Solvency II – an insurer’s perspective

The new European solvency regime will bring many changes for European insurers. As companies examine the impact of Solvency II on their business, and prepare to meet its requirements, we have been working with clients to prepare for this new environment.

What will change under the introduction of Solvency II from an insurer’s perspective?

Under Solvency II, the internal view of economic capital will become virtually identical with the regulatory capital requirements. This is a positive step: Solvency II will facilitate a better understanding of the actual risks an insurance company is facing, as well as creating incentives for state-of-the-art risk management and ensure greater risk transparency. Many insurers have already started to optimise their businesses along these lines and, as this may lead to a the restructuring of reinsurance programmes, we started talking with clients very early to allow enough time for the development of tailor-made solutions.

So how will this affect the way that insurers run their business?

Clearly there will be changes in the way insurers steer their businesses. Previously, many insurers focused on balance sheet issues such as profit and loss volatility, accounting volatility and budget. Under Solvency II, insurers will be making decisions from a risk and capital perspective. Another example of change is the need to adapt to revised capital requirements: the upcoming Solvency II directive has prompted insurers to reexamine their risks and raise capital to stand against those risks. While reinsurance has always been an important risk management tool and financing instrument for insurance companies, the economic effects of reinsurance will have a more immediate impact on the solvency capital requirement under the new regime.

Solvency II will change the capital requirements for insurers. Can reinsurance help ease the capital burden?

The cost of capital is a crucial element in managing shareholder value or the expectations of other stakeholders. With the greater transparency that Solvency II will bring in terms of what capital is being used in which lines of business and for what return, senior management will get sight of what value reinsurance is offering and when it can lower the capital requirements for the primary insurer. It means Chief Risk Officers and Chief Financial Officers will be a lot more interested in the benefits of reinsurance as a capital management instrument and have better measures for judging the value of the reinsurance coverage purchased.

Swiss Re has produced a range of factsheets on the topic of Solvency II. These factsheets go into more detail on the changes the upcoming regulatory regime will bring for insurers in Europe. Many include case studies and other practical examples.

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