Big ticket items such as the solvency and financial condition report (SFCR) and the regular supervisory report (RSR) have been left out of scope for the time being – a disappointment to those who feel these reports are failing to deliver insightful information on the business.
We support the proposal to include a reporting template for excess capital generation, which is something WTW called for as long ago as 2017.
Solvency II external reporting focuses on the solvency of the balance sheet at the calculation date; however, additional metrics, including sensitivities and analysing the sources of surpluses or deficits arising in the reporting period, are critical to understanding the business model and risks faced by the firm.
Currently, these are published by firms on a voluntary basis with no prescription or common approach and would benefit from a degree of standardisation.
More generally, it appears that the more ambitious hopes to alleviate the reporting burden will not be fulfilled.
There will be reporting template deletions, consolidations and changes to the thresholds and frequencies of some reporting aspects, but the review has lacked a much-needed analysis of what reporting is 'nice to have' and what is 'must have'.
Risk margin: a done deal?
Reform of the risk margin was supported by the industry and the regulator, with the only real challenge being how it would be done.
Now that the modified cost of capital method has been singled out as the preferred approach and HM Treasury has stated that long-term life insurers will see the risk margin reduce by 65 per cent under recent economic conditions, it looks like the work here is almost finished.
More cautious stakeholders have enquired as to the meaning of “recent economic conditions”. By our calculations, the risk margin for a typical in-payment annuity fell by 53 per cent between December 2020 and December 2022.
Much of this reduction has materialised recently, as interest rates rose substantially in the second half of 2022 and again in recent weeks, leading some to speculate that the wording allows an interpretation that part of the 65 per cent targeted reduction has already been achieved.
Momentum however seems to be clearly behind the interpretation that the reforms alone will deliver a 65 per cent reduction in risk margin. Based upon our own analysis, applying a further 65 per cent reduction to current risk margin levels would lead to around a 85 per cent overall reduction compared to year-end 2020.
The latest draft of the statutory instrument sets out the proposed changes to the risk margin calculation, which will be a modified cost of capital approach.
As these parameters for the risk margin sit in the statutory instrument, any future changes to these parameters will likely involve an onerous process, suggesting that the risk margin approach will remain relatively stable.
