2011-09-12

By staff reporter

Solvency II will be the greatest challenge facing continental European (re)insurers with run-off business, according to survey carried out by PwC. Access to exit mechanisms and capital constraints were ranked as the next greatest concerns.

Respondents to the PwC’s fifth annual survey, Unlocking value in run-off, produced in conjunction with the Association of Run-Off Companies, said medical malpractice, credit and surety as well as employers’ liability are the lines of business their companies are most likely to exit. However, 43% said Solvency II may result in their organisation acquiring certain lines of business, with long-tail liability lines seen as the most likely target area.

Dan Schwarzmann, partner in the run-off business team at PwC, said: “It is clear that the impending arrival of Solvency II is forcing many (re)insurers to reassess their capital position and product mix. We anticipate that there will be a significant volume of transactional activity linked to Solvency II with new niche players emerging, but this will probably not start materialising for another 12 months or so. Management are postponing decisions on what will be tomorrow’s run-off until they have fully evaluated the capital and diversification implications.”

Over 90% of those surveyed have a strategic plan in place for dealing with their run-off business and more than 60% cite releasing capital as the key objective. Two thirds of respondents that had contemplated exit had considered using a solvent scheme of arrangement, 59% a reinsurance or loss portfolio transfer, 55% a sale and 41% an insurance business transfer. Several respondents also commented that they expect to see an opt-out solvent scheme of arrangement in the market in the next 12 months.

“European run-off business is now being managed through increasingly sophisticated strategic plans, with the spotlight on releasing capital and consolidating organisational structures," adds Schwarzmann. "Part VII and insurance business transfer activity has been particularly strong this year as companies seek to create more efficient capital, regulatory and operational structures.”

Other key findings from the PwC survey include:

• The size of the non-life European run-off market is now in the region of €218 billion. In March 2010 we estimated it to be approximately €205 billion.

• Run-off is handled in a variety of ways, 44% manage it in a separate business unit but 15% handle run-off alongside ongoing business. Respondents identified appropriately skilled resources as a constraint to being able to deal with run-off effectively within their organizations, a finding which echoes the results of PwC’s ‘Getting set for Solvency II’ Survey conducted in November 2010.

• 72% of respondents have been involved in some form of restructuring activity to date and half of the respondents believe there will be more than 10 run-off disposal transactions in the next two years, representing an increase from the third of respondents that took this view last year.

• Respondents believe that most activity will take place in Germany, the UK and Switzerland.

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