Vol 4 (2007) - Issue 3

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European Insurance Restructuring and Reorganisation – The Potential for Discontinued Business Rationalisation

The European insurance regulatory framework has undergone significant change over the past fifteen years. Various European-wide regulations and directives have been implemented and more are in the pipeline as the European Commission seeks to create a single European insurance market through harmonising regulation and removing barriers to trade on a cross-border basis. The diagram below illustrates how active the Commission has been over a sustained period.

As the legislative changes are implemented, it is anticipated that there will be an increase in restructuring activity within European insurance and reinsurance businesses. A recent survey by PricewaterhouseCoopers LLP (‘PwC’) focuses on the challenges to and opportunities for dealing with discontinued or run-off business in Europe and draws some comparisons between the UK and European run-off markets.

The run-off market in the UK is well established in its own right and has pioneered many innovative and proactive measures for delivering value from discontinued business, particularly over the last decade. To date, insurers and reinsurers in Continental Europe have been less concerned with run-off liabilities and there are far fewer examples of high profile run-offs and corporate restructurings. Exceptions do exist however. The bulk of Alea’s business entered run-off following ratings downgrades and Globale provides an example of where a separate legal entity has been established to deal with legacy (re)insurance run-off issues.

PwC’s European run-off business survey confirmed that European books of discontinued business are often fragmented within organisations. They are generally located either in older subsidiary entities that receive little management attention or housed in large, well-capitalised and strongly rated entities where run-off may be of secondary consideration and is managed alongside the live business. However, PwC’s findings indicate that European insurers and reinsurers are starting to take greater interest in their discontinued liabilities. Legislative changes encourage opportunities for restructuring in order to deal with non-core and discontinued business lines as pressure increases to recycle and utilise economic capital more efficiently.

In considering the current position of discontinued insurance business in Europe and the potential for future reorganisation and restructuring it is worth taking a look at three of the recent regulatory changes in more detail.

The Third Non-Life Directive

The Third Non-Life Directive became effective in 1992 and was required to be implemented by each member state by July 1994. The directive built upon the foundations that were laid down by the First Non-Life Directive some 20 years earlier to initiate the development of a common basis for insurance supervision across the European Economic Area (EEA) by introducing the principle of home state control. One provision of the First Non-Life Directive allowed EEA insurers to establish branches in other member states. The Third Non-Life Directive developed this theme by establishing the ‘single passport’ regime that enabled EEA insurers to conduct business across all EEA territories without the need to establish a branch or to be separately authorized in multiple jurisdictions.