Those readers hailing from the re/insurance industry – or perhaps founders building full-stack insurance businesses – will either be aware of or have grappled with, solvency capital requirements. For those new to the concept: at a high level, financial regulators around the world stipulate how much capital insurers and reinsurers (and other financial institutions, in fact) must hold in order to ensure their survival, even in the most extreme circumstances. In Europe, this comes from a directive known as Solvency II.
This capital, known as an insurer’s solvency capital requirement, is the sum of capital that must be held against numerous risks faced by an insurer. These risks are varied and include underwriting, investment, credit, operational and counterparty risks. They are managed in a variety of different ways, including by hiring good underwriters, buying reinsurance, asset-liability monitoring, implementing operational risk management programs, by buying highly-rated government bonds and more.
In particular, investment risk has received renewed and increased scrutiny under Solvency II. Under Solvency II, capital requirements increased for insurance products with some connection to the financial markets, principally life insurance.
Faced with the above as well as increasing competitive pressures, what is an insurer to do? A new option has now emerged – we’re excited to share that Balance Re, Europe’s newest reinsurer, is the latest addition to our portfolio.
Balance Re’s initial proprietary technology allows them to offer a unique product – asset reinsurance – that covers both financial and insurance risks. Balance Re has created the technology to facilitate the transfer and the ongoing management of investment risk, at a fraction of the costs that would be incurred to develop the same capabilities in-house.
Depending on the insurer’s portfolio of risks, investment risk can account for 80% of a life insurer’s overall risks. However, life insurance companies often do not fully integrate the management of financial risks in their business processes. As a result, they frequently need to hold excessive amounts of capital to withstand adverse financial conditions. Balance Re helps life insurance companies become more efficient by significantly reducing their large (and sometimes unnecessary) capital buffers, through continuous simulating, monitoring and re-balancing of capital allocations.
Balance Re’s team and their technology reflect the complex interactions between actuarial, financial, accounting and regulatory matters. Balance Re’s coverage is designed to help clients reach their strategic goals whilst also keeping the interests of their policyholders in mind – we’re excited to see them drive much-needed change in the life reinsurance sector! If you’d like to join them on their exciting mission, do get in touch.