Solvency II – The clients’ perspective

Many clients have already started to look at the impact of Solvency II on their business ahead of implementation in 2012. It might seem like a long way off but we have already started working together to support clients preparing for the new environment. Even if items such as group support have not as yet been adopted by the European Union, the fundamental elements of an economic and risk-adjusted view of the capital environment are going ahead.

What will change under the introduction of Solvency II from our clients’ perspective?

Under Solvency II, the internal view of economic capital will become virtually identical with the regulatory capital requirements. This is a positive step. Our clients are already starting to optimise their businesses along these lines. This may lead to a need to restructure their reinsurance programmes. We are starting this dialogue very early to have time to make tailor-made solutions for our clients in the context of Solvency II. Insurance companies are changing. Their thinking is changing. The strategy for buying reinsurance is changing.

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

Clearly there are going to be changes in the way they steer their businesses and that means that our relationship with our clients will also change. Many clients would previously focus on balance sheet issues such as profit and loss volatility, accounting volatility and budget. Previously they would have bought to budget, rather than from the perspective of risk and capital. That is the first change. The second change is that the economic effects of reinsurance will have a more immediate impact on the solvency capital requirement. It is vital that we as an organisation stand ready to serve our clients on a continual basis.

And what will the influence be on capital management?

The cost of capital is a crucial element in managing shareholder value. 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 cost for the primary insurer. It means Chief Risk Officers and Chief Financial Officers will be a lot more interested in the benefits of reinsurance and have better measures for judging the value of the reinsurance coverage purchased.

Published 19 March 2010