December 2nd, 2009

Five Ways to Achieve Competitive Compliance for Solvency II

Posted at 1:00 AM ET

Financial Intelligence Team

Solvency II compliance should provide more opportunity than burden … if executed properly. The ability to use approved internal models results in a Solvency Capital Requirement (SCR) that’s tailored to the risks in your portfolio - which in itself is advantageous. This benefit translates into more effective capital management, as it reflects the risks you actually cover (rather than the output of a standard formula). Improved operations through the internal model approach may also free capital for deployment elsewhere — if the model-determined SCR is lower than that from the Solvency II standard formula. The newly available capital can be invested in any number of initiatives that can lead to a competitive advantage.

After the jump, you’ll find five ways to attain competitive compliance.

1. Set objectives beyond compliance: complying with Solvency II should also entail a broader strategic planning effort. Determine your risk profile, appetite and tolerance, and use these thresholds to determine how productive your capital should be in a post-compliance business environment.

2. Identify key strategic alternatives: define the growth opportunities that make the most sense for your company (given its risk profile, appetite and tolerance). These may include investments in existing lines of business, entering new markets or engaging in tactical or strategic acquisitions.

3. Model for results: use an approved internal model to determine your Solvency Capital Requirement (SCR). Then, compare the capital for each risk category to the results of the Solvency II standard formula SCR to find the approach that offers the most capital flexibility. The capital that remains is available for investment in growth opportunities.

4. Allocate your capital: use your internal model to identify the strategic alternatives that best increase market share, bolster return on equity, generate more premium revenue or lead to acquisitions with the capital not needed for Solvency II compliance.

5. Never stop measuring: always track your progress. Evaluate changes in your portfolio to ascertain the implications for the SCR and your Solvency II compliance program. Gauge the success of the capital you have redeployed through targeted modeling, and make changes as necessary.

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Statements concerning accounting, legal, regulatory or tax matters should be understood to be general observations based solely on the author’s experience in the reinsurance industry, and may not be relied upon as accounting, legal, regulatory or tax advice which he is not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.

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