On 8 July 2021, the European Insurance and Occupational Pensions Authority (EIOPA) published its draft Supervisory Statement on Supervision of Run-Off Undertakings (Paper). The Paper is a precursor to a pan-European supervisory approach to regulating entities in run-off.
The Paper was published in response to the growing levels of activity in the run-off market, particularly regarding private equity funds activity. The run-off market has been very active in the past number of years, largely due to hardening interest rates and insurers seeking to benefit from capital relief by disposing of legacy portfolios.
The involvement of private equity funds, indicating a higher risk-reward asset mix and a shorter investment horizon for run-off undertakings, was a key driver for the Paper. This can be detrimental to the interests of customers.
To whom does the Paper apply?
The Solvency II Framework (transposed into Irish law by the European Union (Insurance and Reinsurance) Regulations 2015 (Solvency II Regulations)) does not distinguish between the different forms in which a run-off can manifest itself. The Paper seeks to remedy this by specifying three types of run-off, namely: (1) partial/portfolio run-off, (2) full run-off, and (3) specialised run-off.
One shortcoming of the Paper is that it does not distinguish between life and non-life run-off scenarios. Insurance Europe has suggested that the Paper should distinguish, not only between life and non-life, but also between the different scenarios that can apply to each, i.e. a life/non-life company with a portfolio in run-off and a life/non-life company in full run-off.
Application to enter run-off
In practice, the Central Bank of Ireland (Central Bank) already applies much of what is required when applying to the relevant supervisory authority to enter run-off (application). The Paper specifies that an application must include particulars of the Board of Director’s decision to enter run-off (including the motivation to do so), the strategy to manage remaining (re)insurance business (if any). The application must be supported by detailed financial projections (covering assets, technical provisions, own funds, and capital requirements). Additionally, the application must be supported by details of any material outsourcing arrangements expected in the future and the impact on key staff retention (i.e. PCF/CFs).
The Paper suggests that a decision to stop writing business is “material” and should therefore be disclosed in the SFCR of the entity, and where the decision is made mid-year, an ad-hoc SFCR should be produced.
Insurance Europe’s response to the Paper suggested that an ad-hoc ORSA would be more appropriate than an SFCR, particularly where there is a significant change in the risk profile because of the decision to stop writing business.
Acquisitions of undertakings or portfolios
In the case of an acquisition of an undertaking in run-off or a portfolio in run-off (Acquisition), the Paper proposes that the relevant supervisory authority will be required to conduct a business model analysis. The financial soundness of the acquiring entity in an Acquisition will be the primary focus and, under Solvency II Regulations, the Central Bank has the power to require an increase in technical provisions where it is not satisfied with the financial position of the acquiring entity. Similarly, the Paper points out that, where the Central Bank (or another national supervisor) is unhappy with the financial capacity of the acquiring entity, it may require the provision of additional collateral to safeguard the interests of policyholders. This extra collateral is required to back up the initial commitment by the acquirer.
The key concern is policyholder protection. In this regard, the Paper proposes that operational risks such as the migration of IT systems and the ability of the acquiring entity to service policies should be a primary focus for supervisors.
Private Equity
The involvement of private equity funds is specifically called out in the Paper. It is proposed that supervisory authorities assess the track record of the investor prior to any Acquisition and that such authorities consider the impact of any early withdrawal from investment. This is to combat EIOPA’s concern that policyholders will be unduly affected by the typically shorter investment horizon of private equity funds.
The applicable consultation period has closed. It remains to be seen whether the proposals made by Insurance Europe will be taken on board by EIOPA once the final guidance is issued. It is unclear when the final version of the Paper will be published.
William Fry LLP
Our Insurance & Reinsurance team have extensive experience advising clients in run-off scenarios, including those seeking to acquire entities or portfolios in run-off. Should you require any advice or wish to find out more about the Paper, please contact a member of our Insurance & Reinsurance team or your usual William Fry contact.
Contributed by James Grogan
