Recent findings from Lane Clark & Peacock’s (LCP) third annual survey of Solvency II implementation across the UK and Ireland shows that the proportion of firms highlighting Brexit as a key risk to solvency has nearly doubled over the last 12 months from 33% to 64%.
The report also shows that firms are less concerned about IFRS17 as a key risk, perhaps partly due to The International Accounting Standards Board (IASB) which, in late 2018, voted to defer the new reporting standard by one year to 1 January 2022.
Overall, fewer than 15% of firms noted climate change as a sizeable risk to their businesses. This proportion is expected to increase in future years as climate change becomes a key focus of boardroom agendas following calls to overhaul corporate reporting standards that would force companies to disclose information that reflects their commercial, social and environmental context.
Cat Drummond, Partner in LCP’s General Insurance team, commented:
“With nearly two-thirds of firms identifying Brexit as a key risk as the UK confronts the possibility of leaving the European Union with no deal in place, Brexit uncertainty continues to keep insurers awake at night. Almost all firms that highlighted Brexit as a key risk had plans in place (or were formalising such plans) to address the issue.
“Surprisingly, only a small minority of firms reported climate change as a key risk – even in the wake of the PRA’s Supervisory Statement which emphasises the need for firms to respond to the financial risks of climate change and embed this into existing risk management frameworks. This focus is, however, likely to sharpen as climate risk is increasingly discussed at board level in the wake of heightened regulatory focus.”
Other key findings of LCP’s analysis include:
- The average eligible own fund ratio was 206% at 2018 year end compared with 205% at 2017 and 199% at 2016 year end.
- 24 firms would breach their Solvency Capital Requirement (SCR) following a loss equal to their Minimum Capital Requirement (MCR), up from 18 in 2017.
- In aggregate, nearly 2/3rds of invested assets were held in either government or corporate bonds. The next largest allocation was 11% held in collective investment undertakings.
- The proportion of firms citing cyber considerations as a key risk marginally increased this year to 43% (from 41% in 2017).
- All firms included some commentary on sensitivity testing that they had performed. Around 70% of firms included the quantitative results of their testing, up from 60% last year.
- Only two-thirds of SFCRs and QRTs were available on firms’ websites on the reporting deadline. There is more work to be done to ensure that SFCRs are readily available and easy to find from the main homepages of insurers’ websites.
Drummond continues: “Although there are encouraging signs of improvements around SFCR’s, it is disappointing that only two-thirds of SFCRs and Quantitative Reporting Templates (QRTs) were available on firm’s websites on the reporting deadlines. Evidently, insurers still have some way to go to ensure that their SFCRs comply with regulatory requirements and are readily available and easy to access. EIOPA’s recent announcement of its intention to discuss with national regulators having public SFCR repositories may assist with this going forwards.”