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Solvency II finally begins to make impact

The UK legacy market continued to shrink in 2011 but the long-predicted impact of Solvency II may finally be beginning to make its mark on the sector.

These were two of the conclusions from KPMG's annual survey on the sector, which noted that the UK legacy market is now at its smallest since a decade ago - when the study began.

The UK sector's non-life run-off liabilities fell £1.4bn in 2011 to £11.2bn, against £16bn in 2002, as the industry continued to settle claims with policyholders and few, new legacy businesses entered the sector.

Indeed, the decline has been consistent since 2002 with the exception of 2008 - at the height of the financial crisis - when total liabilities spiked to £19.7bn (see bar chart) because of the impact on specialist monoline insurers.

As a percentage of the live UK market, the legacy industry is now a mere 13 percent, against 27 percent 10 years ago, when a flurry of major (re)insurers went into run-off including CNA Re, Gerling Global Re, Eagle Star, Independent and HIH.

But despite predictions that Solvency II will prove to be a new dynamic for the sector - encouraging companies to off-load or restructure portfolios that are capital inefficient - the impact has been muted until now. In part, this is probably because of uncertainty over when the European regulatory regime will be implemented.

As KPMG notes: "There has been an expectation that Solvency II would reinvigorate M&A activity. That does not appear to have materialised quite as anticipated, although the conditions for that activity to occur are still in place."

But one new portfolio was added to the UK legacy market in 2011 - and Solvency II would almost certainly have been a factor. This was a restructuring by Aviva, which resulted in almost £500mn of run-off liabilities that had previously been excluded from the survey being transferred to the company's internal run-off unit, Ocean Marine.

Other internal restructurings that were noted in 2011 included Aviva's major UK insurance rivals, RSA and Direct Line (RBSI).

"The potential cost of complying with Solvency II is likely to have been at least part of the reason why the large-scale reorganisations of Aviva, RBS and RSA (via the Part VII transfer mechanism) took place in 2011," noted the report.

Mike Walker, head of KPMG's UK insurance restructuring practice, concluded: "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."

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