May 7th, 2015

Reinsurance Versus Subordinate Debt: Which is Best for Solvency Capital?

Posted at 1:00 AM ET

matt-day-headshot-sm5ross-milburn-pic-128x149smallMatthew Day, Senior Vice President, Guy Carpenter Strategic Advisory and Ross Milburn, Managing Director, GC Securities*, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Conduct Authority


Here we review how a holistic approach to managing solvency capital requirements can benefit insurers’ bottom line: 

Part I:    In recent months a number of market commentators have opined on the merits of proportional reinsurance versus subordinated debt (sub debt), some favoring reinsurance solutions and some favoring sub debt, but generally finding results in line with the products their companies offered. Guy Carpenter feels reinsurance or sub debt alone is unlikely to provide the best solution to meet solvency capital requirements. Instead, a blended approach should be considered.

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Part II: Sub debt is an additional part of the capital tool kit available to insurers and can often be used to greater effect as part of a tailored solution than in isolation. In conjunction with a risk and/or capital management-based approach to the mitigation of each of the solvency capital requirement (SCR) components, management may consider issuing sub debt to provide growth capital (organic and through acquisition) as well as make a longer term contribution to SCR coverage.

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Part III: What About Volatility? Insurers understand volatility in respect of their insurance and investment risk and reinsurance can play a significant role in controlling this. However, another form of volatility exists in respect of the pricing and availability of reinsurance and sub debt. To counter this clients are encouraged to consider multi-year reinsurance transactions, retroactive solutions and to explore sub debt issuance that by nature is long term. By staggering the end-dates of different transactions, a natural hedge against rising rates on line and debt market spreads can be created.

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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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