With Solvency II rewarding diversification in insurers, many have taken advantage of portfolio transfers to group together what were previously different businesses, thus reducing capital charges. Intelligent Insurer takes a look at the implications.
Under Solvency II, it is widely understood that insurers will be rewarded for greater diversification. As such, many insurers have responded by moving into new lines of business. Others have also been taking advantage of a legal procedure known as a portfolio transfer, or a Part VII transfer as it is known in the UK, that insurance groups can use to consolidate several subsidiaries to form either a single, or a smaller number of more diversified businesses.
If considered by the regulator as separate entities, these companies would have attracted larger capital charges under the new rules. Together, however, they can make use of this diversification weighting to free up more capital under Solvency II, says Tim Goggin, the partner who heads the corporate and regulatory insurance team at law firm Hogan Lovells.
“For example, instead of all of your property business being in one company and your liability insurance in another, if you put them together, because of the way that the rules work, you are likely to need to keep less capital against them,” he says.
Portfolio transfer, Part VII, Solvency II, RSA Group, Hogan Lovells, Zurich, DARAG