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Underwriting Risk – EIOPA Europe-wide Study of Non-life Insurers


On Friday, EIOPA published the results of its Europe-wide study of non-life insurers, focused on differences in risk modelling between firms.

The study considers the “capital intensity” assessed by 75 non-life insurers for underwriting risk – where capital intensity is the amount of capital required as a proportion of an exposure measure, such as premium or reserves.

The output is a fairly long and technical document, with findings that closely reflect recent publications both by other regulators and LCP.

Key findings

Differences between firms

There were notable differences in the capital intensity assessed by firms. This highlights both the differences in approaches that individual firms are taking, and also the heterogeneity within business categories. In our experience, this is typical of benchmarking studies – and highlights the importance of carefully interpreting any benchmarking results, rather than just blindly aiming to “stay in the pack”.

Differences in risk measurement

There were also differences in risk measures. In particular, many of the firms reporting lower capital intensities are achieving this by taking advance credit for uncertain future profits. This was also a key point raised by the PRA’s recent “Dear CRO” letter – and continues to be a key focus area for both the PRA and across Lloyd’s. In our experience, ensuring there is careful rationale and evidence to support future assumptions is key to ensuring that both capital setting and future business planning remains effective. Catherine Drummond's recent post gives more information on the Dear CRO letter (see link below).

Stability over time

Whilst there are differences in the capital intensities between firms, overall these have remained relatively stable over time. Whilst the risk profile may have remained broadly consistent over time in some cases, in our experience, there are often other behavioural biases in place – including anchoring to previous model results, and the typical desire to avoid an involved and potentially expensive major model change (which can be triggered by a material change in capital calculations). This also further highlights the importance of robust independent validation of internal models.

Other findings from EIOPA’s study confirmed that the majority of firms are well prepared for the recent changes to the QRT reporting templates. There were also some comments on inflation – although as the data was collected over a number of years, our expectation is that many firms will now be more advanced in their treatment of inflation than the study suggests.

If you are interested in reading more, I’ve added a link to the full EIOPA report below.

I’ve also added links to a number of other relevant recent LCP resources:

  • Pillar 3 reporting: LCP’s recent report analysing the SFCRs for the top 100 insurers across the UK and Ireland. Now in its seventh year, we have published this annually since the start of Solvency II, and it provides an in-depth comparison across a wide range of metrics.
  • LCP InsurSight: Our award-winning analytics platform LCP InsurSight, being used by insurers to revolutionise how they analyse data and set reserves.
  • LCP’s Behavioural Insights Hub: A wealth of resources on how to identify and manage behavioural basis, such as anchoring, both for insurers and much wider.
  • Cat's recent post on the Dear CRO letter.