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Aon Benfield Study Assists Insurers to Optimize their Balance Sheets under Solvency II

Posted on 20 Oct 2011

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Aon Benfield, the global reinsurance intermediary and capital advisor of Aon Corporation, has launched its Solvency II Revealed report, which contains a series of in-depth articles on the key challenges of the new regime based on actual client projects.

Solvency II Revealed offers fresh perspectives on the regulatory challenges of the EU protocol, and includes important considerations for firms' key personnel managing the regulation, from chief financial officers and chief risk officers, to actuaries and catastrophe modellers.

Themes highlighted in the report include:

* Combining the management of insurance and market risk, and leveraging the internal model framework, enables insurers to optimise their overall business strategy across insurance and investment risks and deliver higher shareholder returns without increasing risk or capital.

* Solvency II will change the investment behaviour of insurance companies.  Allocating risk and capital across underwriting and investment risk more dynamically provides an opportunity to deliver a more stable return to shareholders through the underwriting cycle.

* Insurers do not necessarily have to choose between a reinsurance programme which achieves business objectives and one which reduces capital requirements. A non-proportional treaty with or without frequency protection (aggregate covers) can substantially reduce capital requirements as an additional benefit to the protection against unexpected losses.

* Internal models, despite requiring a significant investment, result in more accurate calculations of solvency capital for catastrophe risk. Irrespective of whether the standard formula or an internal model is used, catastrophe excess of loss reinsurance remains the leading mitigation tool for natural catastrophe risks and a cost effective source of capital.

* Pandemic and terrorism risks drive the life catastrophe capital requirement. Fully transparent models, such as those developed by Impact Forecasting, allow insurers to demonstrate internally and to regulators how to potentially quantify these risks.

* Ratings agencies are unlikely to change their ratings processes as a result of Solvency II but insurers that can demonstrate an effective internal modelling process may achieve favourable capital adjustments under the rating agency models over time. This could mean a reduction in the capital needed to support their rating.

* Many insurers have chosen to reap the benefits of using an internal model – such as Aon Benfield's ReMetrica – for Pillar 1 but these can also play a positive role under Pillar 2 as part of the Own Risk and Solvency Assessment (ORSA) to demonstrate to regulators that risk is being effectively managed.  

* Calculating the fair value of a reinsurer's share of technical non-life liabilities could be a challenging task if the reinsurance programme has changed in recent years. The report examines the Solvency II framework and presents two different approaches from a practical perspective.

Gareth Haslip, EMEA head of Aon Benfield Analytics' Risk & Capital Strategy team, said: "As insurers continue to prepare for Solvency II, the key is in understanding how and where to prioritise resource to not only achieve compliance but also make the most of the business opportunities arising from the regulation. We are helping insurers prepare for Solvency II by offering expertise on both sides of the balance sheet and advising clients on designing both optimal insurance and asset strategies under Solvency II."

Marc Beckers, head of Aon Benfield Analytics in EMEA, added: "The report highlights key areas of strategic change, driven by the transition to Solvency II, which can also create a more value-oriented way of running an insurance company. Following the unofficial confirmation by the European Council and several regulators of 2014 as the new start date for Solvency II, we are continuing to work with insurers across Europe to help them prepare for Solvency II and in the process maximise the return on their investment. Our involvement focuses on areas such as catastrophe risk, model validation, investment optimisation solutions, benchmarking of premium and reserve risk parameters, structuring solutions for companies with capital concerns due to the economic environment or because the Standard Formula is inappropriate."