Another shortcoming of a single ratio is that it provides no insight into the resilience of an entity’s capital position. This became relevant when market volatility spiked in the first quarter of 2016 and companies disclosed how much their Solvency II ratios fell in the period.
This environment produced varying outcomes in the first half of 2016, with an additional sharp increase in volatility caused by catastrophe losses. Timely and accurate reporting of this volatility has increasingly become a management responsibility.
Today, reinsurance as an alternative form of capital is more at the center of risk management. Insurers have increased efforts to understand and quantify all material risks and are using reinsurance not only as a tool to manage capital and their solvency capital requirement ratio, but also to manage earnings volatility as reflected in their risk appetite statements and risk tolerance levels.