You are here

Contingent capital in a post Solvency II world

As actuaries continue to prepare for the challenges of Solvency II and the increased emphasis on the efficient use of capital, a workshop at the Actuarial Profession’s life conference, which took place in Birmingham  from 7 to 9 November 2010, examined the potential use of contingent capital in a post Solvency II world. 

Cormac Galvin and Richard Baddon began by explaining how many contingent capital structures aim to align regulatory with economic capital, their current treatment under Solvency I before going on to examine how transactions may be structured under Solvency II. 

Cormac said: “A significant change from the current framework is that, the emergence of expected profits in future premiums (EPIFP), which is analogous to Value of In-Force  (VIF), will automatically count as tier 1 capital under Solvency II.  This may mean that the most common trades of recognising VIF through the use of financial reinsurance or contingent loans will no longer be needed.”

The discussion also examined the nature of the structures practitioners can expect to see in the post Solvency II landscape.  Richard said: “We are already seeing transactions being structured that provide contingent capital in new and innovative ways.   The closer alignment of economic and regulatory capital under Solvency II is moving towards contingent capital transactions that give an real economic benefit in extreme events delivered in a cost effective way.”

Cormac and Richard outlined structures that could manage insurers’ Solvency II liabilities, capital requirements and tiering of own funds along with fungibility across complex groups.  Richard said: “An example of where the Solvency II may cause challenges for insurers is in relation to the liquidity premium and contingent capital structures may be used to bridge this gap.”

Cormac said: “These structures should not be thought of a way for insurers to avoid prudent capital provision.  In our view, these structures are not regulatory arbitrage as they are often labelled, the transactions transfer risk and therefore can form an important part of sensible risk management.”



Enquiries: Tel. Michael Scanlan on 07798 804 871 or email

Notes for editors 

  1. Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
  2. Members of the Profession have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
  3. The Profession is governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.
  4. The Profession is available to provide expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.