Eric Paire, Head of Global Partners & Strategic Advisory, EMEA
Movement Within Capital Ratios Leading to Uncertainty Amongst Mid-Size Companies
The impact of the Solvency II capital ratio on composite life and property/casualty balance sheets is proving more substantial than some companies initially expected, according to Eric Paire, Head of Global Partners & Strategic Advisory, EMEA at Guy Carpenter. This development is due to the double impact of market volatility and volatility within the solvency ratio itself.
According to Mr. Paire: “As companies have shifted from the preparation phase of their Solvency II strategy which focused on implementing the necessary processes and systems to the data crunching phase, they are gaining a much clearer picture of the potential capital charges - and in some cases, the results have been unexpected.”
“The life side of the balance sheet brings a very significant amount of market risk and in addition to the Solvency II capital pressures, there is also increasing capital solvency ratio instability. As a result, there are major fluctuations that many did not foresee on the solvency ratio linked to the asset side, as well as the impact of interest rate movements.”
Mr. Paire continues: “We are transitioning from a Solvency I era where the capital ratio was relatively stable subject to the ability to manage volatility within a P&L; to a Solvency II era which requires management of P&L volatility as well as solvency ratio volatility.”
The knock-on effect is increased uncertainty regarding the optimal capital level, according to Mr. Paire. While a number of large-scale market players are targeting capital levels of 200 percent or above, for the mid-sized practitioners setting the solvency marker is a much greater challenge.