Capital requirements

Solvency II provides for precise measurement of risk exposure. Tailor-made reinsurance products will allow optimization of risk capital for each product line.

Risk and capital

Solvency II is an economic and risk based regime. As a result, insurance companies should assess their risk exposures in a comprehensive way and ensure sufficient capital under a stress scenario. The Solvency Capital Requirement (SCR), which is defined as the 99.5% Value at Risk, must be met for all obligations arising from existing and new business for the following year. In other words, businesses' solvency capital must be sufficient to withstand a 1-in-200 year event. Measuring the required capital can be done with the standard formula (defined in legislation) or with a partial or full internal model, which can prove to be more complex.

Diversification and efficient capital allocation are more important than ever to the success of the insurance industry. Both impact on the entire value chain, including in product development, pricing, distribution and in portfolio management which will have a direct and measurable effect on capital requirements. Swiss Re has developed tools to help clients calculate their risk exposures under the new rules. We have cross-line expertise, encompassing presence and a highly diversified portfolio. Together this can effectively reduce the costs of Solvency II compliance and, more importantly, increase our clients' competiveness.

Role of reinsurance

Reinsurers have a key role to play in risk management and achieving diversification benefits.

Many reinsurance solutions have a long and successful track record for transferring risk and providing capital relief. Under Solvency II some reinsurance products will even allow clients to manage their economic balance sheets in a more precise way. Swiss Re provides reinsurance solutions to suit the particular needs of our customers. In particular, we can help clients conduct reviews of their risk appetite and provide the appropriate products to support this. We also aim to broaden our product portfolio to create solutions to new challenges that did not exist under the old regulatory framework. Contact us to find out how you can use reinsurance in the most effective way.

Internal model

Many clients will use the standard formula to calculate their required capital, the benefits being comparability and relative simplicity. Clients may find that the standard formula does not take important aspects of their business into account, however. Diversification impacts of certain types of more complex reinsurance might not be adequately captured, leading insurers to develop their own partial or full internal model to calculate solvency requirements.

Under a partial internal model, companies may replace modules of the standard formula with internal models, eg for catastrophe risk. Developing and approving a full or partial internal model involves a high degree of complexity and resources, including efforts to ensure supervisory approval and ongoing model governance. This should be weighed against the benefits of getting better credit on diversification which can have a particularly high impact on complex portfolios. We will support clients using the standard formula by showing how reinsurance is dealt with and by finding the most effective way to ensure its benefits are fully taken into account.

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