How life insurers can optimise the run-off of old portfolios

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– Why Run Off is an issue for all life insurers -.

All life insurance companies are largely in run off. This is because, with the exception of parts of the portfolio with the current guaranteed interest rate and unit-linked business, all other insurance contracts are actually just being wound up. because it’s closed to new business. The fact that increases still occur due to dynamics, for example, does not change this.

The life insurance business is collective and also characterised by equal treatment. This means that if an insurer wants to invest in higher-yielding but riskier capital investments, for example, it will need more expensive equity capital to do so – and this will be increased in future under Solvency II. He also has to do this for the investments of the old portfolio, even though he actually has nothing left of them in new business. If he were to manage the old portfolio for winding-up in another company or merely wind up the existing one and set up a new one for the new business, the provision of equity capital specifically for this purpose would be much easier. In addition, he could even free up equity in the old portfolio through safer investments and reinsurance and then use it specifically in the new company.

Transferring legacy assets to a dedicated external run off platform is just one option among many and not always the best. Although equity is then released and a purchase price is still obtained, a cost object is also lost, which can be helpful for the start-up. Where to put the partly qualified staff until the start-up has grown to the point where they would be needed again?

Dragging along a massive closed legacy portfolio to run off in the same insurer alongside new business is common, but alternatives to this should always be explored. And even if the legacy portfolio is not separated, the issue of the “run off” of this carried portfolio is still relevant for any life insurer. But also for anyone who, for example, deals with life insurance as an agent.

Here, the paper “Run-off in der Lebensversicherung” by Marco Ritter (Ed.: Fred Wagner) published in the series Leipziger Masterarbeiten, Volume 17 ( 2014) with 136 pages, price 32 EUR by Verlag Versicherungswirtschaft offers a good introduction to the topic, which is also available as an ebook ( ).

The continuing low-interest phase is forcing life insurers to question their business model and their future positioning. The paper provides insight into the strategic decision of run-off. The paper deals with the issues related to a run-off and options for action within the framework of active run-off management. In addition, a business model specialising in the management of closed life insurance portfolios is also presented. Up to now, this topic has only been dealt with to a very limited extent in the literature. The author offers an insight into the complex topic and provides a basis for further discussion by both theorists and practitioners in the life insurance sector.

A decision to run-off does not at the same time imply a decision to discontinue new business, but only to carry out a separation, sensibly in different companies.

For example, the old portfolio can be transferred to a special run-off insurer, but the operational processing can continue to be carried out within the own Group by means of a function spin-off.

The supervisory regime introduced with Solvency II obliges life insurers to reassess the risks inherent in their business model and to hold more safety capital in line with them. Against this background, the concept of run-off is gaining considerable momentum. The newly published work by Ritter offers a condensed systematic introduction here.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm


by courtesy of
published 11/20/2014)



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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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