PricewaterhouseCoopers survey finds European insurers are increasingly looking to run-off in the current economic crisis
Over 60% of insurance businesses surveyed for a new report by PricewaterhouseCoopers believe the financial crisis is a key issue for the European insurance industry. This, coupled with the introduction of Solvency II which is leading companies to focus on their core business activities, means 2010 should be a significant year for the run-off industry as companies strive to extract value from legacy businesses and save costs where they can.
The importance of run-off to insurance businesses continues to grow with nearly three quarters of all respondents considering proactive management of run-off as a major priority for senior management. In addition, a massive 86% of overall respondents now have a strategic run-off plan in place – an increase of 14% on 2007.
Total estimated liabilities continued to fall to a total of Euros 196 billion from Euros 202 billion in 2007. However, this fall was driven solely by the UK, as Continental European liabilities continued to grow.
The PricewaterhouseCoopers third 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.
Dan Schwarzmann, partner in the solutions for discontinued insurance business team at PricewaterhouseCoopers LLP, said:
“Our research clearly shows that the advantages of proactively handling legacy and run-off business are recognised Europe-wide. The fact that 56% of Continental European respondents regard the financial crisis and Solvency II as the most important issues facing the insurance industry, means insurers in Europe have the impetus to proactively release the value in their run-off liabilities.
“At the same time, the implementation of the Reinsurance Directive across the whole of Europe, coupled with recent court rulings clarifying the jurisdiction for solvent schemes of arrangements, means the tools available to European business to deal with run-off are ever more accessible.
Other key findings from the PricewaterhouseCoopers survey include:
- There is beginning to be a convergence of views across Europe on what run-off business actually is, with over 85% of respondents defining run-off as ‘lines of business which are no longer written’.
- According to respondents, the key challenges facing Continental European insurers and reinsurers in relation to their run-off business include tied-up capital, operational costs and adverse loss development.
- Just over half (52%) of respondents estimated that it will take over 10 years to run off their business in the natural course which is down from 70% last year. This would indicate that organisations have begun to take steps to implement exit mechanisms to reduce the run-off tail. The reduction probably stems from the level of commutations over the last year and around 60% of respondents indicated a strategic commutation programme would be the most frequently used exit mechanism over 2009.
- An overwhelming 98% of respondents expect an increase in insurance business transfers in Continental Europe over the next few years following the implementation of the Reinsurance Directive.