With the popularity of solvent schemes on the rise, Jon Francis looks at the pros and cons of exit solutions.

A solvent scheme may facilitate the closure of a company in its entirety or it may be used to close an identifiable and discrete section of an insurance company’s portfolio of exposures. With this in mind, there are plenty of good reasons for exiting insurance risk via a solvent scheme of arrangement.

For shareholders, it enables the release of funds from low-return or loss-making business activity. It can improve one’s rating; it can cleanse a balance sheet for an initial public offering or capital-raising. It will reduce employment costs and management distraction from the current portfolio; and ultimately it releases capital.

For policyholders it provides an early settlement of losses with paid claims settled for 100% – and the net present value of claims is maximised. It ensures that outstanding losses are potentially paid in advance of actual settlement and it means that future credit risk is quantified – ie cash is now a credible hedge against future insolvency.

But there are also good arguments against making such exits. Shareholders enjoy the tax efficiency of assets protecting reserves; the long-term investment hedge may prove attractive; the long-term stability and ability to service old and/or legacy losses is attractive to insurance buyers; by maintaining an interest in and participation in the “loss universe”, one also retains potential lobbying power and a company’s claims handling skill base is maintained.

“Policyholders might argue against an exit due to the lack of peace of mind in relation to future loss development

Jon Francis Business development manager, Whittington.

Policyholders might argue against an exit due to less peace of mind in relation to future loss development; the pressure to accurately and adequately quantify developing loss and because of the prospect of legislation imposing duties not spelled out in the original insurance or reinsurance contract.

So is a solvent scheme exit a good idea? Is it a straightforward decision for shareholders?

In the professional world of reinsurance and retrocession, the answer is clearly yes. Provided that adequate data is available, the outcome is relatively certain and consideration is given to other tools that make up the exit palette.