LCP’s seventh annual analysis of Solvency II reporting of 100 of the largest non-life insurers in the UK and Ireland highlights the financial strength of the market, but warns that insurers continue to face new challenges.
The average eligible own funds ratio across LCP’s sample was 180%. Total eligible own funds increased from £97bn at the end of 2021 to £101bn at the end of 2022.
Text analysis of the SFCRs shows that the risks that firms are still navigating include inflation, which was mentioned by 96% of firms in their SFCRs, the Ukraine invasion (85%) and cyber risk (76%). There is also increasing emphasis on climate change and other emerging risks like cyber risk and people risk.
Nine percent of firms highlighted either AI, digitisation or technological developments as an emerging risk. However, few firms highlighted the disruptive impact that it could have on their business, or the opportunities it could present to the industry. Given the rapid changes in this space, and the need to keep up with both customer expectations and competitors, LCP predicts that AI risks will become an increasing priority for insurers.
The report also identified people risk as an emerging theme in SFCRs, and in particular, the challenges with recruitment and retention of people. LCP expects this to rise up the industry’s agenda and believes that the current approach of thinking about it as a subset of operational risk overlooks the potential knock-on effects that it could have on other risk areas.
Key recommendations for insurers:
- Assess what’s unsaid in your SCFR – If a risk is omitted, there must be a valid reason. Dive a little deeper into overlooked risks and anticipate potential second order effects.
- Focus on more meaningful scenarios – In particular for inflation and geopolitical risks. Move beyond generic sensitivities and, if necessary, set up internal working groups to refine these scenarios.
- Get ready for changes to Solvency II – Be aware of upcoming changes for UK and Irish insurers and their implications, and report on these impacts in the next round of disclosures.
Matthew Pearlman, Partner and author of the report, commented: “It is good to see that the top insurers’ financial strength is growing. An important aspect of the SFCR is reporting on the risks that firms face, and this is shown in the increasing emphasis on climate change and other emerging risks like cyber risk and people risk. However, we believe that many firms could increase the quality of the narrative supporting these risks. In particular, very few firms mentioned using stress and scenario testing to quantify these risks.”
Solvency II: Navigating evolving and emerging risks is available for download here.
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