new buyers and sellers competing to enter a busy market.

PwC’s latest global insurance run-off survey published earlier this month highlighted the continued growth of the global non-life run-off market, with estimated liabilities rising 11 percent to $960bn since the beginning of 2021.

Corver discussed how transaction activity stepped up a gear in 2020 around the time the coronavirus pandemic first struck, with an influx of new sellers of portfolios coming from the live markets.

“We believe that’s partly driven by balance sheet impact from the investment market collapsing, capital requirements and the acknowledgement that the legacy industry was there to provide a solution,” Corver told The Insurer.

The legacy market has given these insurers and reinsurers the ability to recycle capital to bolster their balance sheet and get protection over volatile liabilities,” he added.

“The 30-year history and the reputation that the insurance legacy sector has achieved has given greater confidence in companies to transact, knowing there’s a safe harbour for their business, protection from economic lumps and bumps, and the ability to recycle capital,” Corver said.

Once the preserve of a handful of players, the market has seen a swathe of new counterparties enter in recent years with incumbents also scaling up by attracting capital from private equity houses in response to an increase in appetite for legacy solutions.

Corver said the increase in players in the space “obviously creates greater competition”, but added there were challenges as a result.

“You need to understand the business, get the pricing right, ensure that you are comfortable with the risk that you’re taking on the price you’re charging,” he said.

But Corver said there are others “who perhaps have a different approach” with different criteria and investment returns as well as alternative approaches to pricing.

“At the moment… it’s beneficial for the sellers, they have a much wider community of traders to transact with, they have competition on price,” he said.

“But at the end of the day, it’s not all down to price,” he concluded.

Watch the full interview with R&Q’s Paul Corver, speaking with The Insurer TV from our pop-up studio suite in the Hôtel de Paris overlooking Casino Square in Monte Carlo. Click for more on:

  • Lloyd’s deal activity
  • The growth of $1bn+ plus transactions
  • The trend for “repeat business”