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Legacy sector faces margin pressure amid increased competition and reserving challenges

Emerging inflationary trends, coupled with social inflation effects, present clear headwinds to the sector’s ability to preserve reserve adequacy over the run-off period, AM Best has warned

Increased competition in the legacy market, coupled with pricing pressures and uncertainties relating to reserve adequacy, threaten companies’ margins, AM Best has warned.

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.

In addition, the segment has seen an influx of capital in recent periods, along with new market entrants.

But emerging inflationary trends, coupled with social inflation effects, present clear headwinds to the sector’s ability to preserve reserve adequacy over the run-off period, the rating agency said in a new report.

With the recent increase in the capacity deployed, the run-off sector is set to remain highly competitive over the coming years. “Ultimately, this enhanced competition may pressure prospective returns and companies’ ability to meet their cost of capital,” AM Best warned.

Global run-off liabilities amounted to $860bn in 2021 and have been increasing over recent years, up from around $730bn in 2018, according to PwC.

The growth in run-off reserves from discontinued business held on the balance sheets of insurers has been a strong contributory factor to the active legacy market at present.

New capital inflows have been attracted by the potential scale of the market, with estimates suggesting in excess of $5bn has been contributed to the segment in recent years.

AM Best said activity in the global non-life legacy insurance market is “buoyant”.

“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,” the rating agency said.

“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.”

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