The insurance industry has shown through the years that it has a remarkable ability to respond to challenges, and to adopt and adapt, whether this relates to a new financial or regulatory framework or to respond to demands for new products and solutions. One of the biggest challenges that the European industry faced in recent years was the implementation of Solvency II, the European legislation that codifies and harmonizes insurance legislation across the European Union.
In this first of three articles, we will consider the transfer mechanisms used widely for decades now across Europe; we will then compare the European and U.S. frameworks, especially in light of the relatively new framework in Rhode Island. In the final article, we will examine where the U.S. market finds itself two years on from the enactment of the Rhode Island IBT framework and discuss what may have influenced the way in which the market and other states reacted to this development.
The way we were
When I started my career as a lawyer in the early 1990s, insurance litigation was seen as the poor relation of insolvency litigation. For those who were around at the time, this was the era of Asil Nadir and Robert Maxwell, to name a couple of non-insurance colourful characters. I had the pleasure and honour to work on both insolvencies. The first insurance “novel” I had to read when I qualified was the Department of Trade and Industry report on the collapse of the Weavers Pool. It was fascinating and had all the ingredients of a good novel: money, men with power and authority, a business empire, allure and a twist at the end. We then had Pacific and General and Pine Top. Then came the Independent and HIH. Life for contentious lawyers was great, the issues were untouched, it all went to litigation and the settled legal principles that we all take for granted today were made then. Still, run off was seen as second class and perhaps so were we! And today? Run off is an integral part of the insurance industry and specialist acquiring vehicles operate alongside insurers offering them additional tools with which to profitably and efficiently manage their business. The recent impressive investment into new vehicles and growth of existing vehicles is evidence of the market’s profitability and therefore, appeal to investors.
Twenty plus years on, judging from the new players and capital invested in it, I and quite a few others, find our market more appealing than ever…
Our world today
Solvency II, the relatively new European regulatory framework, along with the low investment returns, soft market and pressure on underwriting profit has forced insurers to focus, more than ever, on the cost of capital and consequently on capital efficiency, in addition to the need for optimization of internal resources and cost reduction. Reserves held for old, discontinued or non-core business have become more capital intensive, therefore restricting insurers’ ability to deploy capital elsewhere such as new products, digitalization or a strategy to increase one’s market share in core business or a new jurisdiction. The disposal of such portfolios to specialist acquiring vehicles has long been used in the United Kingdom and more recently in Continental Europe as a way in which insurers deal with portfolios they no longer wish to keep on their balance sheet. The harmonized regulatory framework makes this process predictable and efficient, both key advantages in any business transaction.
Capital release solutions through retrospective reinsurance, the assumption of insurance portfolios or the acquisition of entire legal entities provide insurers with much needed additional tools in their tool kit when considering how to manage demands on capital and resource efficiency.
For the full article, refer to page 15 in the Spring 2017 issue. https://www.airroc.org/assets/docs/matters/AIRROC%20Matters%20Spring%202017%20No%2013%20Vol%201.pdf