German run-off first bodes well for Reinsurance Directive roll-out

German reinsurer Deutsche Rückversicherung AG (Deutsche Rück) has become the first continental European firm to transfer its third party run-off business to a UK subsidiary.

It is the first time a German firm has been able to transfer this type of business to the UK and follows changes to German legislation as part of implementing the European Union’s Reinsurance Directive. Deutsche Rück’s active reinsurance business is not affected by the move.

Deutsche Rück has transferred all of its third party run-off business via a business transfer using Section 121f para.1 of the new German Insurance Supervisory Act VAG which came into force on 2 June 2007.

The new Act is part of Germany’s implementation of the EU Reinsurance Directive and its provisions enable reinsurance portfolio transfers similar to those which are permitted under Part VII of the UK’s Financial Services and Markets Act 2000. Prior to its implementation Germany had no legislation for reinsurance business comparable to that of the UK.

Under the strategic initiative, Chiltington International will manage the Deutsche Rück’s run-off business that is being centralised in Deutsche Rück UK, with the overall objective of finalising the run-off.

Jürgen Rehmann, Deutsche Rück chief executive, said “The key benefit of this initiative is it enables us to fix a maximum cost for the run-off liabilities and to concentrate those liabilities in the UK, so insulating Deutsche Rück’s balance sheet from any potential future adverse loss deterioration from these portfolios.”

“In this particular situation, when compared to the UK's Part VII transfer process, the German procedure had been simpler and therefore less costly

Chiltington's group head of consulting, Ian Marshall

Chiltington’s group head of consulting, Ian Marshall commented “In this particular situation, when compared to the UK’s Part VII transfer process, the German procedure had been simpler and therefore less costly.

“However, it is equally likely there will be situations where a Part VII transfer could have advantages over the German process. In this respect, the German transfer procedure should be seen as a valuable addition to the overall tool kit for Germany-UK transfers, not a replacement of existing mechanisms.”

Nigel Montgomery, of law firm Sidley Austin which advised on the deal, added that the move helped cement the UK among the world leaders of run-off. He said, “The UK is certainly a pre-eminent run off centre. In terms of the Part VII legislation and people skills I don’t think there is anything that is comparable.”

In the immediate aftermath of the announcement, Montgomery said he received calls from other interested firms and believed that this move may pave the way for similar deals in the future.

So far Germany and Ireland have progressed most rapidly in terms of legislating to accommodate the new Directive and it could well be that firms from other countries make similar decisions once their national law allows.