Solvency II is a key focus for European insurers on books of business in run-off as a way to release capital according to a new report released today by PricewaterhouseCoopers LLP. Over half of the insurers surveyed for the report anticipate that Solvency II will drive a greater cost of capital and 68% of insurers expect Solvency II to focus them on their discontinued businesses and the exploration of exit options. However, despite these findings only 16% of insurers see their companies exiting lines of business as a result of Solvency II.

As a further measure of the importance insurers are placing on run-off business, 90% of survey respondents have a strategic run-off plan in place – an increase of 18% on 2007. Of those who have plans in place, 78% of plans cite commutation strategy as a component of their plans and 64% encompass an exit strategy. When comparing the UK to the rest of Europe, we find that that percentage rises to 89% of plans encompassing an exit strategy, which may change as the applicability of exit tools used in the UK becomes more widespread.

Dan Schwarzmann, partner in the solutions for discontinued insurance business team at PricewaterhouseCoopers LLP, said: 

“It is clear that European insurers are carefully considering their discontinued operations and exit mechanisms which deliver value are becoming more of a focus throughout Europe. The impending arrival of Solvency II and the associated impact on capital will make dealing with run-off even more important and we are now seeing major groups taking positive steps to exit discontinued portfolios.

“At the same time, with the recent ruling on Scottish Lion making it very clear that a solvent scheme of arrangement can be used to change contractual rights with a policyholder and exit a business, we predict that this tool will be used more by European businesses to deal with run-off portfolios.”

Alongside the concerns around tied up capital and the costs of this, insurers also cited the availability of skilled resources as a challenge to their ability to deal with discontinued business. This perhaps demonstrates why 39% of insurers currently outsource their run-off operations. However, with an additional 59% of insurers either not currently outsourcing their run-off operations or not planning to do so, it seems that the use of outsourcers is still viewed by some as a cost-cutting measure as opposed to a strategic decision.

Interestingly, under half of respondents expect to use insurance business transfers as their means of exit. This is in contrast to last year’s survey which showed that 98% of respondents expected an increase in transfers in Continental Europe following the implementation of the Reinsurance Directive. This decline in appetite for transfers may be as a result of the recent ECJ ruling relating to a transfer of a Swiss Re portfolio which meant the transaction was liable for VAT.

The PricewaterhouseCoopers fourth annual survey, ‘Unlocking value in run-off’, produced in conjunction with the Association of Run-Off Companies, analyses questionnaire results from a cross-section of professionals from discontinued and live insurers in both Continental Europe and the UK. It examines the attitudes towards managing run-off business across Europe and presents a unique insight into the run-off market.

Other key findings from the PricewaterhouseCoopers survey include:

• Total estimated liabilities rose again this year to €205 billion, following a fall to €196 billion last year. This increase has been driven by UK insurers ceasing to write certain product lines such as financial guarantee and credit insurance, but is partially off-set by continued commutation activity in the existing run-off market.

• According to respondents, consolidation amongst UK run-off providers and a healthy deal appetite from the traditional run-off acquirers will continue in 2010. Over 60% of respondents believe there will be more than two significant transactions in the next two years.
• Long tail claims and counterparty interest again feature highly when respondents cited the major obstacles to obtaining finality.
• When asked what run-off would look like in 2015, responses varied but there was some consensus around it being a highly skilled industry with growth in Continental Europe and the US 

ENDS