Most (re)insurers believe EU directives will cause a rise in run-off business, explains Dan Schwarzmann

The recently released second edition of the PricewaterhouseCoopers (PWC) Survey of Discontinued Insurance Business in Europe looked at developments in the European run-off market.

Among the issues in the survey was the impact of the Reinsurance Directive and Solvency II on run-off business. More than 60% of respondents indicated that Solvency II would drive an increased focus on run-off business and the exploration of various exit options, and more than 80% said they believed the Reinsurance Directive is likely to result in an increase in transfer activity over the next five years.

Those surveyed were also asked which exit mechanisms would be the most frequently used over the next five years. Responses here indicated that some 40% of respondents highlighted strategic commutation programmes, compared with 37% who identified business transfers, and 23% who pointed to solvent schemes of arrangement.

Two thirds of respondents in Continental Europe said they expected their run-off to last for at least a further ten years which, coupled with the expectation that commutations would be the most frequently-used exit mechanism suggests finality (and capital release) could be achieved more effectively than envisaged at present. Commuting “low hanging fruit” could yield short-term savings but a rump of more difficult to commute exposures may still remain. Administration of these policies will continue to require resource and capital support long into the future. For example, a solvent scheme might provide an opportunity to deal more expeditiously with all exposures under an accelerated timeframe.

UK legislation has been used to exit over 30 European portfolios in run-off with UK “sufficient connection”. This is where relationships to the UK exist based on a number of factors, including, the domicile of the policyholders and/or reinsurers as well as that of the brokers used to place the business.

A development in this area is the impending launch of the Globale Rückversicherungs-AG scheme - the first scheme to be proposed in respect of a German company using “sufficient connection” to the UK. The market has also seen the first example of a transfer under the Reinsurance Directive from Continental Europe to the UK in the form of Deutsche Rückversicherung. More examples of transfers to the UK are likely. It will be interesting to see if these businesses are then subject to a solvent scheme and achieve complete finality where a UK “sufficient connection” solvent scheme would not be available.