The reviews of the pension funds’ assets and of the balance sheets of insurance companies are conducted pursuant to § 10 of the Transitional and Final provisions of the Law on Recovery and Resolution of Credit Institutions and Investment Firms and in line with the approved methodologies by the FSC and the Steering Committee (SC). The FSC and the European Insurance and Occupational Pensions Authority – EIOPA, participate in the SC as Voting Members and the Ministry of Finance, the Bulgarian National Bank, the European Commission and the European Securities and Markets Authority – ESMA, participate as Observers.
Pension Funds’ Assets Review and Insurance Balance Sheet Review were performed in the period from 15 July 2016 until the end of January 2017.
All FSC decisions regarding the organization, monitoring and control of the review process were adopted in full consensus with the Steering Committee decisions.
BULGARIAN INSURANCE SECTOR REMAINED ABOVE 100% OF THE CAPITAL REQUIREMENTS
The Solvency II framework, in force since 1 January 2016, introduced higher capital requirements for the insurance industry as well as a different framework for reporting and assessment of risks. The full-scope reviewof the balance sheets of the Bulgarian insurers in the very first year of the introduction of the Solvency II regime provides a competitive advantage for the Bulgarian industry. This review enhances the credibility of the industry and allows the companies and the FSC to better focus their efforts in the right areas of weakness.
To ensure consistency of the results across insurance companies, the project manager team made an extensive effort to compare and analyze their portfolios instrument by instrument. Both Solvency II and IFRS are principle-based standards and involve the use of judgement. Complete comparability will never be possible in practice. On the other hand, judgement has to be supported by sufficient evidence and be reasonable given the circumstances at the time the judgement is made. Having this in mind the Steering Committee asked the project management team to make an assessment of the situations where economic reality of similar transactions and events was not understood in a similar way. This consistency assessment will be taken into consideration when the follow-up measures are enforced.
The Insurance Balance Sheet Review shows an aggregated Solvency Capital requirement (SCR) ratio of 154% and an aggregated Minimum Capital requirement (MCR) ratio of 308% for the solo entities before the impact of the consistency procedures. After the consistency checks performed by the project manager, the aggregated Solvency Capital Ratio(SCR) is 157% and the aggregatedMinimum Capital Ratio(MCR) is 313% for solo entities, SCR for Non- Life being 147% and MCR 333% while for Life sector SCR was 235% and MCR was 238%, groups/sub groups SCR standing at 107% and MCR 187%, all above the prudential requirements.
For a number of 13undertakings, the total available own funds to cover SCR and/or MCR as at 30.06.2016 was insufficient. For those companies at a deficit, the total amount of the MCR deficit was BGN 25 million, and the total amount of the SCR deficit was BGN 50 million BGN. It should be however noted, that these deficits are relatively small to the capital requirements and the available own funds of the insurance sector – the aggregate Solvency Capital Requirement is BGN 1.2 billion and the aggregate own funds available to cover it – BGN 1.9 billion.
Out of the 13 companies, which had a deficit as at 30.06.2016, 7insurers already undertook the necessary actions to increase their own funds to the required level in accordance with the results from the balance sheet review. Another part of the remaining undertakings also took actions, which have lead to strengthening of their capital base although still not fully sufficient. Such actions included capital increases, attracting of subordinated debt as well as sale of financial instruments. Considering the effects of the said subsequent actions, this SCR deficit has been narrowed to BGN 17 million and the MCR deficit – to BGN 22 million to present date. As a result, recovery follow-up actions will be imposed by the FSC to 5 insurance undertakings, which jointly have a market share of 1.49% in the market premium income. These 5 undertakings will have 3 months to raise their own funds to cover their Minimum Capital Requirement, and another three months to cover their Solvency Capital Requirement. Two more insurers will have to present to the FSC progress reports setting out measures taken and progress made to meet the Solvency Capital Requirement by the end of 2017 benefitting from the transitional period to comply with the Solvency II regime.
It is worth noting that the balance sheet review revealed an adequacy of the levels of technical provisions of the insurance sector. In fact the review has lead to proposals by the external reviewers for a decrease of the technical provisions to an aggregate amount of BGN 209 million in the non-life sector and BGN 22 million in the life sector.
The stress-test, which was performed for the insurance sector, is in its very last stage of finalization. The tested scenarios were adverse market conditions (double-hit scenario), earthquake stress, a flood stress and a provisions deficiency stress. One pre-defined scenario for the Life (re) insurance entities was set as the longevity stress. Total aggregation was not required as all stresses are considered to be independent from each other. The preliminary results reveal that overall the market stress scenario, testing adverse conditions at a global level, has the most significant impact on aggregated own funds. This scenario had a negative impact on the aggregated balance sheet of stress test participants of 15.8% (m BGN 313) of the total excess of assets over liabilities. The provision deficiency test results in 14% devaluation of own funds, with the MTPL related scenarios producing the most significant losses, given the dominance of the MTPL insurance portfolio across the Bulgarian insurancemarket. The provisions deficiency and the earthquake and flood stress scenarios, resulted in an impact of 5,8% and 8,9% decrease in the excess of assets over liabilities respectively. The (re) insurance entities showed resilience to the longevity scenario with a 0,7% increase in the excess of assets over liabilities at a solo level. The FSC will carefully analyse the results both at aggregate and individual level and will proceed with the necessary measures to increase the resilience of the Bulgarian insurance industry.
THE SUPPLEMENTARY PENSION INSURANCE IN BULGARIA IS SUSTAINABLE
The results indicate sustainability of the supplementary pension insurance sector. The pension funds’ assets are available and are kept in the custodian banks in accordance with the regulatory requirements. No deviations from the applicable regulatory framework have been identified in regard to the review of investments in related parties. The general conclusion of the independent external reviewers (IER) is that pension insurance companies meet the regulatory requirements (Ordinance 9 of the FSC) upon performing the assessments of the pension funds’ assets.
The PFAR encompassed all 18 supplementary obligatory pension insurance funds in Bulgaria (universal and professional) and all 9 supplementary voluntary pension insurance funds. The total value of the assets reviewed amounts to over 93% of the funds’ assets.
The PFAR results reflect the need of adjustments, which for the whole sector amount to BGN 33 mln. or 0,3% of the assets of the reviewed 27 PF as of 30 June 2016. The proposed adjustments relate to two categories of assets, owned by part of the PF and are due to differences in the methodology for valuation of investment properties by the different IERs and to the measurement of the risk premium for some corporate bonds issues. FSC will ask the undertakings to reflect the adjustments in the calculation of net asset value at the reference date. Those adjustments shall be confirmed by audit in compliance with the principles of International Financial Reporting Standards and shall be reflected in the financial statements of the pension funds for 2016, taking into account subsequent events occurring after June 30 2016, influencing subsequent valuation of pension fund assets.
The summary report in English and Bulgarian on the results of the Insurance and Pensions’ Reviews can be viewed on FSC’s Website in Bulgarian:
https://www.fsc.bg/wp-content/uploads/2021/files/19637_file.pdf
https://www.fsc.bg/wp-content/uploads/2021/files/19638_file.pdf
https://www.fsc.bg/wp-content/uploads/2021/files/19653_file.pdf
https://www.fsc.bg/wp-content/uploads/2021/files/19654_file.pdf
and in English:
https://www.fsc.bg/wp-content/uploads/2021/files/19639_file.pdf
https://www.fsc.bg/wp-content/uploads/2021/files/19640_file.pdf
https://www.fsc.bg/wp-content/uploads/2021/files/19656_file.pdf
https://www.fsc.bg/wp-content/uploads/2021/files/19657_file.pdf
The full report in English can be found on EIOPA’s Website – https://eiopa.europa.eu/Publications/Other%20Documents/IBSR_Insurance%20Balance%20Sheet%20Review%20of%20the%20Bulgarian%20Insurance%20Sector.pdf.