What Makes a Solvency Assessment “Own”?
An insurer’s solvency assessment is useful only if it says something meaningful about that insurer. Two companies can face the same broad economic shock but reach different conclusions because their products, customers, contracts, financial resources, and operating choices differ. An insurer’s own view makes those differences explicit and assesses what they mean for its ability to meet obligations over a stated horizon.
The word “own” does not mean that management can select assumptions to produce a preferred result. It means the assessment reflects the insurer’s circumstances and is supported by appropriate evidence, transparent reasoning, and challenge. A result is not more credible simply because it is more optimistic or more conservative.
This is consistent with ORSA as an insurer-owned solvency assessment: the assessment is the insurer’s responsibility, not merely a calculation copied from a prescribed formula. A regulatory or external capital measure can provide a useful reference point, but it does not by itself explain how the insurer’s own business model and management perspective affect its future solvency.
How Circumstances Shape the Conclusion
A company-specific conclusion depends on more than the name of a risk. It depends on how that risk reaches the insurer’s financial position. For example, a catastrophe scenario may produce different net outcomes depending on the insurer’s covered property, policy terms, geographic concentration, reinsurance, and ability to collect recoverables. An assessment should make the consequential assumptions visible rather than treating “catastrophe loss” as a self-explanatory figure.
The business model matters because it affects both the sources of financial strain and the way those strains develop. A business that relies on renewals may be sensitive to retention and premium assumptions. A business with long-term guarantees may be sensitive to assumptions about assets and obligations over time. These observations do not prescribe a particular model. They identify questions the insurer must answer using information relevant to its own operations.
Management perspective matters too. A forecast may assume that management will reduce distributions, change prices, or take another action. The insurer needs to assess whether the action is within its control, can be implemented within the assessment horizon, and has a supportable financial effect. An action that is merely possible is not automatically a credible assumption.
Worked Example: A Property Insurer’s Own Catastrophe View
A hypothetical regional property insurer starts with $240 million of available financial resources. Its internal minimum for the end of the one-year assessment horizon is $150 million. For a specified storm scenario, the insurer estimates $130 million of gross claims, $45 million of reinsurance recoverables, and $8 million of additional claims and operating expenses. Its own assessment applies a 20% haircut to the recoverables for collectability uncertainty. Calculate the stressed resources and headroom against the internal minimum.
Method and assumptions. Treat all amounts as millions of dollars. Assume the $130 million gross claims and $8 million expenses reduce available resources dollar for dollar, and that no other gains, losses, or management actions occur. Apply the haircut to the recoverable, not to the gross claim.
First calculate the amount expected to be collected:
Next calculate stressed resources:
Headroom is stressed resources minus the internal minimum:
The insurer has $138 million of stressed resources, which is $12 million below its $150 million internal minimum. The result is specific to the scenario and assumptions stated; it does not, by itself, establish the insurer’s position under every possible scenario.
Check. The net reduction from opening resources is $130-$36+$8=$102 million, and $240-$102=$138 million, agreeing with the calculation above. The common mistake is to apply the 20% haircut to the $130 million gross claim. That would use the wrong base: the stated uncertainty applies to the $45 million recoverable.
Make Assumptions Traceable to the Business
A company-specific assessment should let a reader follow the path from an assumption to a conclusion. For each important assumption, it is useful to ask: What business feature makes this assumption relevant? What evidence supports its amount or direction? Over what period does it apply? What changes if it is wrong? These questions help distinguish an insurer’s defensible own view from an unexamined forecast.
The assessment should also state its horizon and the financial quantities being compared. In the examples below, available resources are measured at a stated future date and compared with an internal minimum at that same date. This is a simplified illustration, not a universal definition of a regulatory or economic capital measure.
The relationship follows directly from the meaning of headroom: it is the amount remaining after setting aside the resources required to meet the threshold. If resources are $138 million and the threshold is $150 million, then $138-$150=-$12$ million, a shortfall of $12 million. The arithmetic is simple; the important judgment is whether the projected resources and threshold are appropriate for the insurer and the scenario.
Worked Example: A Renewal-Dependent Business Plan
A hypothetical insurer projects $200 million of available resources at the start of a one-year period. Its business plan assumes $90 million of net premium revenue, $58 million of claims, $22 million of operating expenses, and a $6 million distribution to owners. Its internal minimum at year-end is $190 million. Under an insurer-specific renewal scenario, premium revenue is $12 million lower, claims are $7 million lower because fewer policies remain in force, and operating expenses are $2 million lower. The distribution is unchanged. Calculate planned year-end resources, scenario year-end resources, and headroom in each case.
Method and assumptions. Treat each amount as millions of dollars and assume all listed cash-flow effects change available resources dollar for dollar. The scenario changes only the stated revenue, claims, and operating expenses; do not treat the premium decline as a pure loss while leaving the associated claims and expenses unchanged.
Under the plan, the net change in resources is:
Planned year-end resources are therefore:
Under the renewal scenario, premium revenue is $90-$12=$78 million, claims are $58-$7=$51 million, and expenses are $22-$2=$20 million. The net change is:
Scenario year-end resources are $200+$1=$201 million. Planned headroom is $204-$190=$14 million, while scenario headroom is $201-$190=$11 million.
Check. Relative to the plan, the scenario reduces revenue by $12 million but also reduces claims by $7 million and expenses by $2 million. Its net effect on resources is $-12+7+2=-3$ million; $204-$3=$201 million, as calculated. The common mistake is to subtract the full $12 million premium decline without reflecting the stated reductions in claims and expenses.
Justify and Challenge Management Actions
An own assessment can include management actions, but the assessment should distinguish between the amount an action could produce and the amount that is reasonable to rely on. Relevant considerations include timing, authority, operational capacity, contractual constraints, market conditions, and whether the action conflicts with another assumption in the scenario. If an action’s benefits depend on favorable conditions that the scenario has removed, the projected benefit may not be credible.
A useful calculation separates the stressed position before action from the net effect of each action. It also makes the comparison threshold explicit. The calculation does not prove that an action will occur; governance and evidence are needed to support that judgment.
Worked Example: Testing a Proposed Solvency Response
A hypothetical insurer has $138 million of resources after a stress and an internal minimum of $150 million. Management proposes two actions within the same one-year horizon: cancel a planned $6 million distribution, and introduce a price change expected to improve resources by $9 million after it takes effect. Implementation costs for the price change are $2 million. Assume both actions are approved, can be completed within the horizon, and their effects do not overlap. Calculate the resulting resources and headroom. Then state what must be true before including these actions in the insurer’s own view.
Method and assumptions. Treat the quoted amounts as millions of dollars. The distribution cancellation adds back the $6 million that otherwise would leave the insurer. The price action contributes its $9 million benefit less its $2 million implementation cost.
The net benefit of the price action is:
The total benefit of both actions is:
Resources after the actions are $138+$13=$151 million. Headroom is $151-$150=$1 million. Before relying on this result, the insurer needs support for the assumed timing and amounts, evidence that the distribution can be cancelled, and a credible basis for believing the price change can be implemented and will produce the stated benefit in the scenario. The assumption that the effects do not overlap must also be reasonable.
Check. The starting shortfall is $150-$138=$12 million. The actions add $13 million, so they close the shortfall and leave $1 million of headroom. The common mistake is to count the $9 million gross benefit while ignoring the $2 million cost, or to count a proposed action without testing whether it can actually be executed.
Common Traps in an Own-View Assessment
A company-specific assessment can become less useful if “own” is taken to mean “whatever management believes.” The conclusion should be challenging enough to inform decisions and sufficiently documented for others to understand its basis. A scenario is not a test of resilience if it omits an important consequence solely because that consequence makes the result less favorable.
- Confusing ownership with discretion. Insurer-specific assumptions need evidence and rationale; they are not free choices.
- Using inconsistent bases. Compare resources and thresholds at the same date and on a clearly stated basis.
- Applying stress to the wrong quantity. In the catastrophe example, the collectability haircut applies to the recoverable, not the gross claim.
- Ignoring linked effects. A change in business volume may affect both revenue and claims. Include the effects stated by the scenario rather than isolating just one.
- Counting an action before testing it. A proposed response is not automatically available; examine its timing, feasibility, and net financial effect.
- Treating a single result as certainty. The result depends on the stated assumptions. Sensitivity to consequential assumptions should be visible in the insurer’s reasoning.
The purpose is not to make every estimate maximally cautious. It is to explain why the assumptions are reasonable for this insurer, where uncertainty remains, and how that uncertainty affects the solvency conclusion. A well-supported own view is therefore both company-specific and open to challenge.
Check Your Understanding
For each problem, state the calculation and interpret the result in the context given.
- A hypothetical insurer starts with $175 million of resources. A one-year stress produces $42 million of gross claims, a $16 million recoverable subject to a 25% collectability haircut, and $3 million of expenses. Its internal minimum is $140 million. Calculate stressed resources and headroom. (Answer: Recoverable $12 million; resources $142 million; headroom $2 million.)
- A plan begins with $120 million of resources and projects $40 million of premiums, $26 million of claims, $10 million of expenses, and a $2 million distribution. A company-specific scenario lowers premiums by $5 million, claims by $3 million, and expenses by $1 million; the distribution is unchanged. Calculate plan and scenario year-end resources. (Answer: Plan $122 million; scenario $121 million.)
- A stress leaves an insurer with $86 million of resources against a $95 million internal minimum. A proposed action avoids a planned $4 million distribution and produces $6 million of gross benefit at a cost of $2 million. Assuming both effects are distinct and fully achievable, calculate post-action resources and headroom. (Answer: Net action benefit $8 million; resources $94 million; headroom -$1 million.)
- A hypothetical insurer projects $210 million of resources against a $200 million minimum. A scenario reduces resources by $18 million, and a proposed action is expected to add $5 million but costs $1 million to implement. Assuming the action is credible and its effects are not already included, calculate stressed resources, post-action resources, and final headroom. (Answer: Stressed resources $192 million; net action benefit $4 million; post-action resources $196 million; headroom -$4 million.)
- An insurer begins with $160 million of resources. In a stated stress, gross claims are $30 million, expenses are $4 million, and recoverables are $10 million with a 10% haircut. The insurer’s internal minimum is $132 million. Management proposes cancelling a $3 million planned distribution. Calculate stressed resources before action and headroom after action, and identify one credibility question about the action. (Answer: Collectable recoverables $9 million; pre-action resources $135 million; post-action resources $138 million; post-action headroom $6 million; for example, verify that the distribution is approved but cancellable within the horizon.)