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The Actuary The magazine of the Institute & Faculty of Actuaries

European insurers with US APH liabilities face solvency scrutiny

This may in turn lead to insurers increasing their reserves to cover the liabilities.

The research by Ruxley Ventures into the impact of Solvency II found US insurers - subject to the onerous reporting requirements of US GAAP - have had to reassess and increase the level of their reserves.

It also revealed the Solvency II financial reporting regime will expose European insurers to similar pressures regarding their APH liabilities as those experienced by their US counterparts. This will have resourcing implications in terms of both sourcing and managing data to fulfill the disclosure requirements as well as increasing capital requirements.

Initial over-reserving, which occurred when the problem of US APH was uncovered in the late 1980s and early 1990s, has encouraged European insurers to disengage from actively managing these portfolios - leaving a surplus that may be reduced or wiped out by Solvency II.

Solvency II is likely to be a catalyst for many European insurers to find a permanent solution for the old problem of US APH liabilities.

John Winter, chief executive of Ruxley Ventures, said: "Given the insurance industry's crisis over APH related claims occurred more than twenty years ago, many of today's managers have little experience of, or inclination for, dealing with them. I believe Solvency II will push the issue firmly back up their agenda.

"Our research suggests that European insurers with US APH liabilities may be over reserved. Ruxley's view is that there is an opportunity for insurers to avoid the burden imposed by Solvency II of having to increase reserves and instead achieve an instant profit release. This would be done through a transfer of the business to a specialist APH acquirer. Given that Solvency II's implementation is less than 18 months away we advise businesses with APH liabilities to start looking at their options now."