In May 2017, all German solo insurance companies were required for the first time to publish selected reporting forms as part of Solvency and Financial Condition Reporting (SFCR) – insurance groups followed at the end of June. These reports did not only include a huge amount of data on specific Solvency II risk figures but also comprehensive information about
- general business development,
- qualitative explanations on the presented figures and on the financial, solvency and business situation.
Aside from the obligation to publish own Solvency II results, insurance companies now for the first time have the opportunity to compare their Solvency II results with direct competitors.
The publication of SFCR reports also gives stakeholders access to Solvency II reports who did not have insight into these results before, for instance
- rating agencies,
- sales partners,
- and creditors.
The extension of the target group has two main consequences for insurance companies:
- Firstly, Solvency II results need to be explained to an audience that has little experience with Solvency II – unlike insurance supervisors who had exclusive access to Solvency II results until now.
- Secondly, the solvency ratio becomes increasingly important as a material piece of information from SFC reports.
Due to the flood of information available in the SFC reports and the lack of experience of many market participants, it can be expected that processing Solvency II results will be mainly restricted to the evaluation of the solvency ratio as the core result of Solvency II. In particular, it was revealed that individual insurance companies are already actively using the solvency ratio in sales.
The attention given to the solvency ratio by the public will increase even further in the future if ratios approach the critical 100% threshold due to reduced interim measures.
Due to its increasing importance, the solvency ratio is no longer regarded as a pure reporting figure but as a value that requires active management. A variety of degrees of freedom and options in the calculation of Solvency II results allow insurance companies both to adjust their business policies and to influence SII results through suitable calculation methods. Due to the short history of Solvency II, there is little understanding of the impact mechanisms “behind” the solvency ratio at the moment, which is why not all optimization potentials are currently leveraged and insurers are still actively searching for solvency ratio levers.
In light of the extended information basis, decisions about
- the use of interest rate measures,
- an internal model (instead of the standard model),
- simplified calculation methods
- and the use of company-specific parameters
can be reassessed.
In a survey of the Solvency and Financial Condition Reports (SFCRs) and public Quantitative Reporting Templates (QRTs) for 100 of the top non-life insurers in the UK and Ireland the aim of the review was twofold – to analyse the numbers disclosed by firms for the first time and to consider how well firms have dealt with the narrative reporting required of them under Solvency II.
The survey team has also drawn upon our Pillar 3 roundtables with insurers and reinsurers across the market to understand how the first year of submissions has worked in practice.
Their key conclusions are:
- Insurers are generally sufficiently capitalised, but the buffers firms have in place to protect against balance sheet volatility may not be enough to prevent them from having to recapitalise over the short term.
- Motor insurers typically have the least financial headroom, compared with other insurers.
- Brexit is on the agenda for many insurers, with some firms setting up internal steering groups to ensure they are well placed to access the European Market after the UK leaves the EU.
- Uncertainty around the Ogden discount rate used to calculate personal injury compensation payments poses a material risk to some insurers, with two firms disclosing that the recent change required them to recapitalise significantly.
- Firms must work harder to publish better quality QRTs, with over a quarter of the firms we reviewed disclosing QRTs containing obvious errors.
- Some firms’ SFCRs are not fully compliant with the Solvency II regulations, with particular areas of weakness including disclosure around sensitivity testing of the SCR and uncertainty within technical provisions.