Solvency II presents challenges on management actions

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By Elliot Varnell, Andrew Gilchrist, Jeremy Kent, Russell Ward | 23 December 2012

The current draft Solvency II requirements on management actions are challenging, even for firms used to taking credit for such actions. Many companies are therefore concerned to ensure they can claim credit in the best estimate and solvency capital requirement for their proposed management actions. With-profits firms have to balance the Solvency II requirements with a need to maintain flexibility in their responses in stressed scenarios. UK with-profits firms also need to consider conduct of business constraints in assessing the credit that can be claimed under Solvency II. Participating business in the European life sector generally includes fewer explicit management actions but such actions can arise implicitly through the targeting of credited rates. Finally, hedging can be seen as a management action, depending on the context, and specific considerations need to be accounted for when looking to take balance-sheet credit from hedging programmes.

Management actions can impact the Solvency II balance sheet in two areas: the best estimate liability ("best estimate") element of the technical provisions; and the solvency capital requirement (SCR) and consequently the impact on the risk margin element of the technical provisions. This article focuses mainly on the best estimate, but the final section examines how the management actions can also affect the SCR.

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