Insurance Regulatory Capital

Our Products

Our products mirror the three Tiers of Solvency II compliant subordinated debt

  • Tier 1 subordinated debt
  • Tier 2 subordinated debt
  • Tier 3 subordinated debt

Based on the specification set for the 5th Quantitative Impact Study (QIS5), in order to be allowable as regulatory capital, tiered subordinated debt should have the following characteristics:

Solvency II Subordinated Debt Characteristics

Max Eligibility as a % of SCR Step Up Coupon Min Term Cumulative *
Tier 1 20% No Undated No
Tier 2 35% Yes (<1%) 10 Yes
Tier 3 15% Yes 3 No

* Cumulative means that coupon payments prohibited by the Insurance Regulator accumulate until they can be paid.  Source: EIOPA QIS5 guidance

Tier 1 subordinated debt (subject to review by EIOPA and the European Commission)

  • A maximum of 20% of total Tier 1 capital can be subordinated debt; the remainder must be equity.
  • Equity and Tier 1 debt combined must exceed 50% of the solvency capital requirement (SCR, a capital amount which is intended to equal the amount that would be lost by the company once in every 200 years).
  • Equity and Tier 1 debt combined must exceed 80% of the minimum capital requirement (MCR, a lower minimum capital threshold than the SCR).
  • The term at issue must be at least 10 years.
  • The issue must be loss absorbent – i.e. must be converted to equity or written down in the event of a significant breach of SCR (and may then be written back up on recovery).
  • The debt must be fully paid up, deeply subordinated and unencumbered – the holder of the asset cannot seek or cause the insolvency of the issuer.
  • Coupons must be cancelable (non-cumulative) if there would be a breach of SCR.
  • Redemption is subject to regulatory approval and is not permitted if the SCR would be breached (or unless the issue is replaced).
  • There is no incentive to redeem allowed (such as a step up after a non call period).

Tier 2 subordinated debt

  • Tier 2 debt must be subordinated in a wind up, unencumbered and loss absorbent after Tier 1 capital.
  • The holder cannot seek or cause insolvency of the issuer.
  • Coupons must be deferrable (cumulative) if the SCR is breached.
  • Redemption will not be allowed if the SCR is or would be breached unless the redeemed capital is replaced.
  • The term at issue must be at least 10 year (non call 5 year)
  • Moderate incentives to redeem are allowed e.g. a step up in interest rates at end of non-call period.

Tier 3 subordinated debt

  • Tier 3 debt must be unencumbered, subordinated to policyholder and business liabilities in the event of a wind up and loss absorbent after Tier 2 capital.
  • Coupons must be deferrable if the MCR is breached.
  • Redemption will not be allowed if the SCR is or would be breached unless the redeemed capital is replaced.
  • The term at issue must be at least 3 years.
  • Incentives to redeem are allowed.
  • Tier 3 capital cannot form part of the MCR.
  • The amount of Tier 3 capital cannot exceed the amount of Tier 2 capital.

If you are considering the advantages of subordinated debt please contact us for an exploratory conversation.

Quota Share Reinsurance

In a quota share reinsurance arrangement (also known as pro rata reinsurance, proportional reinsurance or participating reinsurance), the reinsurer shares a proportional part of the original premiums of the reinsured. In return, the reinsurer assumes a proportional share of the losses.

incurred by the cedant. The reinsurer pays the ceding company a commission, which is generally based on the ceding company’s cost of acquiring the business being reinsured (including commissions, premium taxes, assessments and miscellaneous administrative expenses) and may also include a profit sharing arrangement. Under proportional reinsurance contracts, ceding commission can be adjustable based upon loss experience which potentially reduces earnings volatility under such arrangements.

For more information please contact: info@maiden.bm