The survey highlights that the recent momentum in proactive management and disposal of legacy business is set to continue, with the majority of all global respondents predicting they will undertake restructuring or exit activity in the next three years.
Mirroring 2016, non-life run-off transaction activity in 2017 was strong, and PwC predicts a healthy pipeline of deals continuing in 2018 driven by a range of factors. These include further impetus from Solvency II in Europe, international (re)insurers focussing increasingly on core underwriting and fulfilling a desire to gain either full legal or economic finality for their legacy liabilities through insurance business transfers or reinsurance arrangements. Capital efficiency, however, remains a central theme across all geographies.
Key findings
The lines of business most likely to be disposed of in the next two years are employers’ liability and workers’ compensation;
More than half of the survey respondents say run-off and legacy management is a priority for their Executive Board;
Continental Europe is expected to be the most active territory in terms of number of deals, followed by the UK and the US;
Over a third of all respondents expected to undertake restructuring activity in the next three years anticipate utilising insurance business transfers to achieve their objectives.
Dan Schwarzmann, head of Market Initiatives and Industries at PwC UK, said: “It is clear from our survey that the global run-off market remains extremely buoyant and there is growing recognition among (re)insurers of the benefits of proactively managing legacy books. This is complemented by an increasingly sophisticated and well-capitalised group of run-off consolidators that have recently been supplemented by a number of new entrants, who are eager to provide exit solutions for owners of discontinued business. The results of our previous surveys have highlighted Continental Europe becoming an increasingly active run-off market and 2017 has seen a step change in this region which looks set to continue.”
Other key findings
The increased focus on run-off is driven by a variety of factors and key objectives include releasing capital, managing costs and exiting legacy lines in order to focus on core underwriting goals. However, challenges remain and survey respondents identify adverse loss development, the regulatory environment and access to exit mechanisms as barriers to achieving their goals.
Commenting, Andrew Ward, director in PwC’s Insurance Liability Restructuring team, said: “The run-off and legacy management markets are at their most active for many years and the level of restructuring activity looks set to be significant in the near term. In 2018 it will be interesting to see if developing US initiatives around Insurance Business Transfers and Brexit restructuring in Europe also provide additional momentum to the run-off community.
“There are many external factors influencing the way insurance is written, including new technology, AI and the growth of cyber risk. These developing underlying risks will inevitably drive change in the future run-off market, but we’re confident the legacy sector will adapt, continue to innovate and deliver value for all stakeholders.”
While traditional markets in Europe and the US dominate the run-off landscape, the Asian and African insurance markets are set to grow over the next decade which will lead to an increase in the value of their run-off reserves.
UK insight
68% of UK respondents say it is likely or highly likely that they will engage in restructuring activity in the next three years
The size of run-off liabilities in the UK and Irish markets has grown due to ongoing uncertainty around the Ogden discount rate
UK survey respondents cited political uncertainty, including Brexit, as likely to be a significant factor influencing or impacting run-off in the next two years. It is not yet clear what impact the UK’s departure from the EU will have on the value and location of European run-off. An uncertain political landscape could act as a catalyst for restructuring activity involving run-off portfolios, as (re)insurers re-evaluate the lines of business they want to prioritise.
UK respondents indicate a greater challenge presented by the regulatory environment than those in the US who are more concerned with adverse loss development in achieving run-off objectives. The implementation of Solvency II has undoubtedly driven much of the run-off transactional activity in the UK and Continental Europe in recent times, prompting proactive decision making to free up and redeploy capital.
Dan Schwarzmann concluded: “Our UK respondents have cited political uncertainties, including Brexit, as likely major influences on run-off in the next two years. Our experience is that the uncertainty surrounding Brexit has focussed the attention of (re)insurers and, as a result, planning, and in some cases, related restructuring, is well underway. However any significant Brexit impact on the run-off sector is yet to materialise.”
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