Solvency II will focus minds, trigger run-off
New proposed capital requirements under Solvency II will force re/insurers to both reassess their strategic priorities – potentially placing non-core business into run-off – while also selling discontinued books of businesses to specialist third parties.
That is the view of Andrew Ward, partner at PricewaterhouseCoopers in the department that specialises in solutions for discontinued insurance business. He believes more insurers and reinsurers will be placing books of business into run-off ahead of the Solvency II deadline.
“It’s definitely on the agenda. We have seen large organisations starting to have a think about books of business; either stuff that is already in run-off or new things that they are considering putting into run-off,” he said. “The general feeling still holds true and I believe that there will be an increase nearer the time.”
Ward believes Solvency II will force companies to face this issue and act based on what they view as their strategic priorities in the future.
“Some people who have run-off in their portfolio may not yet have focused on it and may be beginning to realise that now is the time,” said Ward. “There is more activity and more people thinking about exit options and consequently the possibility of run-off, which may not have been on the agenda. There will be some instances where it’s moved up in people’s schedule.”
This view echoes the findings of several reports and surveys issued in recent months. PwC’s report ‘Unlocking the value in run-off’ suggested that an increase in exit activity was likely. “Indeed, we have had more conversations over the past year with providers of new capital looking to acquire run-off business than for some time,” said PWC partner Dan Schwarzmann in that report.
The PWC survey revealed that ‘finality’ was now the most popular answer given by European respondents when asked about their strategic plans around run-off, replacing ‘capital release’ as the most cited reason.
“A greater appreciation of the potential impact of Solvency II may explain the increased desire for finality,” the report said. “Respondents perhaps recognise that long term run-off is not an economic option for some books of business. However, whilst finality is high on the radar for run-off businesses, the number of exits may have been limited by businesses postponing major decisions in these times of economic uncertainty.”
Others agree that an uptick in activity around run-off is likely. John Winter, CEO of Ruxley Ventures, an insurance investment boutique which specialises in US-based Asbestos Pollution and Health Hazard (APH) liabilities, believes recent delays to Solvency II will give companies the chance to act.
“Ruxley believes the delay should be treated as an opportunity to look again at old outstanding liabilities, and with the sufficient time now available, consider a transfer and the profit that could be generated,” Winter said.
The run-off market is vast in size. In a survey of the run-off sector this year, PWC estimated that there are a staggering €220 billion of discontinued non-life liabilities held on the books of European insurers alone.
Some deals are starting to appear although it is difficult to say if these represent an upturn in activity. Lower Insurance AG recently sold its reinsurance portfolio, which contains predominantly liability and marine contracts in run-off, to Hamburger Internationale Rückversicherung AG (HIR), part of Tawa Plc.
