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21 August 2018

LCP survey finds 99%
of top 100 non-life insurers can cover solvency capital requirements

However, the quality of disclosures still leaves room for improvement with many firms falling short of the narrative requirements or publishing Quantitative Reporting Templates (QRTs) containing errors.

Recent findings from Lane Clark & Peacock’s (LCP) second annual survey of Solvency II implementation across the UK and Ireland shows that 99 of the top 100 non-life insurance firms surveyed are capable of covering solvency capital requirements (SCR). This marks a slight improvement from last year’s results, which found two firms disclosed they had insufficient capital to cover their SCR.

Significantly, this year many firms have highlighted cyber as a key area of risk, with 42% of firms concerned that cyber security poses a credible threat to their business activity. Action taken by firms to mitigate operational cyber risks has included ongoing training for staff, purchasing cyber security insurance and setting up committees to regularly monitor cyber risks.

Cat Drummond, Partner in LCP’s General Insurance team, commented:

“Our report has revealed that financial strength remains generally good across the industry, although individual firms have seen large shifts in their capital cover over the last year. Nearly half of firms have cited cyber security as a key risk, while unsurprisingly uncertainty around the impact of Brexit remains an ongoing concern.

“While some firms have taken the opportunity to improve the quality of their Solvency and Financial Condition Reports (SFCRs) this time around, there’s still a long way to go to ensure they become useful documents, as well as being compliant with the requirements. Firms must continue to develop SCFRs to bring greater clarity and consistency in insurance company regulatory disclosures, not just to conform to this third pillar of the Solvency II on disclosure requirements, but to reassure stakeholders that their houses are in order.”

Other key findings of LCP’s analysis include:

  • Ambac Assurance was the only firm in the survey to disclose that it had insufficient capital to cover the SCRs as at 31 December 2017.
  • In terms of financial resilience, 20 of the firms analysed had a 15% chance of breaching their SCR over a one-year period. This compares to 25 at the previous year end and suggests that, two years since Solvency II went live, the market is now financially more resilient than it was a year ago.
  • The average eligible own funds ratio (the ratio of excess funds eligible to cover the SCR) was 206%, which represents minimal change from 2017’s figures. The highest ratio was disclosed by Gresham, part of the Aviva Group, whose eligible own funds were 13 times its regulatory capital as at 31 December 2017.
  • Nearly 60% of firms cited Brexit as a risk in their SFCRs, with 33% seeing Brexit as a key risk, up from 23% the previous year.
  • 42% of firms highlighted cyber as a key business risk to be managed.
  • The disclosure quality of firms’ Solvency and Financial Condition Reports (SFCRs) has improved over the last year although there is still some way to go on uniformity of reporting, with the ‘look’ and ‘feel’ of SFCRs continuing to vary considerably.
  • 10% of firms are publishing QRTs containing errors, down from 25% the previous year. A good improvement on the accuracy of data from last year, although further work will be required to ensure the reporting is reliable.

Drummond continues: “Although the financial strength of those surveyed is in general good, there is still some way to go when it comes to improving the quality and value of the public reporting with QRTs. In particular, where requirements are open to interpretation, the quality of disclosures varies significantly from firm to firm. Insurers must find a way to comply with all requirements, not just those that are ‘clear cut’.”