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Leveraging Solvency II Reporting Requirements

Companies and Markets

By Joel Salomon, FSA  |  March 16, 2021

The purpose of Solvency II (SII), also known as the Solvency and Financial Condition Report (SFCR), is to provide stakeholders of European insurance companies with additional information over and above what is contained in the insurer or reinsurer’s annual statement. The SFCR contains qualitative and quantitative information on an insurer’s business and performance, system of governance, risk profile, and valuation for solvency purposes and capital management together with standardized Quantitative Reporting Templates (QRTs).

Capital Requirements

A solvency capital requirement (SCR) is the total amount of funds that insurers in the European Union (EU) are required to hold. SCR is a formula-based figure and is used to ensure that all quantifiable risks are considered. The SCR covers existing business as well as new business expected over the following twelve months. It must be recalculated at least once per year. The SCR is mandated by the EU for all insurers and reinsurers.

There are three pillars for capital requirements. The first is quantitative, the second is qualitative, and the third is a disclosure and transparency requirement.

In addition to the SCR, the insurer must also calculate a minimum capital requirement (MCR) that represents the amount below, which a national regulatory agency would intervene. The MCR is intended to achieve a level of 85% probability of adequacy over one year.

For regulatory purposes, the SCR and MCR figures act as "soft" and "hard" figures, respectively. This means that regulators can intervene as the capital of the insurer falls below the SCR towards the MCR. The SII directive provides regional regulators with several options to address breaches in the MCR, including the complete withdrawal of authorization from selling new policies and forced closure of the company.

Breaking down the SFCR

The report begins with an overview of the insurer’s business and performance in the last calendar year. The company then discloses its governance system including risk management, internal controls, and what is outsourced. The main part of the report, from an analyst’s point of view, comes next. The company enumerates its risk profile according to underwriting, market, credit, liquidity, and operational risks.

The valuation of the company is then disclosed. The assets are evaluated on a very conservative measure excluding any intangibles like goodwill or deferred acquisition costs (DAC) as well as reinsurance recoverables that an insurer may expect to receive under normal circumstances. Reinsurance receivables are also generally excluded unless they are past due.

Similarly, the liabilities are valued on a conservative system. SII requires the technical provisions to be the best estimate of the current liabilities relating to insurance contracts, plus a risk margin. This “best estimate” is calculated as follows:

  • The discounted best estimate of all future cash flows relating to claim events prior to the valuation date (also known as claims provisions)
  • The discounted best estimate of all future cash flows relating to future exposure arising from policies that the insurer is obligated to at the valuation date (also known as premium provisions). The best estimate contains no margins for prudence or optimism and is intended to represent the mean of the aggregate distribution of claims reserves.

The most interesting part of the SFCR for insurance analysts is the calculation of the solvency capital requirement (SCR) and the minimum capital requirement (MCR).

The insurer must disclose their SCR and show how much cushion there is above the MCR while also showing the component pieces of the SCR including the contributions from:

  • Underwriting risk (risks coming from the business of selling non-life or life insurance)
  • Counterparty credit risk (the risk if one of their counterparties they have lent money to defaults)
  • Market risk (the risk that the value of an asset declines because of volatility in the actual security or the overall market)
  • Business operational risk

These risks are generally offset by a benefit derived from diversifying risks.

The insurer must also divulge the factors it uses for each line of business and if it uses any material adjustments.

Quantitative Reporting Templates (QRTs)

QRTs include the detailed balance sheet, as well as premiums, claims, and expenses by both line of business and country.

For non-life insurers, technical provisions (a.k.a. reserves) as well as claims are revealed, allowing analysts to project out the insurer’s liabilities and determine reserve adequacy or deficiency.

Finally, the detailed calculation of the SCR using the standard formula and the minimum capital requirement for life insurance only or non-life only or for just reinsurance is disclosed. Usually, the non-life insurer determines the MCR in accordance with the EIOPA (European Insurance and Occupational Pensions Authority) standard formula for calculation of the MCR.

Access to QRTs can help you answer the following questions:

  • What is your favorite European insurer’s SCR and MCR?
  • How close are they to needing more capital?
  • Are their reserves adequate or deficient?

QRTs are now available in the FactSet workstation.

Solvency II Reporting Detail

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Joel Salomon, FSA

VP Principal Content Manager, Fundamentals Policy & Integration

Mr. Joel Salomon is the Principal Content Manager for Insurance at FactSet. In this role, he is responsible for integrating U.S. statutory and international regulatory data into the system. He joined FactSet in 2019 and prior to that, he worked as an actuary at New York Life Insurance Company, a credit analyst at Moody’s Investors Service, a credit risk manager at Swiss Re, managed a long/short equity and credit portfolio for Citi, and was a prosperity coach. In 2012, Mr. Salomon launched his hedge fund, SaLaurMor, and in 2019, published The 9 Money Rules Millionaires Use: Only The Unconventional Ones, which was a bestseller in both self-help and personal finance. Mr. Salomon is a CFA charterholder since 1995, a Fellow of the Society of Actuaries, and earned a Bachelor of Arts in Mathematics and Statistics, graduating Magna Cum Laude from the University of Rochester.