
ANALYSIS

Introduction
In the UK, the Solvency II reporting regime doesn’t bless us with the richness of understanding that we were used to under Solvency I and the PRA returns, but it does allow easier analysis at a higher level and comparison across Europe. Using analysis of UK insures, this article will show how the disclosures can be used to gain a better understanding of the makeup of insurers’ own funds. Before diving into the detail of how the money was invested, let us first explore UK insurer’s exposure to market risk relative to their other risks. The graphs below show the market risk as a percentage of the total risk (vertical axis) plotted against the amount of diversification benefit (horizontal axis) for each company. [caption id="attachment_1587765" align="alignnone" width="933"]
Company analysis
The big holders of assets are of course the life insurers, at £2 trillion of assets … To access Premium subscriber content click here …Non-life insurers investment – own funds
The universe of non-life insurers provides an uncomplicated and reasonably homogenous set of balance sheets, which can be used to observe how this group of insurers invest their own funds. In doing this, we have assumed a “matching hierarchy” in which ’other assets’ as shown in the diagram above serve first to pay ’other liabilities’ and then claims. We then assume that any remaining liabilities are matched with corporate bonds, then government bonds etc. From this we have derived a set of assets backing own funds (Solvency II broadly defines own funds as the capital a firm has available to meet any unexpected claims and so remain solvent). The diagram below shows the distribution of the asset allocation across the asset classes provided in the disclosures. As expected, there is a significant allocation to deposits and cash equivalents to meet unexpected claims followed by a range of assets that some insurers invest in to obtain additional returns. [caption id="attachment_1587769" align="aligncenter" width="1381"]
Life insurers – own funds
In contrast life companies have a far greater set of heterogeneous liabilities that drive asset allocation, therefore, separating assets backing liabilities from assets backing own funds makes less sense. Here, we have reduced the best estimate liability by those assets backing unit-linked liabilities and excluded these from the asset portfolio. Looking at the asset allocation backing both the technical provisions and own funds. The average balance sheet for a UK life insurer is shown in Figure 5 and an asset allocation for own funds as shown in Figure 6. [caption id="attachment_1587770" align="aligncenter" width="941"]

First insights
The most interesting aspect of the Solvency II disclosures is the insight we get, for the first time, of the split between market risk and underwriting risk. It is also about what the analysis does not show as much as what it does. We found no strong evidence on the non-life side that financially strong companies invested in their own funds more aggressively than those less strong companies. On the life side we could see a bias towards illiquid assets of the annuity writers and the differing preferences of insurers between a number of fixed income asset classes. We also noticed an array of peak exposures, of various asset classes, taken by a minority of insurers. For some this relates to the peculiarities of their balance sheet, for others it is a willingness to differentiate themselves from their peers through their asset allocation strategy. This year is just a snap shot. Next year we will be able to see how insurers have changed their behaviour to meet the continuing challenge to hunt out additional returns within the Solvency II framework. — The author is Director, Insurance Solutions at BMO Global Asset Management (EMEA). Views expressed are the author’s own. Find out more about Solvency II Wire Data and the information available to premium subscribers here: Solvency II Wire Data.