Run-off is not something some people wish to think about. It has the whiff of failure about it. Yet to succeed in the recession, a realistic and tough-minded approach is required.
Not panic, but clear and careful thinking.
Firstly, and most obviously, the recession argues this. Investment losses are profound.
Claims will increase. In the recession there will be a general rise in insolvencies, and the insurance sector will hardly be immune.
A second factor has nothing to do with the recession, because it was planned well before the recession started. Solvency II, the new regulatory requirements for insurance companies in the
European Union, will impose new capital requirements on insurers, with the intent of reducing the risk that insurers are unable to meet claims. Even though it is possible that Solvency II will be delayed, insurers are preparing for it now, or ought to be. Consequently they are looking carefully at where their capital is employed. One solution may be to put certain lines into run-off.
Many do not find run-off an attractive topic. It is complex. There are different methods of run-off. Here are six: run-off to expiry; accelerated run-off through commutation; a reinsurance arrangement where a reinsurer provides economic finality; a scheme of arrangement; sale of the equity of the business; and a Part 7 transfer (selling a book of business to another insurer).
Run-off requires expertise. The time to think about run-off, and to acquire that expertise, for those of us who have not already done so, is now.
David Sandham, editor.