- Traditional London Market run-off is in slow decline
- Decrease in value of total run-off liabilities by 9%
- Solvency II is placing considerable demands on valuable resources
KPMG’s annual ‘Run-off survey’ of UK non-life insurance, has shown that liabilities have reduced again in 2010 but at a slower pace than in the past.
Mike Walker, head of KPMG’s restructuring insurance solutions practice at KPMG in the UK, commented: A large proportion of the remaining solvent run-off market outside of Lloyd’s now resides in the hands of entities whose business approach is not to accelerate claims; through choice or because those claims are insured through compulsory insurance. These businesses currently face potentially difficult challenges as they seek to generate profits and release surplus capital at a time of increasing costs, claims settlements and depressed investment performance.
“Significant time and valuable resources are being used to deal with increasing compliance burdens required as a result of the changing regulatory environment. Despite recent announcements regarding the proposed delay to the implementation of the Solvency II directive, there is little respite for insurers.
“Proposed new transitional exemptions for run-off companies, who have argued that the costs of Solvency II are disproportionate for their businesses, will clearly be welcomed. To benefit from these arrangements however, run-off business will need to close within a limited timeframe and we are likely to see run-off entities revisiting schemes of arrangements and other finality options.”
Key findings of the research include:
Total liabilities of the UK non-life run-off market decreased by approximately nine percent to an estimated £27.1 billion in 2010 (equating to 13 percent of the non-life market as a whole), down from £29.7 billion in 2009;
The decrease in the value of liabilities is primarily a result of two factors: (i) the elimination of syndicates at Lloyd’s with open years through the Reinsurance to Close process; and (ii) the release of reserves following claims settlements, commutations and/or favourable claims development; and
Total capital tied-up in solvent UK non-life companies in run-off decreased by approximately £0.3 billion to £3.9 billion; principally due to successful extraction of surplus capital through capital reduction, dividend distribution and other mechanisms.
The survey also shows that Solvency II remains a high priority for the insurance sector including the run-off market, which may in turn drive M&A activity and further consolidation.
John Wardrop, Partner in KPMG’s restructuring insurance solutions practice, commented: “In the last 18 months we have seen, and have advised on, a number of large scale reorganisation and restructuring projects by many of the largest insurance groups as they seek to minimise future administration and compliance costs, and maximise capital efficiencies ahead of Solvency II. We anticipate such structuring projects for insurance groups may lead to some legacy business ending up in the hands of run-off acquirers.”
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Notes to editor:
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