Solvency II will drive rise in business run-off, says PwC

The EU’s Solvency II regulations will drive an upsurge in mergers and acquisitions among continental European insurers, a new PricewaterhouseCoopers survey has predicted.

The business adviser’s fourth annual run-off report, launched last week, says that 62% of the senior industry figures surveyed agreed that the new regulations on capital adequacy would increase M&A activity, nearly double the 33% figure reported in 2008.

The survey also showed that 62% believed that Solvency II would spark an increased focus on shedding underperforming lines of business when it comes into force in 2012, up from 48% in the previous year.

In line with this finding, the proportion saying that there would be a greater concentration on run-off business rose from 54% to 68% over the same period.

The survey also indicated that 90% of respondents said they have a strategic plan for dealing with their discontinued lines of businesses, up from 72% in 2007. Of those insurers with strategic plans in place, 78% contain a commutation plan and 64% an exit strategy.

Speaking at the launch of the report, entitled ‘Unlocking value in run-off’, the head of PwC’s discontinued insurance business, Dan Schwarzmann, said: “Over the last 18 months, a lot of people have come to the conclusion that some activities don’t make sense under the new regime.”

“It is clear that European insurers are carefully considering their discontinued operations, and exit mechanisms that 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.”

Overall, the report said that the total value of the non-life European run-off market was €209bn (£189.4bn) in 2009, representing a recovery from 2008 when the figure dropped to €196bn.

Those who answered the survey predicted continued consolidation among UK run-off providers and a healthy appetite for acquisitions, with more than 60% of respondents predicting that there will be more than two significant transactions within the sector over the next 24 months.

Schwarzmann commented: “Run-off has been affected by the financial crisis much less than other parts of the financial sector.”

Approximately 500 directors and chief executive officers completed the survey.