SCOR’s latest analysis examines the optimal solvency ratio for insurance companies, addressing the critical balance between risk and capital.

The report examines how insurers can manage this balance effectively, drawing on data from more than 2,100 insurers in 30 European countries.

Get the latest reinsurance news straight to your inbox twice a week. Sign up here

According to the SCOR report, the average solvency ratio is 225%, indicating that these companies have more than twice the capital required by law. This level of solvency has remained stable since the implementation of Solvency II in 2016, with deviations from this average gradually decreasing over time.

For life insurance companies, capital requirements are largely influenced by market risks, while for property and casualty insurance companies, they are primarily influenced by net premium after ceding reinsurance.

SCOR’s results highlight the diverse objectives that drive capital adequacy decisions within insurance companies. Regulators often push for increased capital reserves, while shareholders may prefer to see capital returned in the form of dividends. At the same time, company management is focused on future growth, balancing the need for capital with business expansion goals.

The report confirms that most insurers prioritize achieving their target solvency ratio before addressing other business objectives, such as growth and profitability. The solvency ratio, which compares eligible self-funds (EOF) to the sufficiency capital requirement (SCR), typically hovers around 225%. While the range of solvency ratios can be wide, the majority of companies are close to this average value.

Read more: Major European Reinsurers Report Strong H1 2024 Earnings Amid Peak Cycle

SCOR’s analysis reveals that the distribution of solvency ratios is consistent across risk profiles and calculation methods, for both life and non-life insurers. However, the distribution varies significantly by company headquarters.

Insurance companies can manage their solvency ratios either by increasing their own funds, through capital market solutions such as raising equity or debt, or by reducing capital requirements, primarily by leveraging reinsurance to reduce retention while maintaining business growth.

For non-life insurers, particularly those in the property and casualty sector, capital requirements are primarily driven by underwriting risk. SCOR notes that these risks include premium risk, reserve risk, catastrophe risk, and interruption risk, with premium and reserve risk being the most prominent.

SCOR research indicates that property and casualty insurers require a capital amount of around €7 million plus 42% of the net written premium. This requirement varies according to business lines, diversification, exposure to catastrophic events and reinsurance protection.

Including capital requirements for other risks and diversification effects, the correlation with net written premiums typically ranges between 30% and 35%, although this varies depending on asset management strategies and specific risk profiles.

What do you think of this story? Feel free to share your comments below.

Get the latest reinsurance news straight to your inbox twice a week. Sign up here