Recent analysis of the 2018 Solvency II public disclosures of over 650 EEA life insurance firms show increasing capital strength for the sector.
The research, conducted by Milliman, a global actuarial consultancy, examines various aspects of the QRT disclosures, including balance sheet, capital strength (SCR and Own Funds) and the use of the Long Term Guarantees Measures (LTGMs) in the sector.
The report also includes a focus on the UK life sector. According to Neil Christy, a co-author of the report: “The results were broadly consistent with those seen at the year-end 2017. One notable change, however, was the significant reduction in the volume of business being sold from the UK into other countries.”
Looking to the upcoming 2019 year-end results Neil said: “Results have been fairly consistent between the year-end 2017 and year-end 2018 and as such it is difficult to predict what trends we would expect to see going forwards.”
EEA Life Insurance Market
The survey covers 650 companies from 31 EEA countries, representing about 824 EUR billion of Gross Written Premium (GWP) and 7,619 EUR billion of gross Technical Provisions (TPs).
European life insurers typically favour government and corporate bonds as investment categories, investing over 60% of their total assets (excluding index-linked and unit-linked assets) in these categories, on average.
Split of Non-Linked Assets Across Europe – Year-End 2018
The mix of life insurance business varies across Europe, with many markets (including Belgium, France, Germany and Italy) dominated by ‘Insurance With Profit Participation’ business, while the market in other countries (such as Ireland, Luxembourg and the UK) is predominantly in respect of ‘IL and UL Insurance’ business.
Split of Gross Written Premiums by Line of Business Across Europe – Year-End 2018
However, despite the different business mix, overall European life insurers had high levels of solvency cover relative to the minimum required capital based on the disclosures in the year-end 2018 SFCRs, with an average SCR coverage ratio of 226%. This represents an improvement on the year-end 2017 SFCRs, which had an average SCR coverage ratio of 218%.
Distribution of SCR Coverage Ratio by Country – Year-End 2018
Own Funds are predominantly invested in Tier 1 unrestricted Own Funds (91%), which is the highest form of capital in terms of quality and loss absorbency as defined under Solvency II.
For most countries the largest constituent part of their undiversified SCRs is market risk (59%), with life underwriting risk (22%) being the second largest component. LACTP (23%) and diversification (21%) represent the largest reductions to the SCR.
The LTGMs are used to different extents in each country, with the Volatility Adjustment (VA) the most widely used. However, in countries where the Transitional Measures on Technical Provisions (TMTP) or the Matching Adjustment (MA), or indeed both, are used, they generally have much higher impacts on the SCR coverage ratio than the VA. The benefit from the LTGMs to the solvency coverage has increased since year-end 2017.
UK Life Insurance Market
UK life insurers disclosed healthy results in the year-end 2018 SFCRs, with an average SCR coverage ratio of 154%. No insurers in this report had a coverage ratio of less than 100%, but some had extremely high ratios, depending on a wide range of factors.
Distribution of Average SCR and MCR Coverage Ratios – UK Life Market, Year-End 2018
The MA and the TMTP continue to be popular in the UK, leading to significant increases in the SCR coverage ratio for some companies. Usage of the VA remains relatively low in the UK, comparative to other European countries.
‘IL and UL Insurance’ business continues to be the dominant product grouping for UK life insurers, when measured by volume of TPs, reinsurance recoverables and gross written premiums.
Split of Total UK Life Insurers Technical Provisions by Product Groups – UK Life Market, Year-End 2018
The volume of gross written premiums sold by UK life insurers on a cross-border basis into other countries has decreased significantly over the year, potentially due to preparations for the UK exiting the EU.
The most significant risks to UK life insurers are market risk (49%) and underwriting risk (30%), which is consistent with what is being seen across Europe. LACTP (23%) is a significant element of the SCR of UK life insurers.
Average SCR Breakdown of SCR by Calculation Type – UK Life Market, Year-End 2018
Own Funds are primarily invested in Tier 1 unrestricted Own Funds (over 90%), which is the highest form of capital in terms of quality and loss absorbency as defined under Solvency II. The rest is kept as lower-level capital and is primarily held by the largest companies.
2020 SFCRs and beyond
In respect of longer term trend of the SFCR and QRT disclosures Stuart Reynolds, a co-author of the report, said: “It may be interesting to see the impact that the Solvency II 2020 Review will have on the disclosed results, for example, in areas such as the long-term guarantee measures.”
The data for the survey as sourced from Solvency II Wire Data and company publications.
The full report: Analysis of life insurers’ Solvency and Financial Condition Reports Year-end 2018 is available here.
Solvency II Wire Data collects all available public QRT templates for group and solo.
QRT templates available on Solvency II Wire Data
S.02.01 Balance sheet
S.05.01 Premiums, claims and expenses Life & Non-life
S.05.02 Premiums, claims and expenses by country Life & Non-Life
S.12.01 Life and Health SLT Technical Provisions
S.17.01 Non-life Technical Provisions
S.19.01 Non-life Insurance Claims Information
S.22.01 Impact of long term guarantees and transitional measures
S.23.01 Own funds
S.25.01 SCR Standard formula
S.25.02 SCR Standard Formula Partial Intern Models
S.25.03 SCR Standard Formula Intern Model
S.32.01 Undertakings in the scope of the group