Solvency II and its impact on discontinued business in non-life insurance

In order to harmonise regulation of insurance industry and to increase protection of policyholders, the European Commission has adopted a Directive on the taking-up and pursuit of the business of Insurance and Reinsurance, known as Solvency II. One of the most important innovations of the Directive is introduction of a risk-based solvency model, according to which insurers are required to allocate capital against certain categories of their risks. This results in higher capital charge for many firms. The impact of the upcoming rules on the live insurance market has been discussed at length by academics as well as practitioners. However, Solvency II also affects the inactive business i.e. the business, underwriting of which for various reasons has been discontinued (so-called run-off). This paper seeks to provide a discussion of the upcoming Solvency II regulation model highlighting its impact on discontinued business in non-life insurance industry. Accordingly this article uses analysis of the current and upcoming solvency legislation together with relevant literature and various secondary data.
It is shown that the impact of the Solvency II on discontinued insurance goes beyond the capital requirements. The rules of regulatory supervision and disclosure also have serious ramifications. Thus, apart from generating little to no profit for insurers, a run-off portfolio under Solvency II creates additional pressure on company’s capital and human resources. Consequently passive management of discontinued business is no longer a feasible option for majority of the undertakings. Most of them therefore will be forced to seriously deal with their run-off books, often for the first time. As a result the demand for active run-off management and exit options is likely to increase.
Understanding the implications of Solvency II will facilitate the choice of mechanisms for managing discontinued business and underline the importance of proactive dealing with run-off. Considering the lack of attention to the topic of discontinued business, current article is aimed to trigger academic discussion by setting the basis for further discourse.