In the United Kingdom, the Prudential Regulation Authority and the Financial Conduct Authority recently issued two complementary Consultation Papers, setting out their proposals to extend the Senior Managers & Certification Regime, which currently applies to the banking sector, to insurers. This article by Milliman consultants provides an extended summary of the proposed changes that will apply to Solvency II insurers, Insurance Special Purpose Vehicles and large Non-Directive Firms.
Solvency II represents a radical shift in the way that European insurance regulation works, and the authors of a new Milliman paper believe it will fundamentally change the way European insurers view risk and returns. In this paper, Milliman consultants Ed Morgan and Jeremy Kent introduce a new methodology for measuring new business value and new business profitability in this Solvency II world.
On 18 August the Central Bank of Ireland (CBI) published consolidated insurance statistics based on firms’ year-end 2016 positions. This is the first such publication since the introduction of Solvency II and this format will be used for publications in each future year as part of efforts to harmonise disclosure across Europe. This publication replaces the ‘Central Bank Insurance Statistics’ produced in previous years (based on the returns submitted to the CBI under the old solvency regime), more commonly known as the ‘Blue Book.’
Industry balance sheet
The statistics are at an aggregate level only, covering 196 companies based in Ireland (a mix of life and non-life firms, both direct writers and reinsurers) with assets valued at almost €347 billion. It is interesting to note that, while two new authorisations were granted during 2016, 15 authorisations were withdrawn.
The total Own Funds of the Irish industry are just in excess of €39.0 billion. They cover a Solvency Capital Requirement (SCR) of almost €22.7 billion. The resulting solvency cover for the industry is 172%. In comparison the European industry as a whole had coverage of 210% at the end of June 2016.
Of the SCR of €22.7 billion almost two-thirds is calculated using the standard formula. Nine companies use full internal models and another three use partial internal models to calculate the SCR, with these 12 firms accounting for 36% of the total SCR at an industry level. In addition to the calculated SCR, one firm has had a capital add-on imposed by the CBI, totalling almost €94 million at year-end 2016. The CBI does not disclose the name of the company with the capital add-on in this publication.
Applications to the CBI
The statistics also outline various approvals granted by the CBI during 2016. Of the three firms which applied to use the volatility adjustment, only two received approval, adding to the total number of seven firms using the volatility adjustment at year-end 2016. Only one firm submitted an internal model application during the year, which appears to have been unsuccessful. This could suggest that some firms were inadequately prepared when submitting applications to the CBI.
As at year-end 2016 no firms were using the matching adjustment and only one firm was applying the transitional measure on risk-free interest rates. No further submissions for these measures were received during 2016. This could indicate that the long-term guarantee measures are not considered to be very attractive to Irish companies—either in terms of the effort involved in obtaining approval or the benefit gained.
While the data contains a number of interesting figures, it is the absence of company-specific data that is most noteworthy. The Blue Book previously outlined assets, liabilities and premium volumes at a company level. The new format report does not include any premium data and only provides statistics at an industry level. Of course all this information is publicly available in individual companies’ Solvency and Financial Condition Reports, but requires some time to analyse.
Full details of the year-end 2016 statistics published by the CBI can be found here. Additional Milliman analysis of the year-end 2016 position of the Irish industry can also be found here.
For many firms, year-end 2017 will be the first time that they need to recalculate the Transitional Measure on Technical Provisions (TMTP relief), although some firms have already applied and received approval for a recalculation following material changes in their risk profiles.
Milliman consultants have experience in recalculating the TMTP relief for a number of clients, performing independent reviews of recalculated TMTP relief, and have provided assistance with the development and review of firms’ recalculation policies.
The Standard Formula (SF) aims to capture the risk that an average European (re)insurance company is exposed to. The SF may not be appropriate for all (re)insurance companies, but the majority of European insurers currently uses it. In this article, Milliman’s Steven Hooghwerff, Sinéad Clarke, and Roel van der Kamp provide a short overview of the SF’s structure. They also present a suggested framework and worked examples, and discuss challenges and pitfalls to be considered.
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 a breakdown of investment assets held by Irish insurance companies.
The figures below are based on an analysis of the investment breakdowns found in the Solvency and Financial Condition Reports (SFCRs) of 51 insurance companies in Ireland, which include all the major players in the Irish insurance market. Please note that these investments do not include assets held for unit-linked or index-linked contracts. Instead they represent the assets backing technical provisions and shareholder investments.
On average, Irish insurers are heavily invested in bonds, with 41% in government bonds, followed by 35% in corporate bonds. There are also significant holdings in cash and deposits (9%), listed equities (4%) and collective investment undertakings (5%).
The chart below shows the various market sectors in more detail.
• Domestic life companies are heavily invested in government bonds, which account for 64% of their total investments, followed by corporate bonds, making up 22%.
• For life cross-border companies, there is a wider distribution across investment types, with the highest allocation of investments to government bonds (32%), followed by corporate bonds (23%), cash and deposits (17%), collective investment undertakings (11%) , listed equities (10%) and derivatives (6%).
• Reinsurers are heavily invested in corporate bonds, which account for 56% of their investments on average, followed by 33% invested in government bonds. This may indicate that the large global reinsurers are prepared to take on a little more risk, in order to gain a higher spread.
• When we look at non-life companies, we can see their investments are almost equally split between government bonds (37%) and corporate bonds (38%).
In terms of more unusual assets, we see a wide range of assets included in the ‘Other’ category in the market sectors chart above, although these investments are typically low. Investments in the ‘Other’ category include property, mortgages/loans and collateralised securities in the form of mortgage-backed securities.
The public disclosure templates do not reveal the duration of investments held. Therefore it is not possible to get a picture of how well matched the asset portfolios are to the associated liabilities. However, a comparison with the investment mix and the market risk component of the Solvency Capital Requirement (SCR) of the various market sectors shows the following:
• For non-life insurers, the market risk component of the SCR is much lower than for life insurers even though the investment mix is broadly similar. This is typically due to the fact the non-life insurers invest in short-term assets, which tend to attract lower capital requirements.
• For life insurers, the domestic insurers have a higher market risk component than the cross-border insurers. This is counterintuitive to the asset mix, which shows that the domestic insurers are more heavily invested in government bonds that are traditionally considered to be less risky and attract no capital charge for spread risk under the Solvency II standard formula. It is not clear from the SFCRs what is causing this but it may be that the domestic insurers are investing in assets of a longer duration to back long-term liabilities, such as annuities, or it could be that the unit-linked policyholders of the domestic insurers are investing in riskier assets than their cross-border counterparts.