LAM13020 | Transfers of long-term business: Commercial background

There are many commercial reasons for insurers wanting to enter into a Part VII transfer of business and the most common drivers are described below.

Economic efficiencies

Within an insurance group lower costs can be achieved by bringing together different books of insurance that may have been written in different subsidiaries or held in subsidiaries that have recently been acquired.

Bringing different books of insurance together may achieve capital efficiencies where uncorrelated risks are pooled. This has become more important since the introduction of the Solvency II regulatory regime. Consolidation can also reduce the costs of administering each policy by scaling up and those may include regulatory costs. The transfer may also enable the group to rationalise its structure and remove an unwanted subsidiary.

Rationalisation of the business

It may also be commercially desirable for an insurance group to separate out its legacy insurance business, particularly if it has a closed book that it either wants to manage by consolidating it with other closed books within the group, or by way of sale.

Sale or purchase

A Part VII transfer makes purchases and sales between third party insurance groups much easier, as it removes the requirement for the whole insurance company to be acquired or for complex mergers to be undertaken. Instead a much more targeted approach can be followed with only the desired part of the business being transferred.

As the application to the court can be lengthy Part VII transfers intra-group or between third parties are often preceded by an immediate reinsurance of the business from the transferor which ensures that the transferee experiences the economic consequences immediately.