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

It is perhaps not surprising that the companies that have used internal models tend to be those with the largest balance sheets, in terms of Own Funds—see the graph below. However, there are a number of firms with lower levels of Own Funds using internal models—they are part of large global groups with internal models.

Transitional Measures and Long Term Guarantee measures
In advance of the introduction of Solvency II, much of the debate centred on the use of the transitional measures, the matching adjustment, and the volatility adjustment. However, these measures have been used sparingly in Ireland to date.

Based on the SFCRs we’ve reviewed, there are five companies that have applied the volatility adjustment, one that has applied the transitional measure on interest rates and no one that has used the matching adjustment.

Company Volatility adjustment Interest rate transitional
Allianz plc X
Canada Life International Re X X
Irish Life X
Friends First LAC X
Friends First MPF X

In all cases, the impact of removing the volatility adjustment is relatively minor (between 1% and 10% reduction in solvency coverage ratio) and would not threaten the SCR coverage. On the other hand, the interest rate transitional has a more material impact on SCR coverage.

A December 2016 report from the European Insurance and Occupational Pensions Authority (EIOPA) also indicates that there is also one Irish company applying the transitional on technical provisions.

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