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Solvency II reporting scares investors from insurance sector

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By Favour Nnabugwu

THE complexity of Solvency II reporting will scare investors from the insurance sector in European Union, according to a joint report from Autonomous Research and Willis Towers Watson.

Solvency II is an EU legislative programme expected to be implemented in all 28 Member States, including the UK, from January, 01 2016. It introduces a new, harmonised EU-wide insurance regulatory regime. The legislation replaces 14 EU insurance directives.

Autonomous Research and Willis Towers Watson said Solvency II has made it harder for investors to have a clear picture of how individual insurers are performing because it has forced apart the sector’s accounting and solvency reporting, says the report.

The report finds that “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.”

Managing partner at Autonomous Research, Mr Andrew Crean, said: “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 states: “A clear explanation of the ‘investor story’ in cash terms with a more coherent link between IFRS, EV and Solvency II is essential to sustaining the sector rating.”

It concludes that the insurance industry needs to aid investors by disclosing Solvency II free surplus and sensitivities in order to address the current lack of transparency.

Amplifying the position of Crean, a director at Willis Towers, Mr Watson Kamran Foroughi, said: “Solvency II is obscuring the transition from IFRS earnings to cash and on to dividends. 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%.”

He added: “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. In response, we have developed standardised templates for the insurance industry which should help address this gap.”

Willis Towers Watson said that neither the upcoming Solvency II prescribed ‘SFCR’ disclosures to be published in May/June, nor the long-term reformation of IFRS, will meet investor needs.


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