Insurance DataLab’s exclusive analysis of insurer Solvency and Financial Condition Reports (SFCRs) for Insurance Times has found that UK-regulated companies reported an average solvency coverage ratio (SCR) of 177.8% for 2022/23.

This was some 39.4 percentage points higher than the positions for Gibraltarian insurers, which reported an average SCR of 138.4%.

SCR ratio is a financial measurement that assesses the extent to which an insurer’s available capital exceeds its liabilities and required reserves. A ratio over 100% indicates that an insurer has more capital than it needs to cover its liabilities and reserves, with regulators using this measure to ensure firms can absorb unexpected losses and, crucially, meet obligations to policy holders.

While the average in both the UK and Gibraltar was still above the 100% limit prescribed by the European-wide Solvency II regulations, it represented a deterioration on previous years. Indeed, this year’s SCR for Gibraltarian insurers is the lowest across all five years of this analysis.

The average SCR for Gibraltarian insurers reached its highest point in 2020/21 when it stood at 172.7%, just 6.4 percentage points behind the average position for the UK at 179.1%.

Since then, the Gibraltarian average SCR has fallen by more than 40 percentage points.

Overall deterioration

But one Gibraltarian insurer – Antares-owned West Bay, which was formerly known as Zenith Insurance – did fall below the 100% SCR limit prescribed under the Solvency II regulations last year with an SCR of 85.9% as of 31 December 2022, down from 182.5% the previous year.

According to West Bay’s SFCR, this drop in the SCR was due to a “significant drop in eligible capital over the year driven by reserve strengthening and overall loss ratio deterioration”.

Additional analysis by Insurance DataLab found that West Bay’s loss ratio rose by some 134.5 percentage points over the course of 2022 – climbing to 210.3% from 75.8%.

The specialist motor insurer, which also underwrites pet, household and gadget insurance, was acquired from the Markerstudy Group in 2018. It provides motor capacity for the group’s UK-based managing general agent (MGA) Markerstudy Insurance Services, which was part of the same acquisition.

Motor insurance accounts form more than 90% of the insurer’s overall gross written premium (GWP), making it the main driver of West Bay’s overall performance.

Indeed, the insurer’s motor book reported a 240.9% loss ratio, according to its latest SFCR, up from 80.1% the previous year. This contributed to a motor combined operating ratio (COR) of 310.7% for 2022 – up from 130.7% the previous year.

Across all lines of business, the insurer reported a loss ratio of 210.3% for 2022 (2021: 75.8%), contributing to a COR of 265.8% (2021: 119.3%).

In addition to the aforementioned reserve strengthening, this drop in underwriting performance was driven by rising claims and a drop in net earned premiums.

The insurer’s net claims incurred across all lines of business more than doubled over the course of 2022 to £175.3m, up from £76.0m the previous year, as the insurer struggled with claims inflation.

West Bay’s performance was also the result of a rebound in claims following the end of the Covid-19 pandemic, during which time motor claims fell significantly as a result of the reduced driving miles on the UK’s roads.

Net earned premiums, meanwhile, fell 16.9% to £83.3m for 2022, down from £100.2m for the previous 12 months. This was largely as a result of changing reinsurance agreements, with total GWP up 33% over that same period.

Since the end of the insurer’s financial year, however, West Bay has taken remedial action on its solvency position by injecting an additional £69.1m of tier 1 capital into the business.

This means that West Bay once again has an SCR above 100%.

It is also worth noting that the insurer always remained compliant with its minimum capital requirements under Solvency II, reporting a minimum coverage ratio (MCR) of 157.4% as of December 2022, compared to 362.5% a year earlier.

UK performance

While Gibraltarian insurers have experienced a deterioration of their solvency positions in recent years, the same cannot be said of their UK counterparts.

Over the last five years, there have been no UK insurers that have dropped below the 100% SCR required under Solvency II, whereas five Gibraltarian insurers have fallen below 100% with their SCR during that same period.

In that time only 2018/19 and 2020/21 had no Gibraltarian insurers report an SCR below 100%, although it is worth noting that all five of these insurers have since improved their SCRs to sit above that 100% level once again.

UK-regulated insurers, meanwhile, reported their second highest average SCR of the last five years for 2022/23, reaching a figure of 177.8%. This represents a one percentage point improvement on the previous year and was only 1.3 percentage points lower than the highest SCR – the 179.1% reported for 2020/21.

But with this analysis coinciding with the launch of the 2023 Insurance Times Top 50 Insurers report this month, it would be pertinent to look at what role an insurer’s premium base plays on solvency.

Does size matter?

So how does an insurer’s size impact solvency positions?

Unsurprisingly, perhaps, it is the larger insurers that are reporting the lowest SCRs, mainly because their large books of business lead to them having larger capital requirements.

This means that a 50% margin on, say, a £205.7m solvency capital requirement – the average for insurers in the fourth quartile by GWP – equates to an additional £102.8m of own funds being held.

This compares to an additional own funds requirement of £16.5m for a 50% margin on the average capital requirement for insurers in the first quartile of GWP, which stood at £32.9m for 2022/23.

Larger insurers are also more likely to have a well-established and diverse underwriting base from which they operate, helping to reduce the overall risk they are facing.

Whatever the reason, those insurers in the first quartile by GWP reported the highest SCR at 233.8% for 2022/23.

This compares to an SCR of 204.3% for those in the second quartile, 198.3% for those in the third quartile and 174.8% for fourth quartile insurers.

Interestingly, each of the four quartiles of insurers by GWP have increased their average SCR over the course of the last five years, with the third quartile increasing its SCR by the most as it rose by 17.8 percentage points from 180.4% in 2018/19.

This third quartile is also the only quartile to report an improved SCR in each year of this analysis, improving its solvency position in each of the last four years.

The largest insurers – those in the fourth quartile – meanwhile, were the only band to report a weaker aggregate solvency position in 2022/23 compared to the previous year, after their SCR fell 1.2 percentage points from 175.9% in 2021/22.

This strengthening of solvency positions should not come as too much of a surprise, however, particularly given the increasingly volatile world we live in.

The Covid-19 pandemic will have reminded insurers of the lurking threat from these so-called Black Swan risks – those unpredictable events that are beyond what we would normally expect that could have severe consequences.

The pandemic was, of course, not really a Black Swan event at all. Pandemics have been part of human history since its beginning, although the interconnected nature of our lives today did make the impact greater, or at least more apparent.

But the Covid-19 pandemic was certainly a wake up call for insurers as to the risks they face – just ask anyone who underwrote a business interruption policy – and with climate change and the systemic nature of cyber risks also on the horizon, it is arguable that insurers have never faced a greater risk landscape.

Insurers have therefore, at an aggregate level at least, responded by increasing their protection against these large risks by increasing their SCRs and strengthening their solvency positions.

But it will be interesting to see how long this persists amidst growing loss ratios and increasing pressure on insurers’ underwriting profitability.