Concerns over tied-up capital will increase exit solutions

One of the key findings of PricewaterhouseCoopers’ latest run-off survey is that new regulation will increase attention to run-off.

Solvency II, in particular, is expected to encourage European insurance and reinsurance companies to seek exit solutions.

When asked what were the key challenges facing their business in relation to run-off, 63% of European insurers and reinsurers said tied-up capital was a concern.

Run-off portfolios will have an onerous impact on capital requirements once the new solvency regime comes in. Seeking exit solutions should therefore help to free up capital.

Despite this, firms are not looking to exit at any price, warned PWC actuarial partner Mark Allen. “Insurers can get rid of anything quickly enough if they’re willing to pay enough,” he added.

“Our clients are focusing on Solvency II already

Dan Schwarzmann

“Our clients are focusing on [Solvency II] already,” said Dan Schwarzmann, partner in the solutions for discontinued insurance business team at PWC.

Speaking at a press lunch he said that although the implementation date for Solvency II had been put back to 2012 many firms were recognising a “first mover advantage” of investigating solutions for their legacy books of business now.

Schwarzmann said the “stars were aligning” in the sense that new regulation was increasing the focus on run-off at the same time that new solutions were becoming available.

With liabilities expected to increase in 2008, these new solutions will become even more important. Softening insurance and reinsurance rates and the global credit crunch are expected to impact the run-off market this year.

The credit crunch will make it “attractive to release capital from the balance sheet,” explained Schwarzmann.

“I went to a conference the other day and nobody mentioned BAIC. It's good to see we've moved on

Dan Schwarzmann

The Reinsurance Directive, which allows firms to transfer books of business between EU Member States and hence gain great access to exit strategies, should provide firms with new options.

Eighty-eight percent of Continental European respondents and 95% of UK respondents to the survey said the Directive would result in either a moderate or significant increase in transfer activity in Continental Europe in the next five years.

Interestingly, and disappointing for Schwarzmann, commutation was favoured by respondents as the exit solution of choice over the next five years.

For Schwarzmann, schemes of arrangement are the logical solution. “Schemes now look very different to schemes two year ago,” he said. “I went to a conference the other day and nobody mentioned BAIC – it’s good to see we’ve moved on.”