5th annual Solvency II survey exposes gaps in SFCR stress and sensitivity testing

5th annual Solvency II survey exposes gaps in SFCR stress and sensitivity testing

The fifth annual survey of Solvency II implementation across the UK and Ireland published by consultancy Lane Clark & Peacock (LCP) exposes the wide discrepancies in both the type and quality of stress and sensitivity testing published in the SFCR by European insurers.

All 100 insurers analysed in the sample reported some information about stress testing and analysis. However, the report finds an ongoing lack of consistency in the level of detail provided by insurers.

The report states: “Only 63% of firms provided detailed results on the sensitivity testing that they have performed. Of these firms, 65% showed the impact of their sensitivity testing on their eligible own funds ratio, which is the metric that EIOPA recommend insurers disclose.”

The stress and sensitivity data for the survey was provided by Solvency II Wire Data, which now provides quantitative data extracted from the narrative SFCR reports in addition to all available QRT figures.

Catherine Drummond, Partner at LCP and co-author of the report, notes that gaps and inconsistencies are more notable in areas such as underwriting, credit and operational risk. Whereas there is greater consistency in reporting market sensitivities. The latter is most likely given the relative similarities in investment holdings across insurers, compared to other risk areas.

“Some firms have tested areas that are specific to their exposures, and some also performed scenario testing [i.e. combining different individual tests]. Others have also tested the impact of emerging risks on their business, however the number of tests here are small and the type of test tend to differ between firms,” Ms Drummond said.

A number of areas were singled out by Ms Drummond as having specific issues: “There is generally little consistency in underwriting risk sensitivities, though firms tend to focus on stressing ultimate loss ratios.

Credit risk sensitivities tend to focus on downgrading the credit rating of counterparties,” but she adds, “firms differ in the number of counterparties considered, and the number of credit steps the ratings are downgraded by.”

Text analysis conducted by Solvency II Wire Data on the SFCRs of +2,500 insurers published in 2020 shows that +1,900 published sensitivity analysis information. Figures for additional information on the SCR Components of standard formula firms, were significantly lower.

As noted above about two thirds of insurers provided figures relating to stress and sensitivity testing. In total 528 sensitivity tests were carried out by these firms.

As expected the largest number of tests were on market and underwriting risk (see chart below).

Number of tests by key risk area

This chart shows the number of tests carried out across the market by key risk area.
SOURCE: LCP, Solvency II Wire Data, Company disclosures

In June EIOPA published a list or 13 recommended stress tests to be included in the SFCR. The sample surveyed showed a range of tests on emerging risks were conducted by some companies (see chart). These include stress testing the impact of COVID-19 and climate change.

Number of tests on emerging risks

This chart shows the number of tests carried out across the market relating to these risks.
SOURCE: LCP, Solvency II Wire Data, Company disclosures

While welcoming an increase in the number of tests Ms Drummond cautioned that quality and consistency were crucial to being able to make use of the information.

“It’s important to strike a balance between consistency across firms, so we can compare them, and also highlighting those exposures that are specific to individual business.”

In addition, Ms Drummond notes, “It would be useful if these tests all show the impact on the firm’s eligible own funds, so there is consistency on how the impact is being measured. Not all firms are reporting on eligible own funds ratios at the moment, though the majority are.”

Covid-19

This year was the first in which insurers began to publish information about the economic impact of COVID-19 on their business.

The survey found that in addition to information on the capital requirements, a number of firms reported information on risk mitigation and policy holder support and social responsibility.

Last year insurers were required to provide an additional COVID-19 Note to the SFCR. Notes extracted by Solvency II Wire Data were used to inform LCP’s analysis on the 2019 SFCRs.

The full report can be accessed on the LCP website Solvency II: Change on the horizon.


Solvency II Wire Data collects all available public QRT templates for group and solo.

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