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

Based on analysis of the reporting statements of 31 European insurers, the report finds Solvency II has forced apart the sector’s accounting and solvency reporting, making it harder for investors to have a clear picture of the performance of individual insurers. The report is titled “Solvency II, One Year On.”

The report finds that Solvency II falls significantly short as a metric for profit performance and cash generation – to replace embedded value (EV).

The urgency of this issue is underlined by the rapidly shrinking publication of useful EV data in Europe and the fact that the reformation of International Financial Reporting Standards (IFRS) is unlikely to help for many years. (New IFRS proposals are expected to be published in May).

“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,” said Andrew Crean, managing partner at Autonomous Research.

“However, Solvency II disclosures have not always considered the investor perspective, creating issues for external users in understanding performance and the dividend paying capacity,” added Crean.

“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,” according to the report.

“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,” said Kamran Foroughi, director at Willis Towers Watson. “In 2008/09, lack of transparency on cash and capital contributed to the sector’s implied cost of equity hitting 20 percent.”

In order to address the current lack of transparency, the report stresses the need for the insurance industry 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.

Foroughi commented: “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 order to aid the investor community, Willis Towers Watson proposes the development of standardized templates for the insurance industry to disclose such details as movement in Solvency II free surplus, Solvency II sensitivities, and an explanation of whether Solvency II or IFRS or something else is “biting constraint when it comes to cash remittances and dividend paying capacity.”


The report is available from Willis Towers Watson’s website.

Source: Willis Towers Watson/Autonomous Research