Our continuing series of blog posts addresses some ways in which companies may be able to achieve capital efficiency under Solvency II. This post looks at three additional capital management techniques that have become popular since the introduction of the new Solvency II capital regime.
Internal reinsurance
We have seen an increase in the use of internal reinsurance to improve Solvency II capital. The use of internal reinsurance can reduce the capital requirements of solo entities through risk transfer to the internal reinsurer. The group may also benefit from greater capital efficiencies through diversification at the reinsurer level.

Aviva significantly increased the amount of business ceded to its internal reinsurer,* Aviva International Insurance, during 2016. AXA also has an internal reinsurer to manage reinsurance for the insurer's global property and casualty (P&C) business, which was recently upgraded by AM Best, and the Belgian insurer Ageas set up an internal reinsurance vehicle in 2015.*

Corporate restructuring
We have seen a large increase in mergers and acquisitions (M&A) activity and corporate restructuring as a result of Solvency II. Recent M&A activity includes:

- Scor announcing plans to merge its three French businesses* to reduce its risk margin by 200 million under Solvency II
- AXA's exiting of the UK life and savings market with the sale of its offshore investment bonds business, Axa Isle of Man, and its UK portfolio services business, Elevate
- Aegon selling two-thirds of its UK annuity portfolio business to Rothesay Life with the aim of freeing up capital in its UK subsidiary
- Allianz selling its Taiwanese traditional life insurance portfolio* to a local Taiwanese life insurer to improve the group's capital efficiency under Solvency II

Unit-linked matching
We are aware of a number of unit-linked providers that are currently rethinking unit-linked matching. The Solvency II regulations state that the technical provisions in respect of unit-linked benefits must be matched as closely as possible with unit-linked assets. Under Solvency II, the technical provisions for unit-linked benefits generally include a best estimate liability, which is lower than the unit value. This opens up the possibility to invest a lower amount in unit-linked assets than the outstanding unit value, i.e., "mismatching" the unit-linked assets and liabilities, which can enhance the capital position of unit-linked portfolios and stabilise economic balance sheets.

However, as usual, such benefits come at a price, and insurers will have to decide whether or not the capital savings are sufficient to offset the operational complexities, coupled with a more volatile solvency coverage ratio. Unit-linked matching is considered in more detail in our briefing note entitled Unit-linked matching considerations under Solvency II.

We have published a number of papers on this topic including Capital management in a Solvency II world, which focusses on life (re)insurance business, Capital management in a Solvency II world: A nonlife perspective (looking specifically at nonlife or P&C issues) and Unit-linked matching considerations under Solvency II.

If you are interested in more information on capital management under Solvency II please contact your usual Milliman consultant.

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