Solvency II turns spotlight on run-off, says PwC

More than two thirds of insurers believe that Solvency II will lead to a greater focus on discontinued business, according to Pricewaterhouse Coopers.

The business advisory company’s fourth annual survey of the run off market, published today, says that more than half of insurers polled anticipate Solvency II will increase the cost of capital.

But while the survey says 68% of insurers expect Solvency II to focus them on their discontinued businesses and the exploration of exit options, only 16% see their companies quitting lines of business as a result of the new EU directive.

As a further measure of the importance the report says insurers are placing on run-off business, 90% of survey respondents have a strategic run-off plan in place – an increase of 18% on 2007’s snapshot of the sector.

Of those who have plans in place, 78% of plans contain a commutation plan and 64% an exit strategy. Eight nine per cent of UK plans encompass an exit strategy.

Dan Schwarzmann, partner in PWC’s solutions for discontinued insurance business team, said: “It is clear that European insurers are carefully considering their discontinued operations and exit mechanisms which deliver value are becoming more of a focus throughout Europe. The impending arrival of Solvency II and the associated impact on capital will make dealing with run-off even more important and we are now seeing major groups taking positive steps to exit discontinued portfolios.

“At the same time, with the recent ruling on Scottish Lion making it very clear that a solvent scheme of arrangement can be used to change contractual rights with a policyholder and exit a business, we predict that this tool will be used more by European businesses to deal with run-off portfolios.”

Insurers also cited the availability of skilled resources as a challenge to their ability to deal with discontinued business, which the report says may explain why 39% of insurers currently outsource their run-off operations..

But the survey, entitled “Unlocking value in run-off” shows that under half of respondents expect to use insurance business transfers as their means of exit.

It also shows that total estimated liabilities rose to 205 bn euros, following a fall to 196 bn euros last year. And it predicts continued appetite for consolidation deals amongst run off providers in 2010.

The survey, produced in conjunction with the Association of Run-Off Companies, analyses questionnaire results from around 500 discontinued and live insurers in both Continental Europe and the UK.