Capital generation: a closer look at asset returns

Kennisbank •
Edwin van de Kreeke MSc AAG, Gerard Stevenhagen MSc

The Solvency II regulation defines no metric on how to report on profitability or earnings. The insurance industry has responded by developing its own approach and calculations for profitability: capital generation.

Capital generation: a closer look at asset returns

The structural part of capital generation, Net Capital Generation (‘NCG’) is important since some insurance companies have explicitly linked their dividend policy to it and DNB takes it into account in providing a declaration of no-objection (DNO) for dividend payments. NCG can be seen as market practice, which analysts use in their valuation of insurers as well.


For life insurance companies, the largest components of NCG generally include (but are not limited to) excess return on asset portfolio, UFR drag and release of prudence (SCR and Risk Margin). The release of prudence is impacted by reinsurance of actuarial risks (e.g. longevity hedge). Entering in these reinsurance contracts result in a lower release on prudence, increasing the necessity of the excess returns component.


We generally observe in the Dutch market that the substantiation of the methodology and assumptions for excess returns is limited or lacks quality. In this article, we highlight challenges in the implementation of the methodology and setting return assumptions.