Publication: Reinsurance as Capital Optimization Tool under Solvency II
Date
2013-01
ISSN
Published
2013-01
Author(s)
Gurenko, Eugene N.
Itigin, Alexander
Abstract
This paper compares solvency capital
requirements under Solvency I and Solvency II for a sample
mid-size insurance portfolio. According to the results of a
study, changing the solvency capital regime from Solvency I
to Solvency II will lead to a substantial additional
solvency capital requirement that might represent a heavy
burden for the company's shareholders. One way to
reduce the capital requirement under Solvency II is to
increase reinsurance protection, which will reduce the net
retained risk exposure and hence also the solvency capital
requirement. Therefore, this paper proposes an extended
reinsurance structure that, under Solvency II, brings the
capital requirement back to the level of that required under
Solvency I. In a step-by-step approach, the paper
demonstrates the extent of solvency relief attained by the
insurer by applying different possible adjustments in the
reinsurance structure. To evaluate the efficiency of
reinsurance as the solvency capital relief instrument, the
authors introduce a cost-of-capital based approach, which
puts the achieved capital relief in relation to the costs of
extending the reinsurance protection. This approach allows a
direct comparison of reinsurance as a capital relief
instrument with debt instruments available in the capital
market. With the help of the introduced approach, the
authors show that the best capital relief efficiency under
all examined reinsurance alternatives is achieved when a
financial quota share contract is chosen for proportional reinsurance.
Link to Data Set
Citation
“Gurenko, Eugene N.; Itigin, Alexander. 2013. Reinsurance as Capital Optimization Tool under Solvency II. Policy Research Working Paper; No. 6306. © World Bank, Washington, DC. http://hdl.handle.net/10986/12188 License: CC BY 3.0 IGO.”
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