SCOR's recent analysis delves into the optimal solvency ratio for insurance companies, addressing the critical balance between risk and capitalization.
The report examines how insurers can efficiently manage this balance, drawing on data from over 2,100 insurance companies across 30 European countries.
According to the SCOR report, the median solvency ratio is 225%, indicating that these companies hold more than twice the capital required by law. This level of solvency has remained stable since the implementation of Solvency II in 2016, with deviations around this median gradually diminishing over time.
For life insurance companies, the capital requirement is largely driven by market risk, whereas for property and casualty (P&C) insurers, it is predominantly influenced by net premium after reinsurance cession.
SCOR's findings highlight the varying objectives that drive capital adequacy decisions within insurance companies. Regulators often push for higher capital reserves, while shareholders may prefer to see capital returned as dividends. Meanwhile, company management focuses on future growth, balancing the need for capital with business expansion goals.
The report underscores that most insurers prioritize achieving their target solvency ratio before addressing other business objectives, such as growth and profitability. The solvency ratio, which compares eligible own funds (EOF) to the Solvency Capital Requirement (SCR), typically hovers around 225%. While the range of solvency ratios can be broad, the majority of companies fall close to this median value.
SCOR's analysis reveals that the solvency ratio distribution is consistent across different risk profiles and calculation methods, whether for life or non-life companies. However, the distribution varies significantly depending on the domicile of the company.
Insurers can manage their solvency ratios by either increasing their own funds, through capital market solutions such as raising equity or debt, or by reducing their capital requirement, primarily by utilizing reinsurance to lower retention while maintaining business growth.
For non-life insurance companies, particularly those in the P&C sector, the capital requirement is mainly driven by the underwriting risk module. SCOR notes that this risk includes premium risk, reserving risk, catastrophe (CAT) risk, and lapse risk, with premium and reserve risks being the most prominent.
SCOR's research indicates that P&C businesses require a capital amount of around €7 million plus 42% of the net written premium. This requirement varies based on the lines of business, diversification, exposure to catastrophic events, and reinsurance protections.
Including capital requirements for other risks and diversification effects, the correlation with net written premium typically ranges between 30% and 35%, although this varies depending on asset management strategies and specific risk profiles.
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