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Solvency II: they think it’s all over…it’s hardly started

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Silverfinch senior vice president of business development Ashley Smith believes there’s more to come with S2

There was a feeling, after years of preparations and numerous delays, that once we got past the hurdle of the launch of Solvency II on 1 January, everything would slot into place and we would witness a whole new insurance landscape unfolding before our eyes – no such luck.

As a company that’s been at the heart of making the new regulations work for Europe’s €9.9tn insurance industry, it’s imperative for us and all other stakeholders to keep an eye on what’s going on. One of the central questions that regulators, insurers, asset managers and policy makers should be asking is whether the Solvency II process is working smoothly or not. More specifically, it would be interesting to know the steps insurers are taking to fit in with the new regime – have they changed their asset allocation to meet the risk framework of the new rules? Are they taking the steps to make sure their portfolios are as efficient as possible considering the broad range of capital charges that are imposed on different asset classes?

Reinsurance as Capital Optimization Tool Under Solvency II

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by Eugene Gurenko, World Bank & Alexander Itigin

Abstract:      

This paper compares solvency capital requirements under Solvency I and Solvency II for a sample mid-size insurance portfolio. According to the results of a study, changing the solvency capital regime from Solvency I to Solvency II will lead to a substantial additional solvency capital requirement that might represent a heavy burden for the company’s shareholders. One way to reduce the capital requirement under Solvency II is to increase reinsurance protection, which will reduce the net retained risk exposure and hence also the solvency capital requirement. Therefore, this paper proposes an extended reinsurance structure that, under Solvency II, brings the capital requirement back to the level of that required under Solvency I. In a step-by-step approach, the paper demonstrates the extent of solvency relief attained by the insurer by applying different possible adjustments in the reinsurance structure. To evaluate the efficiency of reinsurance as the solvency capital relief instrument, the authors introduce a cost-of-capital based approach, which puts the achieved capital relief in relation to the costs of extending the reinsurance protection. This approach allows a direct comparison of reinsurance as a capital relief instrument with debt instruments available in the capital market. With the help of the introduced approach, the authors show that the best capital relief efficiency under all examined reinsurance alternatives is achieved when a financial quota share contract is chosen for proportional reinsurance.