Detailed analysis of solvency and financial strength

FINANCIAL STRENGTH BY INSURER TYPE

The average eligible own funds ratio across our sample at the 2020 year end was 208%.

We have considered how eligible own funds ratios vary between different insurer types.

We have classified our sample of insurers by insurer type according to gross written premiums. Insurers are allocated to a Solvency II line of business if more than 50% of their 2020 gross written premium was in that line of business, otherwise they are classified as “multi-line”.

For the following graph, we have excluded insurer types with only a small number of firms in the group as these results can be heavily skewed by individual insurers.

Range of eligible own funds ratios by insurer type

Motor (liability and other) insurers typically have the lowest eligible own funds ratios. They also have a small range of eligible own funds ratios between firms relative to most other insurer types.

Miscellaneous financial loss insurers have the smallest range of eligible own funds ratios, ranging from 150% (London GI) to 246% (First Title). Medical expense, property and general liability insurers have the largest range of eligible own funds ratios between firms. Since the 2019 year end, property insurers and general liability insurers have on average seen a reduction in eligible own funds ratios. Eligible own funds ratios for all other insurer types increased over 2020, with miscellaneous financial loss and medical expense insurers seeing the largest average increase.

This improvement was seen fairly consistently across medical expense insurers, with only one medical expense insurer, WPA, out of a total of 9, disclosing a reduction in its eligible own funds ratio from 2019 to 2020. Even WPA, who saw a reduction, still has a very strong eligible own funds ratio of 447% at 2020 year end.

TOP TWENTY INSURERS BY ELIGIBLE OWN FUNDS RATIO

The following chart shows the top twenty firms by eligible own funds ratio as at their 2020 year ends.

14 of these firms were also in the top twenty as at 2019 year end.

The average eligible own funds ratio for the top twenty firms is 386%, materially higher than the average of 208% across the whole sample, but lower than the average for the top twenty last year end of 403%. This reduction from last year is largely driven by some small firms with particularly high ratios at 2019 year end:

Gresham’s eligible own funds ratio has reduced from 610% at 2019 year end to 397% at 2020 year end. This decrease was driven by an interim dividend distribution of £14m paid during the year, which reduced Gresham’s eligible own funds over the period.
Stonebridge’s eligible own funds ratio has reduced from 708% at 2019 year end to 405% at 2020 year end. This was largely driven by a dividend of £35m paid to its parent company in July 2020. A further £19m has subsequently been paid in February 2021 and will have reduced the ratio further, all else being equal.
Marine (a subsidiary of RSA Insurance Group) has the highest eligible own funds ratio of all insurers in our sample at 1581%, almost 3 times larger than the second highest firm Avon. It also had the highest eligible own funds ratio at 2019 year end of 1419%.

Firms no longer in the top twenty

Endurance Worldwide was also previously in the top 20 firms. Its eligible own funds ratio reduced from 266% at 2019 year end to 182% at 2020 year end. The decision was taken to consolidate underwriting under one platform and it announced the ‘Endurance at Lloyd’s’ Syndicate closure with effect from 1 January 2021. This resulted in business volumes increasing significantly during the year as renewals and new business were more focussed to the Company, and which increased the SCR. In addition, Endurance Worldwide notes that COVID-19 generated an additional $4.4m of net incurred claims, which will have also reduced eligible own funds over the period.

Wren was previously in the top 20 firms by eligible own funds ratio as at 2019 year end, with a ratio of 283%. Its eligible own funds ratio has now fallen to 153% at 2020 year end due to the COVID-19 pandemic and increased exposure to cladding-related claims. Wren notes that its Board recommended a general rate increase of 70% was applied to the 2020 renewal at 1 July 2020, and notes that all bar two of its Members renewed their cover.

BOTTOM TWENTY INSURERS BY ELIGIBLE OWN FUNDS RATIO

The following chart shows the bottom twenty firms by eligible own funds ratio as at their 2020 year ends.

5 of these insurers are new entrants to the bottom twenty firms this year:

AIU’s eligible own funds ratio fell from 144% at 2019 year end to 126% at 2020 year end, despite receiving a capital contribution of €15m from its parent during the year. Its SCR increased by 6.9%, largely driven by an increase in underwriting risk, and its eligible own funds reduced by 6.2%.
Aspen’s eligible own funds ratio reduced from 146% to 126% over 2020, despite receiving a capital contribution of $85m from its parent on 22 December 2020. It made a net underwriting loss before investment income of $44.7m, which includes $111.9m net losses for COVID-19.
Hiscox’s eligible own funds ratio fell from 155% to 131% over the year. It made an underwriting loss of £22.5m, largely driven by COVID-19. Hiscox took a number of capital management actions during the year including receiving £25m in respect of shares issued and purchasing an equity option from its parent enabling it to return its eligible own funds ratio to 105% following losses arising from COVID-19.
Soteria’s eligible own funds ratio reduced from 142% at 2019 year end to 125% at 2020 year end. On 11 February 2021, its Board made the decision to place the Company into run-off, and its last new insurance policy was entered into with effect from 24 February 2021. This increased the amount of future expenses included within the TPs and reduced own funds.
UIA’s eligible own funds ratio reduced from 194% to 139% over the year. Its eligible own funds reduced by £9m, largely due to underwriting losses (primarily driven by a high expense base and slightly higher than expected claims experience) and an increase in its defined benefit pension deficit.

Firms that were previously in the bottom 20 at 2019 year end but have since improved

5 firms have exited the bottom twenty insurers by eligible own funds ratio over the last year. CACI Non-Life, QBE UK and Tokio Marine Kiln all received capital support throughout the year, which boosted their eligible own funds ratios (see here).

In addition:

Fairmead’s (formerly Legal & General Insurance Ltd) eligible own funds ratio increased from 128% to 179% over the year. Its SCR reduced from £129m to £79m, largely due to the impact of its 100% quota share for specified MGA business reducing premium risk capital and the purchase of a new catastrophe treaty with increased coverage reducing catastrophe risk capital.
Vitality Health’s eligible own funds ratio increased from 139% at 2019 year end to 167% at 2020 year end, driven by an increase in eligible own funds. It notes that this increase is expected to be temporary and is as a result of technical aspects of the Solvency II regulations. In particular, the COVID-19 pandemic resulted in delays to many of the elective treatments which typically make up around half of the claims cost. This resulted in favourable claims experience over the year, when premiums continued to be received, while claims were significantly slowed. This experience is expected to unwind when claims are expected to catch up over the longer term, but the Solvency II contract boundary rules mean that the expected claims catch up is not allowed for in advance within the Technical Provisions.