10 September 2017 Insurance

The importance of capital optimisation

As capital optimisation becomes ever more important to insurers, reinsurers can help them implement today’s sophisticated techniques for managing capital more efficiently, says Marco Sordoni, chief executive of UnipolRe, in an interview.

Why has capital optimisation become a more pertinent question for insurers?
Solvency II has been a major stimulus for most companies to look at the way they manage their capital. Capital is an expensive commodity—too much can mean the company is not efficient in the way it’s being managed, diluting returns for stakeholders. Too little is risky and overexposes stakeholders and policyholders to potential insolvency.

Capital optimisation allows a company to manage its capital in a more efficient way and promotes the interaction between risk management, reinsurance and commercial activity.

For insurers, capital optimisation has become a key driver, ensuring that all business units and projects must deliver an effective capital strategy. The current low interest rate environment coupled with a drive towards the use of internal models has led companies to seek more innovative ways of delivering capital efficiencies such as changing their reinsurance-buying behaviour and delivering innovative solutions which assist in diversification of the portfolio on the asset and liability sides.

Where does this fit within the overall strategy approach of insurers?
Capital optimisation is a main driver of the overall business model and all the business units and executive teams must ensure it is embedded within the strategic focus of the company. Such solutions represent a unique opportunity to structure reinsurance using a more measurable approach.

What role has Solvency II played in making this a more relevant issue?
Solvency II has brought capital efficiency to the fore, especially through the use of internal models and more effective risk management techniques, but it was not the sole reason for such developments. Companies have been considering such strategies over a few years in order to offer more value to their stakeholders. The financial crisis was another driver in the catalyst for capital efficiency.

Do internal models have a role to play?
Yes—we have been successful in the use of a partial internal model (PIM) (life & non-life) in the business as a driver of capital efficiencies within the company. The use of the PIM allows us to use our own data and risk management techniques to allocate capital in the most effective manner across the business units. We believe as a group that the use of the PIM in the business rather than as a regulatory capital measurement is an important aspect of our capital management strategy.

UnipolRe would be happy to share our experiences gained via the PIM process and its application to our cedants as a value-added service to a reinsurance relationship.

What do buyers want from their reinsurers in this regard?
Support in understanding efficiencies in capital management is paramount, and capital optimisation solutions are a value-added service I am keen to offer to cedants of UnipolRe. This consultancy service will allow capital management to be included in the treaty definitions and also provide reinsurance managers with the tools required to strengthen collaboration between the reinsurance and risk departments of a company.

The benefits from reinsurance should be seen not just from an accounting P&L viewpoint but also as a method by which to lower SCR, improve capital efficiency and an opportunity to consider innovative structures such as multiline aggregate solutions in place of traditional cessions.

What benefits are there for insurers that maximise the resources available around capital optimisation?
Business units are more aligned to the overall strategy; there are fewer inefficiencies in reinsurance buying; the use of a PIM allows capital modelling to be embedded in the business especially from a pricing perspective; and asset management allocations are better fitted to the overall asset liability management strategy.

How can a partnership approach with the right reinsurer benefit insurers?
A collaborative approach towards capital optimisation in the structuring of reinsurance treaties ensures that both parties benefit from long-term solvency and overall profitability. This view affords the reinsurer the opportunity to be considered as a true stakeholder in the company, promoting transparency and a perennial relationship.

How is UnipolRe looking to work with insurers on this issue?
UnipolRe wishes to include capital optimisation solutions within its value-added proposition to cedants. This will allow cedants to benefit from the experience gained by the group in the PIM approval process and in embedding risk management within their business.

This will strengthen the relationship between the parties and ensure cedants have additional tools and expertise to further develop their business while being supported by UnipolRe.

Marco Sordoni is the chief executive of UnipolRe. He can be contacted at: marco.sordoni@unipolre.com

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