The UK run-off will benefit from a new European directive

The shrinking UK run-off market could benefit from a foreign investment boost thanks to new EU regulations.

Once implemented, the EU Reinsurance Directive will allow easier transfers of run-off business between Member States – but the experience and expertise available in the UK market, flowing from both government and private business, makes it the most attractive location.

This follows news of Deutsche Rück’s proposal to transfer its run-off business to the UK – the first Germany-to-UK transfer of its kind, and a transfer that would not have been made without the Directive.

Run-off accounted for 18% of the entire UK non-life insurance market in 2006, equivalent to £32.7bn – £5.5bn less than in 2005.

Darryl Ashbourne of KPMG, who has written and produced five surveys for the Association of Run-Off Companies (ARC), said: “With respect to the UK run-off market, the EU Reinsurance Directive will present more options to reinsurance companies looking to close out their legacy business.

“An option is to move the relevant portfolio in run-off to a more favourable jurisdiction for dealing with run-off business. The UK is such a favourable jurisdiction because of the number of available legislative tools for dealing with run-off, such as schemes of arrangement, and the high number of experienced run-off practitioners.

“Also, the FSA’s dedicated run-off team, which has been in existence for over 12 years, is well aware of run-off issues and is very constructive as well as professional in its approach to regulation of run-off.”

Jürgen Rehmann, Deutsche Rück’s chief executive, said: “The key benefit of this initiative is it enables us to fix a maximum cost for the run off liabilities and to concentrate those liabilities in the UK, so insulating Deutsche Rück’s balance sheet from any potential future adverse loss deterioration from these portfolios.”

Deutsche Rück has transferred all of its third party run-off business to its UK subsidiary, Deutsche Rück UK Reinsurance Company Ltd. Chiltington will manage the business, with the overall object of finalising the run off.

Deutsche Rück’s transfer was made under new German legislation implementing the Directive, and is similar to that permitting Part VII transfers in the UK. The Directive must be implemented by the end of the year, but both Germany and Ireland are ahead of schedule.