Tag Archives: Pillar 3

SFCR: Under the bonnet – insurers’ assets

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.

All 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.

Note: The chart above shows the net derivatives position, i.e., derivative assets less derivative liabilities.

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.

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. Please note that Irish Life redeemed €200m of Tier 1 restricted capital in February 2017. Thereafter their Own Funds were 100% 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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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