Insurers operate within a complex framework, and the UK regulatory regime does not guarantee zero failures – with this in mind LCP recommends that trustees consider 5 key issues when assessing an insurer’s financial strength.
1. How robust are the insurer’s solvency reserves?
Key factors to consider include the level of the insurer’s Solvency Capital Ratio (SCR), the extent to which reserves exceed regulatory minimums, and if the insurer can demonstrate resilience under adverse market conditions.
2. How are risk sensitivities managed by the insurer?
Insurers face a wide range of financial and operational risks. Areas for investigation should include investment portfolio structure, reinsurance arrangements and exposure to credit risk. Understanding these risk sensitivities and how they are managed provides insight into how financial strength could change over time.
3. What does the insurer’s ownership structure mean for its financial strategy and resilience?
The ownership structure of an insurer—whether public, private, or mutual—affects how it makes decisions. Trustees should consider how surplus capital is used (eg to strengthen solvency or for other purposes like dividends), and how the insurer might raise funds in time of stress. An insurer’s ownership model influences its ability to manage risks and deliver stability over the longer term.
4. What protections does the Solvency UK framework offer?
Understanding an insurer’s financial strength is crucial, but it is the Solvency UK framework (formerly Solvency II) and the Prudential Regulation Authority (PRA) supervision that is tasked with enforcing financial resilience. For fully informed decision making, it is important for trustees to understand how the PRA monitors and oversees insurer actions.
5. How does one insurer compare to others?
Financial benchmarking of key metrics can help trustees put their potential insurer counterparty into context. Helpful indicators for trustees to consider include solvency ratios, investment portfolio composition, and credit ratings.
Francesca Bailey, Partner at LCP, commented: “Choosing the right insurer is not just a tick box exercise; it’s about securing the long-term future of your scheme and safeguarding member benefits. Insurers operate within a complex framework, and the UK regulatory regime does not guarantee zero failures.
By asking the right questions from the start, trustees and sponsors will be better prepared to navigate the complexities of the buy-in market and confidently make a decision that is, for many, the most significant they will ever face.”
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