capital fungibility - ch10 pg30

[yogesh167]

Hello

Could you please help me to understand below paragraph on pg 30 of ch10 :

'Constraints that apply to the SCR calculation because of limitations on capital fungibility within a group may have led the company to choose to undertake a restructuring exercise prior to Solvency II implementation, in order to free-up capital, even if this was not required by the rules.'

Thanks in advance

 

[mugono]

Hello

Could you please help me to understand below paragraph on pg 30 of ch10 :

'Constraints that apply to the SCR calculation because of limitations on capital fungibility within a group may have led the company to choose to undertake a restructuring exercise prior to Solvency II implementation, in order to free-up capital, even if this was not required by the rules.'

Thanks in advance

It's difficult to answer your question without further context (I don't have access to the notes). However, if this is getting at what I think it is, this issue may have something to do with a Group's SCR relative to the sum of the subsidiary solo SCRs. An interpretation of the SII requirements meant that the sum of subsidiary solo SCRs (which doesn't benefit from diversification between solo entities) effectively served as the de-factor Group SCR and not the Group SCR calculated on a consolidation basis (which recognised the benefit).

To claw back some of the loss in diversification, the Group could have restructured (by for e.g. setting up a reinsurance subsidiary and entering into intra-group reinsurance treaties).

The objective of the restructuring would be to reduce the sum of the solo SCRs (achieved if the reinsurance entity better diversified the risks ceded to it) to be closer to the level of the Group SCR calculated on a consolidation basis.

Hope that helps.