Insurers have learned from experience not to underestimate the volatility of the Solvency ratio. That lesson is of critical importance as we approach the end of the credit cycle:

  • The volatility of the Solvency ratio is heavily driven by the market risk Solvency Capital Requirement (SCR), a significant portion of which emanates from spread risk SCR, which in turn is credit-rating dependent.
  • Our analysis shows that in an average recession, 19% of A rated companies fall to BBB or below, while 15% of BBB rated companies fall below investment grade, causing a 25 percentage point decrease in the Solvency ratio for the average European insurance company, considering credit migration alone. However, recessions and their impacts vary.

We illustrate why now is an opportune time for insurers to review the flexibility of their mandate designs and stress-test portfolio resilience under three recession scenarios


Since the introduction of Solvency II in January 2016, our conversations with clients have become much more focused on the volatility rather than the level of the solvency ratio.

The average level of Solvency ratios across countries together with the magnitude of the changes in these ratios between 2016 and 2017 illustrate the volatility challenge. Indeed, 10% of insurance companies across Europe saw their Solvency ratios increase by more than 50 percentage points, while another 10% saw a 20 percentage point decrease.

Insurers can experience dramatic swings in Solvency ratios year on year

Average Solvency ratios (%) for European life and composite insurers by country – 2017*

Source: Solvency and Financial Condition Reports (SFCR), Solvency II Wire; data as at 31 December 2017.
*Incorporates interest rate and equity transitional measures, as well as matching and volatility adjustments.


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