FINANCIAL STRENGTH OF THE MARKET AT 31 DECEMBER 2020
Overall, the market has remained financially strong during 2020 despite the material and wide-ranging implications of the COVID-19 pandemic.
The eligible own funds ratio - defined as eligible own funds divided by the Solvency Capital Requirement (SCR) - is an important measure for considering firms’ solvency and financial strength. It represents the number of times an insurer can cover its regulatory capital with the net assets on the Solvency II balance sheet1.
We have considered the eligible own funds ratios for our sample of 100 insurers aggregated as a whole, as well as for each insurer individually.
1Subject to certain restrictions.
In aggregate
Aggregate eligible own funds ratio across the market
The total SCR across our sample has been broadly stable year on year since 2016. However, total eligible own funds have been increasing, with the most material increases over the last two years from £76.7bn as at 2018 year end to £84.9bn as at 2020 year end. Some of this increase has been driven by capital injections from parent companies or shareholders, which we discuss in more detail here.
For each insurer
The average (mean) eligible own funds ratio of our sample of 100 insurers was 208% as at 2020 year end compared to 209% as at the previous year end.
This ratio has been similar for the last four years ranging between 207% and 209%.
51% of insurers saw an increase in their eligible own funds ratio between the 2019 and 2020 year ends, whilst 49% saw a decrease.
The following chart shows the range of eligible own funds ratios for our sample at each year end since 2016.
Range of eligible own funds ratios at each year end
The median eligible own funds ratio, which is less influenced by extreme values than the mean, has increased steadily each year since Solvency II reporting began, from 151% at 2016 year end to 174% at 2020 year end.
The range of eligible own funds ratios between the 10th and 90th percentiles for our sample narrowed over time between 2016 and 2019, but has remained broadly stable between 2019 and 2020.
BREAKDOWN OF GROSS WRITTEN PREMIUM BY SII LINE OF BUSINESS
The following chart shows the breakdown of the total gross written premium (GWP) for our sample of 100 insurers by Solvency II line of business (SII LoB) at each year end since 2016.
Gross written premium (GWP) by SII LoB
Total GWP has increased from £99.5bn to £109.5bn between the 2016 and 2020 year ends. Most of this growth has been driven by the fire and other damage, general liability and non-proportional property lines.
The global COVID-19 pandemic has had different impacts on GWP for different lines of business. Some SII lines of business have seen continued growth over the last year, whilst others, such as motor, have seen material reductions in the total GWP.
Over the last year, total GWP has increased by £1.7bn or 2%. However, this varies significantly between product.
The lines of business that have seen material increases over the last year include:
- Fire and other damage: +£1.8bn (6%)
- General liability: +£1.4bn (8%)
- Marine, aviation and transport: +£0.5bn (7%)
- Medical expense: +£0.5bn (7%)
- Non-proportional casualty: +£0.3bn (14%)
- Non-proportional marine, aviation and transport +£0.2bn (11%)
The total GWP for the following SII lines of business decreased from the 2019 to 2020 year ends:
- Motor vehicle liability: -£1.5bn (10%)
- Other motor: -£0.4bn (7%)
- Credit and suretyship: -£0.5bn (16%)
- Income protection: -£0.2bn (12%)
- Workers’ compensation: -£0.1bn (21%)
The reduction in credit and suretyship gross written premium has mainly been from proportional reinsurance accepted business rather than direct business.
- Aspen’s credit and suretyship GWP reduced by 60% over 2020. In its SFCR, it notes that in October 2019, it ceased writing credit and surety reinsurance and sold its renewal right to that book of business to a third party.
- Partner Reinsurance’s credit and suretyship GWP reduced by 24% over 2020. It notes that it has actively managed and reduced its exposure to trade credit during the COVID-19 pandemic.
NET CLAIMS INCURRED BY SII LINE OF BUSINESS
Whilst GWP increased by 2% from 2019 to 2020, gross best estimate technical provisions (TPs) increased by 10% over the same period and net claims incurred increased by 5%.
The following chart shows the breakdown of the total net claims incurred for our sample of insurers by Solvency II line of business for 2019 and 2020.
Net claims incurred by SII LoB
Net claims incurred has increased materially over the year for fire and other damage, general liability, miscellaneous financial loss and non-proportional property. Miscellaneous financial loss net claims incurred increased by 107% over the year from £1.3bn to £2.7bn. This is mainly driven by Lloyd’s, whose miscellaneous financial loss net claims incurred increased from £0.3bn to £1.6bn over the year.
Motor vehicle liability, other motor and marine, aviation and transport have all seen material reductions in net claims incurred over the year. It is not surprising that net claims incurred for motor insurance has reduced over the year, with many firms citing reduced claims frequencies as a result of the COVID-19 pandemic as the main cause of this decrease.
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