The first public submissions of the Solvency and Financial Condition Report (SFCR) for the majority of firms were published in late May this year. In this series of blogs we present the key findings of our analysis of each section of the SFCR. The focus of this blog is the Valuation for Solvency Purposes section.
The Valuation for Solvency Purposes section is required to include the following:
- The value of a firm’s assets, split by material asset class and a description of the methods and assumptions used in valuation
- The value of a firm’s technical provisions, including best estimate and risk margin, split by material line of business, a description of the methods and assumptions used in valuation and a description of the level of uncertainty in the technical provisions
- The value of a firm’s other liabilities, split by material asset class, and a description of the methods and assumptions used in valuation
- Quantitative and qualitative explanations of any material differences in the assets, technical provisions and other liabilities calculated for solvency purposes compared to those reported in financial statements
- Information on the use of a matching adjustment, volatility adjustment and transitional measures employed
- A description of any material changes in the assumptions used to calculate the technical provisions over the reporting period
- A description of recoverables from reinsurance contracts and special purpose vehicles
The key differences between firms in Section D related to the ‘technical provisions’ sub-section.
25% of firms included a comparison to the previous reporting period. While this was not strictly required in this year’s SFCRs, as it was the first reporting period of this type, in future SFCRs firms will be required to include a comparison and comment on any material changes to assumptions.
All firms made some reference to the difference between their Solvency II results and those disclosed in their financial statements. The most common reasons given were the inclusion of the risk margin, the removal of valuation margins and the use of the risk-free rate when discounting under Solvency II. For general insurers, a common difference was the inclusion of Events Not In Data.
The level of detail used to describe the methodology and assumptions used in calculating technical provisions was another source of variation. It was notable that general insurers typically provided significantly less information, for example only 67% identified the technique used to calculate claim provisions (e.g. the chain ladder method), and detail on the assumptions used tended to be restricted to the discounting assumption.
Although life insurers provided more detail than general insurers, there was typically less information than life insurers provided under the Solvency I regime. This is because under the old regime life insurers had to complete Appendix 9.4 in their PRA returns, which contained detailed information on a firm’s methodology and assumptions. In the SFCRs, few life firms stated what their assumptions were, with the majority simply giving an overview of how assumptions were set.
Figure 1 - Breakdown of level of detail given by life insurers for key assumptions
Unlike life firms, general insurers were not subject to an equivalent requirement to disclose their methodology and assumptions under Solvency I, so this is a step forwards for them.
Over time we expect the variance in the level of disclosure to narrow as regulators publish further guidance and market practice emerges.
Further discrepancies in firms’ SFCRs can be found in the disclosures on the matching adjustment, volatility adjustment and transitional measures.
Potentially confusingly, the Solvency II delegated acts require firms to state whether they are using the volatility adjustment, but not the matching adjustment. The majority of firms appear to have played it safe by including a statement for both adjustments, although 3 firms failed to comment on whether they were using a volatility adjustment.
Figure 2 - Breakdown of disclosure requirements and detail given on adjustments and transitional measures
Firms using the adjustments or transitional measures are required to show the impact of removing each of these items individually on the technical provisions, basic own funds, eligible own funds, Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR). Of the firms in our review subject to these requirements:
- 67% explicitly did this in Section D of the SFCR
- 11% referred readers to the relevant Quantitative Reporting Template (QRT) containing this information
- 22% only stated the impact on technical provisions
Finally, there are differences in how firms comment on uncertainty in the value of technical provisions. 80% of firms have opted for generic statements that uncertainty exists in methodology, assumptions, data and claims experience; the remaining 20% of firms have given a high level of detail, identifying specific sources of uncertainty such as persistency or equity values and either including sensitivities or referring the reader to Section C of the SFCR.
- Many of the differences in firms’ disclosures related to the technical provisions sub-section
- Life insurers provided more information on methodologies and assumptions than general insurers…
- …however, the amount of detail provided by life insurers is lower than they used to provide under Solvency I
- Most firms only gave limited information on the uncertainty in the value of technical provisions
- Over time, we expect the variation in the level of disclosure to reduce as more guidance is published and firms adopt consistent approaches with the rest of the market
You can read more of our findings on the different sections of the SFCR by clicking on the links below.