February 27th, 2017

Managing Volatility Key To Solvency II Transition: Part II

Posted at 1:00 AM ET

paire-eric-sm1Eric Paire, Head of Global Partners & Strategic Advisory, EMEA

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“To remain competitive, smaller companies simply cannot afford to operate at 200 percent. This volatility on multiple fronts means that establishing the solvency level that will provide a sufficiently robust capital buffer to withstand these fluctuations is extremely difficult. Is it 130 percent, 150 percent, 170 percent or higher?” notes Eric Paire, Head of Global Partners & Strategic Advisory, EMEA at Guy Carpenter.

Mr. Paire believes that reducing this uncertainty requires companies to adopt a much more systematic risk management strategy, which combines both the asset and underwriting side of the operation and the life and non-life activities. “However, this more holistic approach will not be straightforward, as for many, these activities are conducted very much on a standalone basis.”

As a result, a greater onus rests on the broker to bring together these critical components. “We must be in a position to facilitate a much broader dialogue that covers all of the elements of the Solvency II equation,” Mr. Paire explains. “For Guy Carpenter, this entails bringing our life and non-life specialists to the table as well as working closely with our colleagues at Mercer to ensure that discussions cover underwriting and asset management.”

Managing the solvency ratio with the minimal amount of capital also requires companies to take full advantage of multiple tools, with reinsurance being one of the most effective mechanisms available. Mr. Paire asserts that “reinsurance is a much more attractive option than equity in the current market. Not only are rates low at present, but reinsurance also offers a significant degree of flexibility, which is critical given the high level of short-term volatility we expect to see as companies get to grips with their solvency requirements. Reinsurance is a dynamic solution, one that can be recalibrated quickly to match changing capital needs.”

He concludes: “If we were entering the Solvency II regime at a time of high interest rates and stable capital markets, the transition would be much more seamless; but we are not. We are facing turbulent conditions and companies must chart their solvency course carefully if they are to navigate them successfully.”

Link to Part I>>

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