ANALYSIS OF FIRMS BY THEIR APPROACH TO CALCULATING SOLVENCY II CAPITAL
Under Solvency II, firms calculate their SCRs using either the standard formula or, subject to regulatory approval, a partial or full internal model to better reflect their risk profile.
Eligible own funds ratio by approach
The following chart shows the range of eligible own funds ratios for firms split by each approach to calculating capital.
2019
Average eligible own funds ratios
Standard formula firms
Partial internal model firms
Full internal model firms
2020
Average eligible own funds ratios
Standard formula firms
Partial internal model firms
Full internal model firms
The average eligible own funds ratio for standard formula and partial internal model firms for the 2020 year end is broadly similar to the previous year, at 199% and 174% respectively. The average eligible own funds ratio for full internal model firms has increased slightly over the year from 245% to 256%.
Diversification as a proportion of diversified SCR by model type
We also analysed the level of diversification benefit that insurers allow for within their capital calculations. The following chart compares the average diversification benefit as a proportion of diversified SCR separately for firms using the standard formula, partial internal model or full internal model approach to calculate regulatory capital.
Firms using a full or partial internal model typically get the benefit of a greater level of diversification, since the Standard Formula takes a prudent view on dependencies between high-level risks, in particular by assuming that operational risk is 100% correlated with all other risks.
In last year’s report, we highlighted that while the diversification benefit for standard formula and partial internal model firms had remained broadly stable since 2016, the average benefit for full internal model firms had increased year on year, with a more pronounced increase over the year to 2019.
This year, we have seen the average diversification credit for both full and partial internal model firms reduce.
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