Capital management is the final section of the Solvency and Financial Condition Report (SFCR), so well done for getting this far! Along with Section A, this is one of the shorter sections on average. However, there are still differences in the level of detail provided by firms, and firms using partial or full internal models are subject to additional disclosure requirements.
The Capital Management section is required to include the following:
- Objectives, policies and procedures for managing own funds
- Information on the structure and quality of own funds including descriptions of ancillary own funds, any deductions made and the impact of transitional measures
- An explanation of any differences between own funds and amounts shown in financial statements
- Details of the Solvency Capital Requirement (SCR) spilt by risk module including simplifications, transitional measures and material changes over the reporting period
- Details of the Minimum Capital Requirement (MCR) including inputs and material changes over the period
- For firms using partial or full internal models, information on the purposes, scope and methodology of the internal model and how it differs from the standard formula
- Details of any non-compliance with SCR and MCR
- Other material information on capital management
There were stark differences in the level of detail provided on capital management objectives, with 40% of firms providing just one objective (typically to ensure own funds remain sufficient to cover the SCR with a buffer) and 8% not referring to objectives at all! The remainder provided more detailed objectives, providing a better insight into their capital management priorities.
Many firms identified similar objectives, such as maintaining liquidity to meet obligations as they fall due, supporting new business, and meeting policyholder and regulatory requirements. However, there was a broad range of other objectives which were not overly consistent. These are shown in the graph below.
Figure 1 - Capital management objectives identified by firms
While qualitative descriptions of objectives were relatively common, quantitative targets such as solvency ratio or credit rating were rare. Of our sample, just 5 firms disclosed an explicit solvency ratio target and only one revealed a credit rating target. Target solvency ratios ranged from a minimum of 120% to up to 200%.
The level of detail disclosed under capital management policies and procedures also varied significantly. 52% of firms opted to cover this section lightly with statements such as “the capital position is reviewed in line with our business plan once a quarter/year”. The remainder went into more detail, including information such as:
- the roles of committees and capital management plans
- the use of sensitivities and scenario testing
- capital forecasting
- review of the capital position against dividend policy
- measures that could be taken in the event of falling or low solvency ratio
- descriptions of management actions such as repricing, reviewing expenses and reviewing objectives
Given the forward-looking capital projections carried out in the ORSA, we might have expected firms to discuss this in their capital management procedures but surprisingly only 36% of firms did so. Those that did usually explained how the ORSA helped determine their likely ability to meet their capital requirements in the future.
In addition to the differences in detail on objectives, procedures and projections, we found that:
- Only 56% of propriety companies linked capital management to their dividend policy and only 14% of mutuals commented on the link between capital management and bonus levels
- Firms take different approaches in cases where no material changes have occurred to an area of interest. 32% of firms in our sample explicitly stated that there were no material changes to their capital management policies over the year
- 88% of firms presented their capital requirements as the SCR split into the main risk modules, with 3 of these further splitting the underwriting risk module into its component parts. The remaining 12% of firms simply disclosed the overall SCR, referring to the public Quantitative Reporting Templates (QRTs) in the appendix for a further breakdown.
- 20% of sampled firms used an internal model or partial internal model. Diagrams proved highly effective in demonstrating how these are used to arrive at an overall capital requirement
- The level of detail used to describe a firm’s capital management varies widely. Some firms provided explicit objectives, targets and procedures whilst others stuck to the bare minimum requirements
- Firms who discussed their ORSA, dividend policy and bonus policy generally gave readers more of an opportunity to really understand how capital is managed
- Diagrams were used to good effect in some SFCRs to help emphasise key areas or simplify an important explanation
- Firms took differing approaches in the level of detail reported around the total SCR, though the majority reported the headline SCR with a breakdown of the main risk components as required
You can read more of our findings on the different sections of the SFCR by clicking on the links below.