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10th of September 2010

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Solvency II to boost reinsurance use

Gavin Bradshaw 02/07/2010

Solvency II will boost the importance of reinsurance to captive and other insurance programmes, according to a new report launched this week.
 
The 63-page study by Aon Benfield. Solvency II for Reinsurance Managers, said Solvency II will prove the value of reinsurance as an efficient form of capital.
 
However, the report stressed that partial internal models are crucial to obtaining a more accurate picture of premium risk.
 
“In a Solvency II world, reinsurance is the most obvious place to start with an internal model,” said Marc Beckers, head of EMEA Analytics at Aon Benfield [pictured above].
 
“Under the current proposal, the benefit of an internal model compared to the Standard Formula is largest for reinsurance, particularly for non-proportional property cat and casualty reinsurance.”
 
The report argues that the Standard Formula does not provide adequate credit for non-proportional reinsurance on casualty lines.
 
In particular, it said, the existing proposal in QIS 5 penalises larger insurers by providing no noticeable benefit from purchasing non-proportional reinsurance.
 
The study went on to say that as regulation puts further pressure on capital, buying reinsurance should no longer be a budget matter, but should be based on sound risk and capital considerations. 
 
“Rather than looking to raise capital to fund any shortfall in net assets, companies may consider reinsurance options to reduce their capital requirement,” said Beckers.
 
“Furthermore, volatility of earnings will increase as a result of fair value accounting (Solvency II and IFRS Phase II) and reinsurance is the cheapest and most efficient way to reduce this volatility.”

Tags: Aon Benfield, Reinsurance, Solvency II

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