Capital relief
The reduction in regulatory capital requirements achieved by transferring risk to a reinsurer.
January 1, 2016: Solvency II takes effect, and reinsurance now counts for what it takes off the cedant's solvency capital requirement, in proportion to the risk transfer recognized. Capital relief is the prudential effect of a reinsurance cession: the transferred risk leaves the cedant's capital requirement calculation, in proportion to the transfer recognized. Alongside protection against loss, it is the second economic reason to buy reinsurance, and often the first in practice for growing firms. It resolves a trade-off between two sources of solvency: equity, permanent but expensive and slow to raise, and reinsurance, temporary, reviewable annually and paid for by commission. A finance department compares the treaty's annual cost with the cost of the capital it releases, and buys whichever is cheaper. Relief is never mechanical: it depends on the supervisor's recognition of the transfer, on the reinsurer's quality and on any collateral, and it shrinks proportionately if a clause limits transfer in extreme scenarios. Relief obtained through a fragile structure disappears at the moment it would be needed.
A cedant compares two routes in 2026 to regain 20 points of solvency ratio: a 90 million euro subordinated debt issue at 6.1%, or 5.49 million a year, or a solvency quota share costing 4.8 million net a year. It goes with the reinsurance, noting that it is renegotiated annually while the debt commits it for ten years.
Capital relief, capital relief meaning
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