Tag Archives: Solvency Capital Requirement

New Dutch Coalition Agreement addresses changes in corporate tax affecting insurers’ solvency

On 10 October 2017, the new Dutch government Rutte III of the VVD, CDA, D66 and ChristenUnie presented their Coalition Agreement. In ‘Confidence in the future, Government Agreement 2017-2021,’ the government provides an overview of the intended objectives including expected budget.

Two proposals regarding the corporate tax will affect the solvency position of insurers under Solvency II. The first proposal is related to decreasing the corporate tax rate from 25% to 21%. The percentage decreases are in the table below:

Year Corporate tax rate
2018 25.0%
2019 24.0%
2020 22.5%
2021 21.0%

Decreasing the corporate tax rate will have a decreasing effect on the level of Loss Absorbing Capacity of Deferred Tax (LAC DT), resulting in a higher Solvency Capital Requirement (SCR). In addition, the eligible own funds backing the SCR may decrease should an insurer have a Deferred Tax Asset (DTA) on the balance sheet.

The second proposal is related to mitigating the carryforward of taxable losses with future taxable profits. Currently, loss in corporate tax rules can be recovered by profit last year (carryback) and nine years into the future (carryforward). In the Coalition Agreement, the carryforward will be limited to six years. The government expects the first saving to be in 2028. The intended effective date of this rule is currently unknown. Given the first saving in 2028, our expectation is that the rule will commence between 2019 and 2022.

The second measure impacts the level of LAC DT as well. This is due to the opportunity of recovering tax receivables from the loss (SCR) as a result of the 1-in-200-year simultaneous shock with tax liabilities from future profits. Profits between the seventh and ninth years cannot be taken into account.

The same counts for the recovery of a DTA with tax liabilities from future profits. This will be more complicated.

Insurers need to realise these new corporate tax regulations when defining their capital policies and when managing stakeholder expectations on the level of the Solvency II ratio.

Aggregate statistical data published for the Irish insurance industry

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.

Aggregate data
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.

Central Bank of Ireland review of Solvency II life insurance pricing and reserving assumptions

In February 2017, the Central Bank of Ireland published letters on its website relating to its review of the consistency of Solvency II life insurance pricing and reserving assumptions. This briefing note by Milliman’s Aisling Barrett and Sinéad Clarke summarises the contents of these letters. The authors also reference the contents of the December 2016 industry letter on the standard formula Solvency Capital Requirement.

EIOPA discussion paper on the review of Solvency II Delegated Regulation

The European Insurance and Occupational Pensions Authority (EIOPA) has launched a review of specific items in the Solvency II Delegated Regulation with a particular focus on the standard formula Solvency Capital Requirement (SCR). In this briefing note, Milliman consultants Aisling Barrett, Gillian Tucker, and John Mulvihill summarise the discussion paper EIOPA has published in order to engage with stakeholders on the topic.