Life insurers working under economic value-based solvency frameworks are increasingly turning to reinsurance instead of subordinated debt, with mass lapse solutions priced near 100–150 bps while recent subordinated debt issuances from major players came in at 175–210 bps.
Solvency levels remain a central focus for insurers and related institutions. The Financial Services Regulatory Authority of Ontario reported a median solvency ratio of 124% for defined benefit pension plans in the third quarter of 2025, with 92% fully funded. Only 2% of plans were below 85%, reflecting continued sensitivity to interest rates and liabilities.
Separately, Youplus Group disclosed that its solvency ratio fell from 286% in 2023 to 107% at the end of 2024, prompting a halt to new business in several European markets while existing shareholders seek capital and pursue de-risking actions.
These developments illustrate the differing starting points insurers face when assessing capital solutions.
For life insurers subject to economic value-based regimes, the solvency ratio - available capital divided by required capital - can be adjusted either by raising capital through subordinated debt issuance or reducing capital requirements through reinsurance.
Decision-making typically focuses on solvency corridors that support dividend expectations.
Subordinated debt is classed as Tier 2 capital. It lacks permanency and remains subject to Solvency II limits of 50% of available capital. Redemption incentives usually emerge after 10 years due to coupon step-ups.
Reinsurance instead reduces required capital, with diversification playing a material role. Lower diversification allows higher capital relief, while higher diversification lessens its effect unless whole-account structures are used. Counterparty credit affects the reduction marginally.
SCOR analysis illustrates that at a 200% target solvency ratio and 50% diversification benefit, subordinated debt and reinsurance provide similar efficiency only if costs are aligned. If targets increase to 200–250%, reinsurance becomes more cost-efficient because the same solvency uplift can be achieved with proportionally less notional.
Recent spreads on subordinated debt — including €1.25 billion issued at 175 bps and €500 million issued at 190 bps — compare with mass lapse reinsurance costs of 100–150 bps.
These conditions reinforce SCOR’s allocation matrices, which suggest greater reinsurance allocation where subordinated debt pricing reaches 3–4% and target solvency ratios sit between 150–220%.
AXA’s 220% Solvency II ratio at mid-2025, as published in its first-half financial results, demonstrates how some insurers use reinsurance programs and capital issuances to maintain flexibility while managing volatility in underwriting and asset markets.
SCOR states that capital optimization requires structured choices based on scenario analysis rather than reliance on a single instrument. The firm states that reinsurance can be viewed as a great alternative to more traditional debt instruments.
