Financial solutions

Reserve and solvency relief

Tailored concepts: Hannover Re has developed a range of tailored reserve relief and solvency relief structures. Both help clients to improve their solvency position and to free up capital, which then can be redeployed into more remunerative investments or returned to shareholders, thereby often increasing the return of capital.

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.