What’s in Your Insurer’s Solvency and Financial Condition Reports (SFCRs) – And Why Insurance Buyers Should Read Them
Under Solvency II, insurers must publish their Solvency & Financial Condition Reports. But do you know why this is important for you, as an Insurance Buyer?
As it turns out, there’s a veritable treasure trove of information for Insurance Buyers in that document, you just need to know how to use it.
What Is a Solvency and Financial Condition Report?
SFCRs are documents that make information about an insurance company available to its’ stakeholders, including You, as Insurance Buyers.
The SFCR’s goal is to make information accessible and understandable for the average policyholder without a background in financial analysis. To that end, SFCRs often include flow charts and other tools that help you grasp key points easily. While the information that must appear in an SFCR is pursuant to regulatory guidelines, there’s no established wording in which it must be presented. However, there are general directions that it be “understandable to policyholders and beneficiaries”.
Most insurers use a standard format that makes it easy to compare these documents, shown in the Appendix.
Key Advantages of the SFCR for Insurance Buyers
The primary benefit of the SFCR for Insurance Buyers is the simple fact that it’s a document plainly exposing how an insurer runs its business.
Without it, it would be much more difficult to accurately assess whether you should work with an insurer or not. Remember that insurance isn’t a risk-free form of risk transfer. Insurers can and do fail, so it makes little sense to insure with a company less stable than your own organisation, unless you are 100% protected by the FSCS (all public bodies, such as local authorities, are exempt from such protection).
The key takeaway from the SFCR is the Capital Coverage Ratio (CCR) of a company, more formally called the SCR (Solvency Coverage Ratio).
There are several types of coverage ratios. But, the SCR measures how well a company can meet its financial obligations, in its bespoke situation. It takes into account the company’s entire balance sheet so it’s an excellent heuristic for judging an insurer’s stability.
At a minimum, an insurer should have a SCR of 100%, with most aiming for 150% or more. However, if an SCR is too high, this can lead to increased premiums for reasons outside the scope of this article.
SFCRs are published within four months of an insurer’s year-end. Published accounts, while quite detailed, are required within nine months of year-end in the UK. That makes SFCRs much more relevant as a tool that’s readily available.
Besides providing current information about an insurer’s financial strength, SFCRs also provide:
• Information about strategic moves the company is making. Information about decisions made at the operative levels is often present in the SFCR, as well as the justification for those decisions. Special considerations will also be addressed if they have a material impact on the strategy.
• An insurer’s business performance will be in the SFCR as well, with underwriting results often separated into relevant categories. Net earned premiums and investment returns are also part of this section.
• Perhaps most importantly, the company’s risk profile will be laid out in simple-to-understand terms. Market, credit, underwriting, expense, etc. risks are explained in the context of the insurer’s risk management system.
• While companies are required to disclose information about their governance, there’s often little actionable information to be found in the Governance section. It’s usually presented on a matter-of-fact basis without much insight discussed. Canny buyers, however, will note some important points such as the location of outsourced providers that must be disclosed.
A Powerful Document
Even a cursory examination of an insurer’s SFCR can give you a lot of valuable information if you know what to look for.
If you only have time to look at one point of data, make that the Solvency Coverage Ratio (SCR). It’s the single most important metric that will help you judge an insurer’s financial strength and stability.
Of course, there’s a lot of context around it that must be taken into account but it’s an excellent starting point. If you’re trying to purchase insurance from a reliable insurer, let us help.
InsuranceInspect Services can provide all the published Solvency II information for the insurer and help you understand what it means in the context of your organisation.
Appendix: Typical SFCR Contents List
● Executive Summary
● Company Overview
● Summary of material changes during the reporting period
● A. Business and performance
○ Nature of The Business / Underwriting performance / Investment performance
○ Performance of other activities / Any Other information
● B. System of Governance
○ Fit and proper requirements / Risk management including Own Risk & Solvency Assessment (ORSA)
○ Internal Control System / Internal audit function / Actuarial function / Outsourcing
○ Adequacy of the governance structure / Any other information
● C. Risk Profile
○ Underwriting risk / Market risk / Credit risk / Liquidity risk / Operational risk
○ Other material risks / Any other information
● D. Valuation (of Assets and Liabilities) for solvency purposes
○ Balance sheet / Assets / Technical provisions / Other liabilities
○ Any alternative methods used for valuation / Any other information
● E. Capital management
○ Own funds
○ Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR)
○ Differences between the Standard Formula and any Internal Model used
○ Any Non-compliance with the MCR and SCR / Any other information
● Independent auditors’ opinion
● Post balance sheet events
● Quantitative Reporting Templates (QRTs)
The key Solvency Coverage Ratio (SCR) can be found in Section E: Capital Management
Full SFCRs are available to our clients, free of charge.
The InsuranceInspect Services approach to Insurance Buying
What can you learn from your past? How much profit have insurers made from you?
II. Your Future
What can happen in your future? How likely are large claims really? What’s the best way to pay for them?
III. Your CustomMade Product
Is an off-the-shelf policy right for you? What are the alternatives? Why insure in the first place?
IV. Your Best Providers
Is the brokers’ panel comprehensive enough? How much are they being paid? What if you need a bespoke solution?
V. Your Money
Where does your money go? Offshore? Tax Haven? Who is your actual insurer? What about your claimants?
VI: Your Review Process
How do you know that you made the right decision at the last renewal? What information do you need?