Specimen company under Solvency II

Solvency II obliges companies to take a risk-based view of their operations as a whole. Sample calculations for a specimen company using the standard formula and a partial internal model show that reinsurance remains the simplest and most flexible way for an insurer to manage its business on an economic basis.

The European Union’s modernisation of solvency requirements in the insurance industry poses a major challenge to all insurance companies. The standard approach to determing solvency is intended to result in a risk-based view of each insurer’s overall situation, with all risk drivers being taken into account in the calculations. But what does this mean for our clients in practice? What can be done to reduce the risk capital requirement?

Using the balance sheet of a specimen company, Munich Re’s Solvency II experts calculated the risk capital required if reinsurance were used. The calculations were based on the last field study (QIS5) and were performed using the standard formula and an assumed partial internal model. The impact of four different reinsurance programmes on net solvency capital was analysed.

Use of reinsurance programmes increases solvency ratio under QIS5

Munich Re’s calculations illustrated that the reinsurance programmes produced a substantial rise in the specimen company’s solvency ratio under QIS5 – of up to 227% in the example used. All of the portfolio data are publicly accessible on the PillarOne Solvency II portal (www.pillarone.org) initiated by Munich Re.

Despite its complexity, Solvency II ultimately provides companies with a transparent, holistic view of their risk situation that was not available before. Using practical examples, Munich Re creates transparency and provides insurers with the knowledge base needed to find a systematic strategy and to plan appropriate measures. The result is reinsurance programmes that are even more individually and holistically geared to their requirements than before.

You can find further background information on the specimen company, the process and the figures used in our Knowledge Series entitled “The impact of reinsurance on risk capital”.