This article first appeared in Insurance Day on the 10th of March 2020
Continental European insurance groups are turning to legacy transactions to reduce the cost and disruption to their business of digital transformation.
The European legacy market is maturing – and it is operational efficiency that is becoming more and more of a key driver. Continental European insurers rarely have the capital relief needs that preoccupy companies in other territories. Therefore, understanding the strategic challenges faced by clients is vital.
The ongoing process of digitalisation in the insurance market has also placed a heavy burden on insurers’ operational infrastructure. As companies upgrade their networks, the possibility of transferring non-core books of business becomes more attractive.
Discontinued or minor portfolios add layers of cost or complexity to their operations – whether it’s outdated IT systems or requirements for dedicated staff or management attention. Legacy players with deep roots in continental Europe understand this specificity and therefore the different motivations of European vendors.
Identifying non-core portfolios
Commonly, a European insurer will have invested significant operational resources to expand in either a small line or territory. Yet the growth potential of that investment has turned out to be insufficient to justify the continued spend and management attention.
These issues become compounded by the co-existence within large, established insurance groups of legacy data storage and IT systems, with the small or even medium-sized lines of business that present limited value to the group adding layers of complexity to an already significant operational challenge for large insurance groups. The setup of cost- and time-intensive digital transformation programs has in turn only increased the strain.
Reducing complexity becomes key. In this context, legacy transfers, which might take three to six months, are becoming significantly more attractive than moving complex, non-core portfolios and their infrastructure into the new digital ecosystem. The risk of additional programme costs and delays is eliminated through a legacy deal and resources can be focussed on profitable activity and growth.
In recent years, we have therefore seen continental insurance and reinsurance groups pay significantly more attention to their developing ecosystems and strive to manage their operational attention more effectively. In what could be described as an extremely careful “operational spring cleaning”, insurers begin to consider the disposal of portfolios whose maintenance is difficult to justify.
Sometimes these have been core lines in the past, perhaps even the basis of an insurer’s previous growth. But, as time has gone by, the resources spent on maintaining a book of business start to outweigh the benefits, becoming a liability rather than an asset. Niche lines sometimes require large networks of third party providers, a significant cost and operational investment when a manual process is in place. These historic products require a small but dedicated workforce and begin to distract businesses from their core lines, where there is a greater potential for a return to their shareholders.
Examples of such lines include European medical malpractice which can be highly profitable, when underwritten well by an expert insurer that sees it as a core line and devotes significant talent and management attention to the underwriting. Yet, when it’s a small, non-core line, at best it delivers little return – or even severe losses. Established European legacy carriers have experience of onboarding medmal portfolios to mutual benefit with the vendor. Similarly, professional liability or change of ownership businesses are now more frequently coming to market as they become non-core for several insurers.
To many of European insurance companies, who see themselves as not merely service providers but as embedded within the social fabric of the communities, countries or regions they serve, their reputation is of paramount importance. Even when a line becomes non-core, their promise to policyholders is sacred – and a legacy provider can only succeed if they treat the policyholders to the same standard. Legacy providers’ claims’ handling and operational setup all come under scrutiny when a deal comes on the market. And those that have that organised to the absolute highest standard are those that succeed.
The increased willingness of large continental insurance groups to consider transferring portfolios to legacy carriers has certainly prompted mid-sized and even smaller insurers and reinsurers to evaluate the possibility. This, in turn, has contributed positively to the health of the market. More jurisdictions are opening up to the prospect of legacy solutions – while Germany, the Nordics and the Benelux are leading in continental Europe in this field, we have seen French, Italian and even Central and Eastern European providers begin to make enquiries.
Brokers play a key role. The rise of specialist legacy teams within brokers has helped both the market to mature and potential vendors to be reassured of the value in a transfer. Working in tandem with legacy providers, brokers can help educate the continental insurance market about both the strengths and weaknesses of specific legacy solutions and therefore establish legacy as a tool in the arsenal of operational efficiencies.
Regulators have also increased their scrutiny of legacy players, providing further reassurance to vendors that those that meet the high standards required will protect their reputation and their promise to insureds.
The continued drive of continental European insurance groups towards streamlining their operations caused by digital transformation will therefore, we believe, continue to stimulate the maturing of the legacy market. Legacy solutions should be considered as a strategic tool for insurers to increase their operational efficiency. The legacy market, in turn, must maintain its standards and reputation if it is to claim that role of legacy-as-service.