Tightening the capital buffer policy
In the run-up to the new Solvency II supervisory framework in 2016, health insurers are tightening their capital buffer policy. At the end of 2014, the insurers submitted their risk assessments on the basis of this new supervisory framework. The assessment sets out the insurer's outlook, linking the organisation's strategic path to the risks for the organisation and the required capital buffer.
A more risk-based approach
Capital buffers are designed to absorb unforeseen adversities and fluctuations without endangering the existence of the organisation or the policyholders’ rights. They comprise two components: the statutory solvency requirement, and a safety margin set by the insurer itself. Before Solvency II, the capital required used to be determined on the basis of the insurance liabilities of previous years. Under the new framework, too, a considerable part of statutory solvency will be based on fluctuations in claims loss, which are difficult to predict.
Solvency II requires insurers to look at their organisation from a risk-based perspective. From 1 January 2016, health insurers are required to hold sufficient capital to cover the market risk of risk-bearing investments such as shares and debtors' credit risk. They must also hold sufficient capital to cover operational risks, such as losses resulting from inadequate or failing internal procedures, staff or systems. The new method of calculating the statutory solvency requirement means that the amount of capital required will be higher, but that it will also better match the insurer's actual risk profile.
Applying a safety margin
In general, the insurers’ capital exceeds statutory requirements. DNB is also of the opinion that it is wise to apply a safety margin on top of the statutory solvency requirement, due to the array of inherent uncertainties and to prevent insurers from repeatedly ending up in a recovery programme following non-compliance with a solvency requirement. Neither the supervisory authority nor legislation have provided general instructions regarding the size of this safety margin, which means it is up to the health insurers themselves to determine this. They should consider the organisation's risk appetite, degree of risk control, strategy, and the volatility of the statutory solvency requirement in setting the margin.
The risk assessments revealed that the capital held by health insurers at the end of 2014 in most cases exceeded the internal targets. Figure 1 shows the average of the sector and the average of the two lowest and the two highest internal targets.
Figure 1 - Expected capital position under Solvency II at end-2014 compared against internal targets