Needless to say, I enjoy reading that German life insurers are punching their weight on the international stage in spite of all the challenges facing them. That is the verdict of none other than Germany’s Federal Financial Supervisory Authority (Bafin). In Bafin’s view, the in-depth analysis of the first annual results shows that: “Insurers meet the Solvency II requirements. ” Our industry is working hard to that end – including on how to communicate the news which, in all honesty, is no easy task. Not least because anyone who questions Solvency II compliance receives media coverage.
There can be no question that digitization, globalisation and regulation, not to mention the low interest rate environment, are challenging insurers. It is thus entirely understandable that not only supervisory authorities but also our customers and investors want to understand the financial conditions and risk landscape of an insurer.
Warnings of misinterpretations
That is why we welcome Solvency II. In addition to a wealth of information on capital adequacy, investment and risk calculation, it requires insurers to disclose their cover ratio, which provides details of the ratio of available equity to the equity level demanded by the supervisory authority. The cover ratio can be used to compare insurers’ stability levels, as one figure among many and an initial point of reference. However, it is a misconception to think a company’s capital strength can be reduced to one key figure. Only differentiated analyses can do that, today and in the future even more so. Bafin also sounds a word of warning about such a misinterpretation. In the press release for its annual conference, the supervisory authority states that ratios are not a reliable means of ranking companies as they only show one part of the overall picture.
That makes it all the more regrettable that these misinterpretations persist. Only this morning, I had another reminder – as I looked at the title page of Germany’s biggest daily newspaper. The fact is that life insurers can meet their liabilities. Anyone who claims otherwise has failed to grasp the (admittedly) complex Solvency II reporting framework, or does not want to understand it. Companies with a cover ratio of 100 percent have sufficient capital to absorb risks that statistically occur no more than every 200 years. It is worth remembering that the average figure for German life insurers stands at around 340 percent.
Three pointers for transparency
Is that all transparent and comparable enough? I would like to answer this question by highlighting three factors:
First: all companies are complying with the reporting requirements. The somewhat opaque nature of the reports stems to a certain extent from the repetitions in response to the static questioning.
Second: using temporary measures or volatility adjustment is not an accounting trick. Temporary measures are an integral component of supervisory law and they are used to varying degrees in all European markets. If companies apply the technical measure for transitional provisions, they must consistently reduce the valuation difference. Bafin monitors this process.
Third: there is a new regulatory requirement on the horizon, which can become as significant for insurance as Solvency II. Following two decades of contested consultations, the International Accounting Standards Board has published the accounting standard IFRS 17. Under the new standard, IFRS insurance contract accounting will be carried out on a globally standardised basis from 2021: this will greatly improve the comparability of financial statements. Although the new standard is only binding on capital-market-oriented companies, it is reasonable to assume that non-listed insurers will follow suit. We go into more detail about the underlying rationale here.
The effort that went into creating the new standard will be worth it, if it enables us once again to show customers and investors that their trust in our industry is well founded.
Jörg von Fürstenwerth