The SCR ratio, also known as the Solvency II ratio, also known as the solvency ratio, also known as the capital ratio, also known as the ratio of total eligible own funds over the solvency capital requirement, also know as cell S230101__R0620_C0010 (Ratio of Eligible Own Funds to SCR / Total) in the Solvency II QRTs, is considered a key indicator of the financial strength of European insurance firms.
The ratio is also designed to be a kind of early warning system for market participants and regulators to trigger action in the case of an insurer becoming unable to meet its obligations to policyholders.
Now, with the benefit of EU-wide data collected over the past eight years, Solvency II Wire Data has produced analysis pointing to the effectiveness of the SCR ratio as an early warning indicator of insurers’ financial strength.
The research examines the SCR ratio of over 3,400 European insurance group and solo entities as published in their annual Solvency and Financial Condition Report (SFCR) between 2016 and 2023 (since records began).
Over 21,500 SFCRs that contained QRT data were analyzed, and 69 firms that published an SCR ratio below 100% were identified. Of these, only 19 had ceased publishing reports since the breach of the ratio.
The findings appear to point to the effectiveness of the SCR ratio as an early warning system for triggering regulatory intervention to ensure the financial health of an insurer.
Then table below shows the data distribution by country, line of business and capital model.
Administration or merge
12 firms discontinued in the year following the publication of the breach, while the remaining 7 went on to publish stronger ratios before ceasing to report.
While it is likely that most of these firms went into administration, in some cases the reason for no longer reporting may have been that the insurer was acquired, or merged into other entities in the group.
For example, Harcourt Life Ireland dac (which started reporting as Scottish Mutual International in 2016) was subsequently merged into Utmost PanEurope dac.
Similarly the Dutch insurer Yarden Uitvaartverzekeringen N.V. reported a first breach of the SCR ratio in 2018 (31%), recovered to 119% in 2019, only to drop to 87% the following year, before being merged into DELA Natura- en levensverzekeringen N.V. in August 2021.
It has also been observed that in some cases companies did not publish an SFCR in the years before or just after the breach. This may have been due to reporting exemptions given, while the company attempted to resolve its solvency difficulties.
Is breaching the SCR ratio the end …?
At least three firms were identified that have reported a solvency ratio below 100% for all eight years since 2016.
The Municipal Mutual Insurance (MMI) ratio fluctuated between -110% to -33% over the period. The company explained the situation in its 2023 SFCR as follows:
“MMI is subject to a Scheme of Arrangement and should be technically regarded as insolvent. It has a
deficit of own funds of £27,789k compared to an MCR of £16,806k and an SCR of £60,231k.
MMI is in breach of its solvency requirements and the Scheme of Arrangement does not provide a
mechanism whereby funds can be raised sufficiently to eradicate this deficit. The Company is therefore
expected to remain in deficit and consequently in breach whilst its business is brought to a close. This
process is expected to take many years; however, the Scheme provides protection for policyholders
over the duration and is structured to deliver the best possible outcome for policyholders. The run-off
under the Scheme therefore meets the main objective of Solvency II.”
Other companies in similar situations include Equitas Insurance Limited in the UK and the Czech insurer Exportní garanční a pojišťovací společnost, a.s.
Bouncing back from a low ratio
However, for most of the 50 insurers that have at some point published a drop in the SCR ratio below 100% it appears to be a one-year blip, which subsequently saw the company return to a healthier ratio above 100%.
The SCR ratio indeed an early warning system
Reviewing the SCR ratios of the European insurance market shows that since 2016 a relatively small number of firms breached their SCR ratio, and in most cases the breach was followed by a bounce back.
The findings point to the fact that the SCR ratio, also known as the Solvency II ratio, also known as the etc, etc …, appears to be the early warning indicator intended by regulators.
The completed dataset is available to subscribers of Solvency II Wire Data. To request a demo click here.
