Scor has underlined quota shares as the most efficient form of reinsurance for insurer’s capital optimisation under Solvency II – as the industry continues to adapt to the regime’s regulatory requirements since its implementation last year.
In a recent report on capital optimisation, Scor analysts contrasted the three capital drivers of the Solvency II Standard Formula P&C underwriting module (premiums, reserves and Nat Cat capital requirements), and found quota shares tick the most boxes by decreasing net income, increasing Solvency Capital Requirement (SCR) diversification, and improving liquidity position.
By contrast, excess of loss reinsurance, (Working XS), and catastrophe insurance, (Cat XS) work to reduce earnings volatility and required capital, with Cat XS also marked as potentially increasing SCR diversification and improving firm’s liquidity positions under stressed conditions.
Scor analysts commented that reinsurance “is a key tool for capital optimization, generating the most benefits for insurers operating in a risk-based approach.
“Capital optimization goes beyond capital management in the sense that it can act both on the numerator and denominator of capital and provide sustainable protection through earnings-driven solutions.”
Insurers have come to rely more heavily on reinsurers for capital adequacy since Solvency II’s creation, and as they move to take advantage of the low soft market prices for improved capital optimization.
Scor said; “the growing sophistication and complexity of regulatory frameworks throughout the world has led to an increase of interest in so-called “alternative” and “structured” reinsurance solutions.
“These transactions can be complex but tailored to specific insurance company profiles. They require active engagement with regulators to obtain sign-off.”
A.M. Best analysts also recently reported Europe’s 20 largest cedants have significantly increased reinsurance purchases in the last two years as soft market conditions, Solvency II requirements, and carriers expanding into new lines of business, create conditions that drive higher demand for reinsurance.
