10th annual UK run-off survey from KPMG
KPMG’s 10th annual UK Run-Off Survey: Non-Life Insurance report reveals that run-off liabilities continued their decline in 2011. The report highlights that the overall size of the UK non-life market has declined by nearly 25% over the last decade as the UK active market has more than doubled.
Key findings of the report include:
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Total liabilities of the UK non-life run-off market decreased by approximately five percent to an estimated £25.7 billion in 2011 (representing 13 percent of the non-life market as a whole), down from £27.1 billion in 2010 (and £33.3 billion in 2002);
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Asbestos, pollution and health hazard (APH) liabilities still constitute the large majority of UK run-off liabilities; although recent years have seen an increase in the proportion of shorter tail personal lines business within the run-off sector; and
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Total capital tied up in solvent UK non-life companies in run-off remained broadly unchanged at £3.9 billion.
Mike Walker, head of KPMG’s UK insurance restructuring practice, commented: “While our report shows a significant reduction in its size there is still a demonstrably thriving run-off market in the UK and an innovative community which serves it. Run-off practitioners should be encouraged by the growth in the size of the live market given that the live business of today is, potentially, the run-off business of tomorrow.
“The past decade has been characterised by significant changes and challenges for the run-off sector. When compared to the growth experienced in the live market it looks like a decade of decline. In that period, there have been no major insolvencies and with the exception of the monolines, very few additions to the run-off market. Consolidation has been another constant theme of the past 10 years. The industry has seen run-off liabilities – and the organisations that service those liabilities – consolidated into a relatively small number of acquirers and service companies. There has also been a notable level of compromise that has led to phenomenal growth in the use of commutation, schemes of arrangements and business transfers to bring about finality, as well as preparation for major regulatory change.”
Solvency II remains a high priority for the run-off market and it is clear that an indicative timetable for all the remaining steps required to adopt Solvency II is required. Solvency II has already generated restructuring activity within the run-off sector in 2011 – including a number of large internal restructuring and Part VII business transfers.
John Wardrop, partner in KPMG’s UK insurance restructuring practice, commented: “In addition to the delay and uncertainty associated with its stuttering implementation, many companies have serious concerns about the significant costs associated with Solvency II preparation.
“M&A activity has continued, albeit at a reduced pace, but the deals that are being done are not necessarily being driven by Solvency II considerations. The current economic conditions are forcing groups to be more capital efficient and reduce costs. This is putting increasing pressure on groups to understand the legacy business within their organisations, with a number creating run-off ‘centres of excellence’. It is this growing focus on legacy business from a capital and cost perspective that appears to be driving current M&A activity and which is likely to increase such activity in the future.”
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