Reinsurance as Capital Optimization Tool under Solvency II
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 su...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2013/01/17151391/reinsurance-capital-optimization-tool-under-solvency-ii http://hdl.handle.net/10986/12188 |
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okr-10986-121882021-04-23T14:03:06Z Reinsurance as Capital Optimization Tool under Solvency II Gurenko, Eugene N. Itigin, Alexander ACCOUNTS ACTUARIES AMOUNT OF RISK BORROWING COSTS CAPITAL MARKET CAPITAL MARKETS CAPITAL REQUIREMENT CAPITAL REQUIREMENTS CATASTROPHE BONDS CATASTROPHES COMMISSIONS COST OF CAPITAL COVERAGE CREDIT DEFAULT CREDIT QUALITY CREDIT RATINGS CREDIT RISK CREDIT RISK EXPOSURE DEBT DEBT INSTRUMENTS DEBTORS DEFAULT PROBABILITIES DEFAULT RISK EARNED PREMIUM EARTHQUAKE EMERGING MARKET EMERGING MARKETS EXCESS OF LOSS REINSURANCE EXCESS OF LOSS REINSURANCE CONTRACT FINANCIAL INSTITUTIONS FINANCIAL INSTRUMENT FIRE FLOOD INSTRUMENT INSURANCE CLAIMS INSURANCE COMPANY INSURANCE PREMIUM INSURANCE RISK INSURED EVENTS INSURER INTERNATIONAL BANK LIABILITY LIABILITY INSURANCE LIFE INSURANCE CONTRACT LIFE INSURANCE CONTRACTS LOSS RATIO MARKET BENCHMARKS MARKET PRICE MARKET REGULATOR MARKET RISK NATURAL CATASTROPHE NATURAL CATASTROPHES NON-LIFE INSURANCE NONPROPORTIONAL REINSURANCE ORIGINAL CONTRACTS PENSIONS POLICYHOLDERS PORTFOLIO PREMIUMS PROFIT MARGIN PROGRAMS PROPORTIONAL REINSURANCE QUOTA SHARE REINSURANCE RATES RECOVERABLES REINSURANCE REINSURANCE COMMISSION REINSURANCE COMPANIES REINSURANCE CONTRACT REINSURANCE CONTRACTS REINSURANCE MARKETS REINSURANCE PREMIUMS REINSURER REINSURERS RELIEF RESERVE RESERVES RETURN RISK = CAPITAL RISK CAPITAL RISK MANAGEMENT RISK MITIGATION RISK TAKING RISK TRANSFER SHAREHOLDERS SOLVENCY TERRORISM UNDERWRITING VALUE OF COLLATERAL 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. 2013-01-29T16:25:17Z 2013-01-29T16:25:17Z 2013-01 http://documents.worldbank.org/curated/en/2013/01/17151391/reinsurance-capital-optimization-tool-under-solvency-ii http://hdl.handle.net/10986/12188 English en_US Policy Research Working Paper; No. 6306 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Europe and Central Asia |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ACCOUNTS ACTUARIES AMOUNT OF RISK BORROWING COSTS CAPITAL MARKET CAPITAL MARKETS CAPITAL REQUIREMENT CAPITAL REQUIREMENTS CATASTROPHE BONDS CATASTROPHES COMMISSIONS COST OF CAPITAL COVERAGE CREDIT DEFAULT CREDIT QUALITY CREDIT RATINGS CREDIT RISK CREDIT RISK EXPOSURE DEBT DEBT INSTRUMENTS DEBTORS DEFAULT PROBABILITIES DEFAULT RISK EARNED PREMIUM EARTHQUAKE EMERGING MARKET EMERGING MARKETS EXCESS OF LOSS REINSURANCE EXCESS OF LOSS REINSURANCE CONTRACT FINANCIAL INSTITUTIONS FINANCIAL INSTRUMENT FIRE FLOOD INSTRUMENT INSURANCE CLAIMS INSURANCE COMPANY INSURANCE PREMIUM INSURANCE RISK INSURED EVENTS INSURER INTERNATIONAL BANK LIABILITY LIABILITY INSURANCE LIFE INSURANCE CONTRACT LIFE INSURANCE CONTRACTS LOSS RATIO MARKET BENCHMARKS MARKET PRICE MARKET REGULATOR MARKET RISK NATURAL CATASTROPHE NATURAL CATASTROPHES NON-LIFE INSURANCE NONPROPORTIONAL REINSURANCE ORIGINAL CONTRACTS PENSIONS POLICYHOLDERS PORTFOLIO PREMIUMS PROFIT MARGIN PROGRAMS PROPORTIONAL REINSURANCE QUOTA SHARE REINSURANCE RATES RECOVERABLES REINSURANCE REINSURANCE COMMISSION REINSURANCE COMPANIES REINSURANCE CONTRACT REINSURANCE CONTRACTS REINSURANCE MARKETS REINSURANCE PREMIUMS REINSURER REINSURERS RELIEF RESERVE RESERVES RETURN RISK = CAPITAL RISK CAPITAL RISK MANAGEMENT RISK MITIGATION RISK TAKING RISK TRANSFER SHAREHOLDERS SOLVENCY TERRORISM UNDERWRITING VALUE OF COLLATERAL |
| spellingShingle |
ACCOUNTS ACTUARIES AMOUNT OF RISK BORROWING COSTS CAPITAL MARKET CAPITAL MARKETS CAPITAL REQUIREMENT CAPITAL REQUIREMENTS CATASTROPHE BONDS CATASTROPHES COMMISSIONS COST OF CAPITAL COVERAGE CREDIT DEFAULT CREDIT QUALITY CREDIT RATINGS CREDIT RISK CREDIT RISK EXPOSURE DEBT DEBT INSTRUMENTS DEBTORS DEFAULT PROBABILITIES DEFAULT RISK EARNED PREMIUM EARTHQUAKE EMERGING MARKET EMERGING MARKETS EXCESS OF LOSS REINSURANCE EXCESS OF LOSS REINSURANCE CONTRACT FINANCIAL INSTITUTIONS FINANCIAL INSTRUMENT FIRE FLOOD INSTRUMENT INSURANCE CLAIMS INSURANCE COMPANY INSURANCE PREMIUM INSURANCE RISK INSURED EVENTS INSURER INTERNATIONAL BANK LIABILITY LIABILITY INSURANCE LIFE INSURANCE CONTRACT LIFE INSURANCE CONTRACTS LOSS RATIO MARKET BENCHMARKS MARKET PRICE MARKET REGULATOR MARKET RISK NATURAL CATASTROPHE NATURAL CATASTROPHES NON-LIFE INSURANCE NONPROPORTIONAL REINSURANCE ORIGINAL CONTRACTS PENSIONS POLICYHOLDERS PORTFOLIO PREMIUMS PROFIT MARGIN PROGRAMS PROPORTIONAL REINSURANCE QUOTA SHARE REINSURANCE RATES RECOVERABLES REINSURANCE REINSURANCE COMMISSION REINSURANCE COMPANIES REINSURANCE CONTRACT REINSURANCE CONTRACTS REINSURANCE MARKETS REINSURANCE PREMIUMS REINSURER REINSURERS RELIEF RESERVE RESERVES RETURN RISK = CAPITAL RISK CAPITAL RISK MANAGEMENT RISK MITIGATION RISK TAKING RISK TRANSFER SHAREHOLDERS SOLVENCY TERRORISM UNDERWRITING VALUE OF COLLATERAL Gurenko, Eugene N. Itigin, Alexander Reinsurance as Capital Optimization Tool under Solvency II |
| geographic_facet |
Europe and Central Asia |
| relation |
Policy Research Working Paper; No. 6306 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Gurenko, Eugene N. Itigin, Alexander |
| author_facet |
Gurenko, Eugene N. Itigin, Alexander |
| author_sort |
Gurenko, Eugene N. |
| title |
Reinsurance as Capital Optimization Tool under Solvency II |
| title_short |
Reinsurance as Capital Optimization Tool under Solvency II |
| title_full |
Reinsurance as Capital Optimization Tool under Solvency II |
| title_fullStr |
Reinsurance as Capital Optimization Tool under Solvency II |
| title_full_unstemmed |
Reinsurance as Capital Optimization Tool under Solvency II |
| title_sort |
reinsurance as capital optimization tool under solvency ii |
| publisher |
World Bank, Washington, DC |
| publishDate |
2013 |
| url |
http://documents.worldbank.org/curated/en/2013/01/17151391/reinsurance-capital-optimization-tool-under-solvency-ii http://hdl.handle.net/10986/12188 |
| _version_ |
1764422181257740288 |