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

In order to harmonise insurance industry regulation and to increase policyholder protection, 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 its most important innovations is introduction of the risk-based solvency model, according to which insurers are required to allocate capital against certain categories of their risks. The impact of the 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 has been discontinued (run-off). This paper provides a discussion of the Solvency II regulation model highlighting its impact on discontinued business in non-life insurance industry. Accordingly it uses analysis of the current solvency legislation together with relevant literature and various secondary data.
It is shown that the impact of the Solvency II on discontinued insurance business goes beyond the capital requirements. The rules of regulatory supervision and disclosure also have serious ramifications. Consequently passive management of run-off is no longer a feasible option for majority of the undertakings. As a result the demand for active run-off solutions and exit options is likely to increase.
Understanding the implications of Solvency II will facilitate the choice of mechanisms for managing discontinued business. Considering the lack of attention to the topic of the insurance run-off, current article is aimed to trigger academic discussion by setting the basis for further discourse.