Legacy and run-off market

In 1996, Lloyd's Reconstruction and Renewal plan reinsured all of the Names' liabilities for 1992 and prior years into a new vehicle, Equitas, asbestos and pollution included. In late 2006, Berkshire Hathaway's National Indemnity agreed to reinsure Equitas, and a Part VII transfer moved those liabilities legally into Equitas Insurance in 2009. That sequence is the legacy business in miniature. A cedent wants out of a run-off book, often old and long-tail, that ties up capital and people without producing any new business. It sells the book to a specialist acquirer such as Enstar, RiverStone, Catalina or Compre, for a premium based on the reserves less a discount for the remaining uncertainty. Structure matters. A loss portfolio transfer or an adverse development cover is reinsurance, so the cedent stays liable to policyholders and books a recoverable on its reinsurer. Only a legal transfer (Part VII in the UK, or an equivalent procedure elsewhere) or the sale of the entity takes the liabilities off the balance sheet. Solvency II gave the European market a push by loading capital and a risk margin onto reserves that can take decades to run off.