N° 41 : Analysis of the 2014 Solvency II preparatory exercise

Many insights have been gleaned from the data provided. However, there are a number of particularly salient facts.

Items in the prudential balance sheet, measured according to SII valuation principles, differ to varying degrees from the corresponding items in accounting balance sheets, depending on the undertaking and sector. Investments, for example, are valued on a marked consistent basis. However, the resulting increase in balance sheet size is not matched by an identical increase in own funds, notably because in the life sector, a portion of the unrealised capital gains is integrated in the valuation of liabilities through the profit-sharing mechanism. Technical provisions assessed under SII and defined as the sum of the best estimate and risk margin are thus 19.5% lower on average than book value in the non-life sector but 3.8% higher in the life sector. Average values aside, situations varied – sometimes considerably – from one undertaking to another. Risk margin accounted for 3.9% of SII technical provisions on average but the proportion was very different among life undertakings (1.3%) and non-life undertakings (7.1%). A full 97% of own funds were classified Tier 1, which corresponds to the highest loss-absorbing capacity.

The structure of the solvency capital requirement (SCR) also varied depending on activity. The market risk module accounted for 86% of the SCR of life undertakings and for 80% of the SCR of composite undertakings. Underwriting risk was the largest component of the SCR among non-life undertakings, at 61%. The impact on the SCR from the loss-absorbing capacity of technical provisions (44.3%) and deferred taxes (13.5%) is remarkable, highlighting the need for undertakings to justify the valuation methods that they use.

Subject to the caveat that they were assessed using non-definitive technical specifications as part of a preparatory exercise, SCR coverage ratios had a median value of 256% at end-2013. There were pronounced valuation differences between capital requirement coverage items under Solvency I and II for life undertakings (-42%), composite undertakings (-54%) and non-life undertakings (9%).

Besides Pillar I and Pillar III items, the exercise also provided an opportunity to gather preparatory Own Risk and Solvency Assessment (ORSA) reports from 404 undertakings. For the most part, these reports dealt with the three assessments required under the directive. The main areas for progress include better integration of ORSAs within decision-making processes and better appropriation by governing bodies of ORSAs prepared by outside service providers.

A total of 460 undertakings completed the preparedness questionnaire, with 89% of respondents (21% more than in 2013) saying they had made good progress on their preparations for compliance with Pillar I of the directive. The areas that saw the least progress were the establishment of written policies (27% of undertakings said they were well advanced in 2014, compared with 15% in 2013), oversight of outsourced activities (22% of undertakings were well advanced in 2014, compared with 16% in 2013) and preparation of narrative reports (8% of undertakings were well advanced in 2014, compared with 7% in 2013).