Managing capital

European Solvency II survey

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External reinsurance remains the most widely used instrument to optimize underwriting risk.

Implementing strategies to optimize capital in light of Solvency II will take time – 70% of insurers recognize the need and are starting to take action. Clearly, companies are not waiting for complete certainty in the rules or a full set of metrics to explore opportunities.

Asset matching, hedging strategies and credit/counterparty risk exposure management are priorities for almost 50% of companies. Larger organizations are using reinsurance and intragroup arrangements to realize diversification benefits at the entity and group level. Insurers in Italy, Spain and Germany have postponed their activity in this area until 2013 or later. The Netherlands, Belgium and France are moving the fastest.

Market-related risk, on average, accounts for over a third of respondents’ total risk profile. This is measured by pre-diversification economic capital under the standard formula. Two-thirds of companies expressed the need to improve strategies to manage market risk, including updating their ALM analysis. Optimizing asset mix (by both duration and to achieve diversification) is viewed as an important activity and is likely to generate a high level of capital efficiency.

Non-life and life underwriting risks represent the highest and third-highest risks for an insurer’s risk capital profile. Two-thirds of companies plan to reduce their exposure to underwriting risks using a variety of tools. An equal amount gave high ratings to product pricing review, and some of these insurers cite this as the most important optimization activity. External reinsurance remains the most widely used instrument to optimize underwriting risk.

Credit risk is extremely important for many companies. In this regard, more than 60% of respondents cited diversification of investments, optimization of investment credit ratings and diversification of reinsurance exposure.

Other tools are widely used to improve the corporate risk profile and realize diversification. These include internal reinsurance, intragroup arrangements and reviewing existing entity structures. Mid-market players may underestimate the benefits of these approaches. However, they should be considered for optimization by all insurers with multiple operations.