Reser­ving and sol­vency require­ments can tie up signi­ficant amounts of a life and health insurer’s finan­cial re­sour­ces. This can limit its abi­lity to pursue business opportu­nities – in parti­cular, to achieve organic growth – and suppress the return on capital.

A solvency relief structure reduces the amount of capital the insurer must hold against the risks it faces. The result is, as Figure 1 illus­trates, an in­crease in the insurer’s sol­vency ratio. It thus allows the insurer to enjoy the bene­fits of an im­proved sol­vency position or to use the freed-up capital to, for example, seize attrac­tive busi­ness opportu­nities.

Figure 1: A solvency relief reduces an insurer’s required capital and thus increases its solvency ratio

A reserve relief arrange­ment enables the insurer to reduce its reserves and thus to increase its net assets, as Figure 2 depicts.

Figure 2: A reserve relief increases an insurer’s net assets

In the solvency balance sheet net assets are broadly synony­mous for avai­lable capital. Hence, a reserve relief also in­creases the client’s sol­vency ratio, albeit in a diffe­rent way than a sol­vency relief (see Figure 3). Again, the insurer can now re­direct the additio­nally avai­lable capital into, for example, more remune­rative invest­ments.

Figure 3: A reserve relief increases an insurer’s available capital and hence its solvency ratio

Both the reserve and sol­vency relief struc­tures achieve the desired effect through the trans­fer of the corres­ponding risks to Hannover Re. Which solution is more effec­tive will depend in prac­tice on the client’s circum­stances and objec­tives as well as the legal and regu­latory regime under which it operates.

Typically, a reserve relief is more appro­priate when reser­ving require­ments are particu­larly strin­gent and allow for substan­tial margins against adverse devia­tion. A sol­vency relief tends to be the better option when reser­ving require­ments are more realis­tic but capital require­ments are onerous. Often, a combi­nation of the two approa­ches can achieve the best out­come for the client.

In addition to their main advan­tage of free­ing up capital, both solu­tions can offer signi­ficant ancil­lary bene­fits, such as the profit boost that is typi­cally in­duced by a re­serve relief.