At this time of year, an important source of information on European and UK insurance companies becomes publicly available, providing advisers and their clients with easy access to in-depth information on each company they deal with, says Bryan Low, managing partner, Acuity Consultants.

The publication of these annual Solvency and Financial Condition Reports (SFCRs) represents perhaps the most consistent way of comparing the attributes of different companies. 

These SFCRs contain a wealth of information that can support advisers' ongoing due diligence processes by providing clues as to the relative performance of individual providers on an objective basis. 

Offshore Benefits

The SFCR provides an easily accessible starting point for due diligence on any life company, but it can be viewed as particularly relevant to cross-border life companies given a historical lack of transparency in the offshore world. SFCRs are now available for any cross-border life company based in EU/EEA jurisdictions, such as Ireland and Luxembourg. 

However, offshore life companies based in jurisdictions outside the EU/EEA, such as the Isle of Man, generally don't produce and publish an SFCR as there is no regulatory requirement for them to do so. To overcome this lack of transparency, as an alternative UK-based advisers will often use AKG reports and company financial ratings, where available.

Each company's SFCR has a consistent standardised format, so it's easy for advisers and clients to make like-for-like comparisons. 

Starting Point

So, when looking at an SFCR, what are the key topics and numbers for advisers and clients to focus on? How can you look behind the numbers to help form opinions on a company's suitability and appropriateness, and prompt further questions to the life company if necessary?

The first task is to find the company's SFCR on their website. A link to each year's SFCR can generally be found somewhere in the ‘About us' or ‘Financial Reports' section.

Having located and downloaded the SFCR, how do you find your way around the report?

Consistent Report Structure

All SFCRs are required to have a standard structure and therefore it's easy to navigate around each company's report and make comparisons between companies.

Each SFCR starts with a Summary that covers some of the key points we're about to look at, but in short form rather than in detail. There are then five sections in each report covering:
A.    Business and Performance
B.    System of Governance
C.    Risk Profile
D.    Valuation for Solvency Purposes
E.    Capital Management

Each SFCR then finishes with a detailed Appendix containing a Balance Sheet and other financial metrics.

Looking behind the numbers

An SFCR contains a wealth of information and all sections can be viewed as important. However, if a busy adviser or client was only to check, say, four things, what should they be?

Let's take a look at the SFCR ‘Top Four':

1.    Business Performance
The performance of the business in the previous calendar year is found in section A. 

Here you can find a commentary and data on the company's Gross Written Premiums and Total Assets - is the company's premium income and Assets under Administration growing, stalled or in decline? 

This section also sets out the company's IFRS (International Financial Reporting Standards) Profit/Loss and details the products and markets from which it was generated. 

This section also records any significant events that impacted on the company's performance in the previous year, such as entering or withdrawing from markets, launching new products, and mergers and acquisitions undertaken. 

2.    Corporate Structure
The company's corporate ownership structure is set out in section A, with details of its owner and its subsidiaries.

The financial arrangements involved in the corporate structure can be found in sections D and E. Here you can find information on the corporate financing structure and where any debt is held (at operating company level or holding company level) and any reinsurance arrangements. If there is a private equity aspect to the ownership structure you may wish to check whether the parent group holds regulatory capital rather than bank debt.

3.    Solvency Capital Requirement 
Insurance companies must hold a solvency margin or buffer consisting of their own funds to cover the risk of their assets not being sufficient to cover their liabilities. The main capital requirement is the SCR (Solvency Capital Requirement). 

When companies report solvency, this is often done as a percentage, the SCR Ratio, reflecting the company's own funds divided by its SCR. 

The company's SCR and SCR Ratio can both be found in section E of its SFCR. The lowest acceptable SCR Ratio is 100% and this should enable an insurer to withstand the stress of a 1 in 200-year event. 

Offshore life companies generally have SCR Ratios substantially above 100%, with the main UK offshore providers having strong ratios within a range of 130% to 190% all significantly above their respective minimum capital requirements. 

4.    Own Funds to Cover SCR
The first part of Section E of a SFCR also details the composition and quality of the company's ‘Own Funds' used to calculate its SCR Ratio. 

As a concept Own Funds is basically the excess of Assets over Liabilities and can be a combination of on balance sheet amounts and ancillary own funds (such as letters of credit and guarantees) which require supervisory approval.

The Eligible Own Funds a company uses to meet the SCR are divided into Tier 1 capital, Tier 2 capital and Tier 3 capital, with Tier 1 being the highest quality and readily liquid. The split between the three tiers is set out in the SFCR.

Key Adviser/Client Take-away

As we've seen, SFCRs contain a wealth of information that can support advisers' due diligence processes. They can also provide the basis for questions and a conversation between advisers and providers that goes beyond an assessment of the financial strength and governance of a cross-border life company and onto how the company is managed and how it treats its existing and new policyholders.

Of course, other information sources are available to help advisers and clients carry out due diligence on current and potential product providers. Increasingly both are looking for a financial rating from a main ratings agency. 

Whilst assessing a life company is not a simple task, the importance of getting this right has never been greater, particularly in a market going through a period of rationalisation. Fortunately, advisers and clients have never had so much information at their fingertips to allow them to make a properly informed decision.  

By Bryan Low, managing partner, Acuity Consultants