Solvency and Financial Condition Report (SFCR)
Spotlight on year one disclosures
The first round of public SFCRs have now been published by Irish-based insurers and reinsurers. So what do they tell us and what lessons can we learn for next time? Below we take a high level look at the information presented, consider where there is consensus, where there is divergence and where there were challenges for the industry first time around.
Solvency and Financial Condition Report (SFCR)
In our review, we have considered Irish domiciled life, non-life, health and composite companies and within this, direct writers, reinsurers and captives of all sizes were considered.
|Number in sample||High||Medium
|Non-Life & Health||3||5||9||12|
SCR coverage ratio
The table below summarises the published SCR coverage ratio of (re)insurers in Ireland, split by PRISM rating:
|SCR Coverage Ratio||High||Medium
As expected, the SCR coverage ratios of all high impact companies are comfortably above 100%. For below high impact companies, SCR coverage ratios vary widely across all types and sectors, with no common theme or trend evident.
SFCR user accessibility
Overall, the purpose of the SFCR is to provide publicly available information regarding the company which can be used by policyholders, shareholders and other stakeholders. Therefore, the SFCR is expected to be understandable to the average policyholder who may not have significant knowledge of financial or insurance concepts.
This was a challenge for most companies although, in our opinion, non-life companies have generally performed better than life companies. In particular, the use of flowcharts by non-life companies to describe the Risk Management System and ORSA process allows the reader to grasp the key points of each at a single glance.
Some companies have done more than others to make these documents accessible; for example, a significant proportion of companies included a glossary of terms, explaining complex jargon in plain English.
Length & section weighting
The total length of the SFCR documents varied significantly with some documents as short as 16 pages while others were over 80 pages. This translated through to differences in length of each section as shown in the table below (standardised for font size).
The wide range of section lengths naturally translates into a significant variety in the level of detail in each section, even between comparable companies. In general, Section B was the longest and most detailed section while sections A and E were the shortest for all categories of (re)insurer.
Structure & style
As expected, all companies covered the areas specified in the Solvency II Regulations and the order of presentation was consistent across all companies:
A. Business and Performance;
B. Systems of Governance;
C. Risk Profile;
D. Valuation for Solvency Purposes; and
E. Capital Management.
In addition to the main sections, all companies included the required QRTs in appendices. However, the depth of detail presented and the user accessibility of that presentation varied significantly between companies, even those of similar size and type.
Larger companies and those listed on an exchange already have a significant amount of information disclosed in their Financial Statements and are naturally more comfortable with the disclosures required in the SFCR. Consequently, we found that a greater level of detail was included in the SFCR by such companies and a polished report was typically produced in line with their corporate brand and consistent with the presentational style of their Annual Report & Accounts.
Section A: Business and Performance
Across the (re)insurance industry, this section is quite factual in nature. It outlines the nature of the business written by the company and its financial performance but does not, as we might have expected, use the opportunity to ‘promote’ the company to readers of the SFCR.
There is significant variation in the level of detail included in this section. A large proportion of companies presented underwriting results (i.e. the numbers) by territory / line of business with no supporting commentary. For those that did include commentary, it tended to be at a high level. In general, there was very little qualitative discussion around the underwriting / investment performance of the company.
In addition to the limited commentary, there was some inconsistency in the manner of presenting the quantitative information. Most companies presented underwriting income (premiums and fees less benefits and expenses) but some companies presented internal KPIs. The lack of standard underwriting performance measures makes it difficult to compare underwriting performance between companies.
Section B: System of Governance
The CBI sent a clear message to the market that the system of governance was a key disclosure requirement. In our opinion, companies struggled to present useful information in an accessible way.
In many cases, this section was a compilation of information already included in other documents without much attention to the overall coherence and consistency of the information presented. Generally, the information presented was at the minimum factual level with no real insight into the company-specific system of governance. Some companies did include diagrams to provide clarity around the company and its governance structure but this approach was not universal. The overall feel of this section was that it was very “boilerplate”.
There are a number of specific requirements to be included within this section, some of which have not always been met. For example, a number of companies did not include the location of outsourced providers within their report and only a small minority of companies gave more information on their remuneration policy than just the general principles.
We await the CBI’s view on the SFCRs but we anticipate the system of governance as being an area which companies will need to enhance as market practice emerges.
Section C: Risk Profile
High impact companies generally provided a clear explanation of the risks related to their business, how such risks are managed / mitigated and the potential impact of such risks on their liabilities (i.e. a stress).
Medium impact companies typically provided less detail or presented it in a less user-friendly manner than high impact companies but most provided details of the risks, mitigation plans and potential impacts.
Low impact companies typically had difficulty providing a clear explanation of the risks related to their business. A number of companies documented very generic risks that were not specific to their business.
One requirement which all classifications of (re)insurer struggled with was the requirement to provide details of “stress testing and sensitivity analysis for material risks”. While most provided the standard formula stress impacts, only a small proportion included details of any further sensitivity/scenario, stress, or reverse stress testing. The inclusion of quantitative stress or reverse stress testing information was rare. Qualitative stress or reverse stress testing information was more common but still not widespread. Companies including this information showed no particular bias between sectors but was more common among low and medium-low impact (re)insurers.
Section D: Valuation for Solvency Purposes
The level of detail and structure of this section of the report varied significantly by company.
Medium-low and low impact companies were particularly light in respect of the sub-section on technical provisions (D2). Commentary in this section was often generic, repeating the delegated acts with little or no link back to the business written by the company itself. In addition, the majority did not describe the bases, methods and main assumptions used in calculating the technical provisions. In our opinion, users would have difficulty understanding how the technical provisions were calculated for a given company and comparison between companies is limited by the level of detail provided.
Overall, we would have expected to see enough detail to give users a reasonable understanding of the methodology used so this is likely to be an area where companies may need to apply more focus in the future.
Section E: Capital Management
In this section, very few companies did more than meet the minimum requirements. In most cases, companies simply provided the required SCR and MCR information at a high level. Little discussion was provided around these figures, and most companies stated a capital management aim to continue to meet internal and external SCR coverage ratio targets.
Similar to our comment on Section A, we expect that this is an area where companies may choose to focus efforts in the future in order to expand the dialogue here, for example, to use strong coverage ratios to promote the strength of their business and brand.