Category Archives: Solvency II

SFCR: Capital Insights

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II, we look at the quality of the Own Funds on Irish company balance sheets.

All companies
The figures below are based on an analysis of 46 Solvency and Financial Condition Reports (SFCRs), which cover all the major players in the Irish insurance market. The headline statistic is that Tier 1 unrestricted Own Funds account for 93.7% of capital on Irish insurers’ balance sheets, as shown in Figure 1. Tier 1 restricted (1.1%), Tier 2 (2.9%), and Tier 3 (0.8%) make up the remainder of basic Own Funds. The small level of ancillary Own Funds (1.5%) shows that very few companies have applied to include additional ancillary items on their balance sheets.

Solvency II_Own Funds Breakdown_All Companies
Figure 1

Life industry
It is useful to consider companies selling life business in isolation. We have included 25 published SFCRs within this category.

Firstly, in Figure 2, we look at domestic life companies selling in Ireland. For these companies, a minimum of 90% of Own Funds is Tier 1 unrestricted capital.

Figure 2

In fact, as seen in Figure 3, all these domestic companies are covering 100% of the Solvency Capital Requirement (SCR) using Tier 1 unrestricted capital.

Solvency II_SCR coverage
Figure 3

We see a similar picture in Figures 4 and 5 for the cross-border life market in Ireland, with very few cases of lower-quality capital on the balance sheet. Again, all the companies examined cover the SCR using 100% Tier 1 unrestricted capital.

Figure 4
Figure 5

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Recovery plans: A natural extension of the ORSA

Recovery and resolution1 plans (RRPs) are becoming increasingly important for insurance and reinsurance companies. A requirement to develop RRPs already applies to global systemically important insurers (G-SIIs) and in some territories we are also seeing requirements coming into force which apply to smaller insurers that have not been classified as G-SIIs. In Europe, for example, the European Insurance and Occupational Pensions Authority (EIOPA) is looking at the area of recovery and resolution planning, with Gabriel Bernardino stating that ‘One of the lessons learned from the recent financial crisis is the need to have in place adequate recovery and resolution tools which will enable national authorities to intervene in failing institutions and resolve failures when these materialise in an effective and orderly manner.’2 This speech was followed by the release of an EIOPA discussion paper on the potential harmonisation of recovery and resolution frameworks for insurers.

This blog post offers a look at the link between RRPs and the Solvency II Own Risk and Solvency Assessment (ORSA).

ORSA requirements
One of the key aims of the ORSA is for insurers to identify and measure the risks that they face, with a view to either holding capital against these risks, or taking steps to manage or mitigate them. This process is called the insurer’s assessment of its overall solvency needs.

Guideline 7 of the Solvency II Level 3 Guidelines on the ORSA covers this assessment. It says that, “The undertaking should provide a quantification of the capital needs and a description of other means needed to address all material risks ….”

The explanatory text of this guideline expands on the factors to be considered by companies in deciding whether to cover risk with capital or to use risk mitigation techniques. These considerations include the following:

• If the risks are managed with risk mitigation or recovery techniques, the (re)insurer should explain the techniques used to manage each risk.
• The assessment needs to cover whether the company currently has sufficient financial resources and realistic plans for how to raise additional capital if and when required.
• The assessment of the overall solvency needs is expected to at least reflect the (re)insurer’s management practices, systems and controls, including the use of risk mitigation techniques.
• When assessing the overall solvency needs, the company should also take into account management actions that may be adopted in adverse circumstances. When relying on such actions, companies should assess the implications of taking these actions, including their financial effect, and take into consideration any preconditions that might affect the efficacy of the management actions as risk mitigators. The assessment also needs to address how any management actions would be enacted in times of financial stress.

Based on some of the ORSA reports that I have seen, companies are generally good at identifying possible risks and projecting their solvency positions allowing for the impact of these risks. Companies are also quite good at using the results of such analyses in determining capital buffers as part of the assessment of their overall solvency needs. Furthermore, as required by Solvency II, companies tend to have capital management plans in place, identifying possible shortfalls in own funds and how they might be addressed. However, some of these plans are often quite vague in terms of companies’ prospects of raising capital in the event of financial distress. In such cases, parents might not be willing or able to provide capital and the investment markets might also prove difficult to access.

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SFCR: Where are the risks?

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II, here’s a look at the breakdown of risk components within the Solvency Capital Requirement (SCR) across the Irish market. This provides a useful insight into the largest drivers of regulatory capital, while also indicating some of the sources of risk for companies.

All companies
This analysis is based on 40 published Solvency and Financial Condition Reports (SFCRs) as only standard formula companies have been included. The graph in Figure 1 shows the breakdown of the various SCR components, where 100% represents the calculated SCR.

As can be seen, underwriting risk represents the largest driver of SCR, followed by market risk. In this case, underwriting risk represents a combination of life, health, and non-life underwriting risks.

The benefits of diversification and loss-absorbing capacity represent an average reduction of 43% of the SCR. Please note that diversification here is at the SCR module level and doesn’t include the impact of diversification across sub-modules.

Figure 1

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SFCR: Who’s doing what?

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II, here’s a look at the different approaches being taken by Irish companies in terms of internal models and transitional or long-term guarantee measures.

While this initial analysis does not include every company, the sample includes 46 companies based in Ireland with aggregate Own Funds of €26.4 billion, including all the major players.

Internal models
The identities of the insurance companies using internal models may have been an open secret, but the publication of Solvency and Financial Condition Reports (SFCRs) allows us to confirm them below.

Based on our sample, there are 10 companies using an internal model for Solvency Capital Requirement (SCR) purposes. Interestingly, Ireland has subsidiaries of almost all the major international insurance groups, so what is learned in Ireland also gives an insight into the international market.

# Company Group Full Partial
1 Allianz plc Allianz SE X
2 Allianz Global Life Allianz SE X
3 Axa Life Europe Axa SA X
4 Axa Insurance Axa SA X
5 Axa MPS Financial Axa SA X
6 Beazley Re Beazley plc X
7 Hannover Re (Ireland) Hanover Ruck SE X
8 Prudential International Assurance plc Prudential plc X
9 SCOR Global Life Reinsurance SCOR SE X
10 Zurich Insurance plc Zurich Insurance Group X

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SFCR: An initial picture

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II for most companies on 20 May, there is now a wealth of information available through companies’ Solvency and Financial Condition Reports (SFCRs).

We are currently analysing the contents of the Irish SFCRs, both quantitative and qualitative, and will be publishing more detailed analyses in the coming weeks. However, as a taster, we’ve looked at solvency coverage across life and non-life insurers in Ireland. While this initial analysis does not include every company, the sample includes 46 companies with aggregate Own Funds of €26.4 billion, including all the major players.

The good news is that the Irish insurance industry is in a healthy position in terms of solvency coverage. Only one company has an SCR coverage ratio below 100% at year-end 2016 and it has since received a capital injection to remove the shortfall.

The graph below shows the relationship between Own Funds and SCR coverage ratio for companies. This shows that the majority of companies (66%) have a coverage ratio between 100% and 200%, including those with Eligible Own Funds in excess of €1 billion. The weighted average solvency coverage ratio is 167% (178% for life and 154% for non-life).

Our later analysis will also include a pan-European focus on the public disclosures. However, we’ll have to wait a little longer for this analysis as the group reporting deadline is 1 July. This includes the publications of single SFCRs where groups have opted to include all their subsidiaries within a single public disclosure document. We understand that some of the large groups in the UK have gone down this route.

SFCR: More reports to explore

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Further Solvency and Financial Condition Reports (SFCRs) were published in the past week or so.

• The latest SFCRs include AIG Europe Ltd, Blackrock Life, Sun Life Financial and White Horse Insurance Ireland.
• The award for glossiest report to date must surely go AIG Europe, which has presented a streamlined and consistent SFCR. It is perhaps an example of an insurer treating the SFCR as potential marketing or investor information, rather than purely a regulatory reporting requirement.
• UK firms are including the Audit Opinion and Report within the SFCR as they are required by the Prudential Regulatory Authority (PRA). Some of the previous UK SFCRs discussed in this blog series didn’t include the audit opinion as their reporting date predated the audit requirements. However, we haven’t seen this practice in other countries, such as Ireland, where the supervisors do not require publication of the audit opinion.

Links to all SFCRs included in previous blog posts are shown in the table below.

Company Link Country Country
AIG Europe Ltd Link UK 31/12/2016
ASR Group Link Netherlands 31/12/2016
Blackrock Life Ltd Link UK 31/12/2016
Care Insurance Co Link Gibraltar 30/06/2016
Cornish Mutual Asurance Co Ltd Link UK 30/06/2016
Euroguard Insurance Co PCC Ltd Link Gibraltar 30/06/2016
Evolution Insurance Company Ltd Link Gibraltar 30/06/2016
Hansard Europe dac Link Ireland 30/06/2016
International Diving Assurance Ltd Link Malta 30/06/2016
Municipal Mutual Link UK 30/06/2016
St James’s Place Group Link UK 31/12/2016
Sun Life Financial of Canada Link UK 31/12/2016
The Wren Insurance Association Ltd Link UK 30/06/2016
Vitality Life Ltd Link UK 30/06/2016
White Horse Insurance Ireland dac Link Ireland 30/09/2016