Solvency II will result in customised reinsurance solutions

Solvency II will significantly change the demand for reinsurance cover. Risk-transfer solutions will have to be geared even more strongly than before to each individual cedant's portfolio and balance-sheet profile and must be very flexible. Once Solvency II is implemented, our clients will place new demands on reinsurance; the Solvency Consulting unit will support them and their client contacts at Munich Re in preparing for these changes.

The implementation of Solvency II will involve a great deal of effort from the European insurance markets. At the same time, the new set of rules will enable insurers to be more precise in recording their risk exposure, to control risks better, and to gear capital allocation more closely to their own security and return targets, thus setting the scene for long-term sustainable growth.

Essentially, the insurance industry has to prepare itself for the following separate developments:

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  Expenditure on risk management will rise.
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  The need for risk capital will tend to increase.
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  Insurers will meet these requirements by improving their control of risk and adjusting their portfolios.
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  Individual reinsurance solutions will play an increasingly important role in covering these capital requirements and refining risk control mechanisms.

The crucial aspect for individual insurers will be to identify the classes and products that make up the strongest share of risk capital requirements but do not create long-term added value for the company. In non-life, for example, this may involve products with high exposure to catastrophe, with particularly volatile claims experience or with long run-off periods. In life business, the focus is on controlling biometric risks.

Options for action include adjusting, restricting or terminating certain products or taking up new ones to achieve greater diversification effects.

In the medium term, the contest will be won by those insurers that have

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  a well-diversified portfolio,
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  high-performance IT systems,
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  a sophisticated risk and capital management system integrated in their corporate practice, and
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  good access to the capital markets and risk transfer solutions.

The reinsurers have wide-ranging expertise in compiling and modelling risk. Munich Re’s Solvency Consulting department advises and supports clients in preparing for the new risk control, modelling and capital management requirements.

It is in the nature of the primary insurance markets that the necessary stability is almost unlikely to be achieved without risk transfer. Reinsurance will continue to be the first choice as far as flexibility and practicality is concerned. In addition, it enables primary insurers to achieve diversification and growth targets they would not be able to reach using other means or incurring added expenditure alone.

The greater demands for customised solutions will change the way cedants, reinsurers and brokers interact.

Reinsurers will need much more data and information about the primary insurer’s portfolio and balance sheet than has previously been the case. This is the only way they can develop a reinsurance structure that actually corresponds to their clients’ needs and medium-term strategic orientation. Reinsurance will not only enable them to cover their capital requirements but also support their strategic goals, including more professionalised risk management, reduced result volatility, diversification or profitable growth.

The exchange, structuring and modelling of portfolio and balance-sheet data call for new solutions. Munich Re therefore sponsors the freely accessible open-source platform PillarOne, which allows all interested primary insurers to partially model their underwriting risks. Further functions are scheduled for 2009. The relief that reinsurance provides in terms of risk capital requirements can be reflected more precisely than when using the standard formula provided by Solvency II.

The advisors in Solvency Consulting, in close cooperation with our clients’ contact persons, provide solutions for the whole spectrum, from preparing for the changed regulatory environment to developing customised solutions, and from traditional reinsurance programmes to alternative securitisation approaches.