General Insurance Article - Changes to disclosures that insurers will need to make


Solvency II fundamentally changes the disclosures that insurers will make to the regulator, and more importantly (for many insurers) the public. Not only will there be more data, but with a consistent Solvency II measurement basis this will be more comparable and provide more insight into an insurer’s financial position, capital strength and risk profile.

 By Barney Wanstall, Director, Insurance, PwC
 At the heart of this change is the disclosure firms will now make of both their Solvency Capital Requirement (SCR) and regulatory solvency ratio. In the UK, and indeed in many other European jurisdictions, the real regulatory capital requirement has been a private affair between firm and supervisor. In the UK this has been particularly closely guarded whereby Individual Capital Assessment’s and Individual Capital Guidance’s are often categorised as “highly confidential”. This new public disclosure is fascinating, it includes not just (for standard formula firms at least) a detailed breakdown of the SCR but also a breakdown of the exact capital resources which the firm has in place to meet this requirement. This in turn enables analysis of factors such as capital fungibility and ability to pay dividends. 
  
 We are starting to see a number of firms “preparing” the market for what their regulatory solvency capital ratio is going to be. In some instances this disclosure has been demanded by analysts: the first mandatory public disclosure will not actually be made until well into 2017 for most firms. Perhaps even more interesting has been the market reaction to these disclosures – there have been examples where falling share prices can arguably be directly linked to disclosure of capital ratios that the market was uncomfortable with. It is certainly clear that as the solvency ratio falls significantly below 150% investors nerves increase.
  
 Given the few firms left in IMAP across Europe, for most this disclosure will be based on the Standard Formula. The potential market response to this disclosure is even more interesting when you consider the flaws of this blunt instrument. At our recent breakfast briefing PwC covered a range of reasons why solvency capital ratios between firms are often not truly comparable – best illustrated by the clear disjoint between solvency ratios and far more tailored credit rating agency assessments.
  
 Given the clear interest of those firms who have disclosed to date, we decided to invite the investor analyst community in to discuss their views on this topic. As part of this we ran a survey, which produced some fascinating results:
  
 - When given the choice between IFRS, embedded value, economic capital and the Solvency II SCR, 86% of analysts said the SII SCR would be the most important metric for them as at year end 2015.
 - 83% of analysts intend to request internal model firms to disclose standard formula numbers, as they are sceptical of internal models.
  
 So whilst the standard formula has well understood limitations it is clear the analyst community are interested in what it says and, since it provides a “standard” comparison, will use it to compare firms.
  
 So for insurers, what does this all mean? As well as underlining the need to be prepared, it reinforces 2 things:
 1. You must get it right – public disclosure means potentially very public embarrassment if you get your capital requirement or calculation of solvency surplus wrong.
 2. You must be able to explain it – public disclosure requires explanation – understanding how your solvency ratio is devised, how it compares to others, how it compares to your credit rating and your own view of risk will be vital to avoid your firm being unfairly judged.

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