Solvency II puts insurers at risk of being marginalised by investors

The insurance sector is at risk of being further marginalised by investors as performance reporting has become more complicated as a result of Solvency II, according to a joint report by Willis Towers Watson and Autonomous Research.

Based on the analysis of the reporting statements of 31 European insurers, the analysis shows that Solvency II has forced apart the sector’s accounting and solvency reporting, making it harder for investors to have a clear picture of how individual insurers are performing.

"Unfortunately for the insurance industry, the Solvency II and IFRS projects are heading in different directions for the foreseeable future and on their own will not meet investor requirements," said Kamran Foroughi, director at Willis Towers Watson. "In response, we have developed standardised templates for the insurance industry which should help address this gap."

According to the report, Solvency II falls significantly short as a profit performance and cash generation metric that can replace embedded value (EV). The urgency of this issue is further underlined by the rapidly shrinking publication of useful EV data in Europe and the fact that the reformation of IFRS (new proposals expected to be published in May) is unlikely to help for many years.

"Solvency II is obscuring the transition from IFRS earnings, to cash and on to dividends," Foroughi added. "This risks driving up the sector’s cost of equity, particularly if markets dislocate and concerns emerge about the capital security. In 2008/09, lack of transparency on cash and capital contributed to the sector’s implied cost of equity hitting 20 percent."

Andrew Crean, managing partner at Autonomous Research, commented: “Solvency II has helped provide a clearer picture of capital adequacy for European insurers, providing some guidance as to when dividends may be a risk or additional capital may be returned. However, Solvency II disclosures have not always considered the investor perspective, creating issues for external users in understanding performance and the dividend paying capacity."

The report said that in order to address the current lack of transparency, the insurance industry needs to aid investors by disclosing Solvency II free surplus and sensitivities and an explanation of whether Solvency II or IFRS is the biting constraint when it comes to cash remittances and dividend paying capacity.

Today’s top stories

WR Berkley's reinsurance unit posts underwriting loss in Q1

Liberty hires senior exec from XL Catlin for European role

Everest Re Group achieves profitable growth in Q1 2017

Pen Underwriting hires Zurich exec as regional director and head of SME

Former AssuredPartners vice chair becomes president of US broker Acrisure

Reinsurance Association of America appoints senior vice president of federal affairs

Did you enjoy reading this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.