While two key Solvency II consultation papers published in November finally clarify reporting requirements, they will significantly add to the workload of re/insurers’ quants who will have to complete up to 50 Quantitative Reporting Templates (QRTs).
It has been clear for some time that Solvency II will introduce a hefty reporting burden on insurers which includes the predictably unpopular addition of a raft of new public disclosures. Until now, preparation has been slowed by lack of clarity on final requirements.
So far insurers’ implementation plans have focused heavily on capital assessment in Pillar 1, driven along by the European Insurance and Occupational Pensions Authority (EIOPA’s) high profile Quantitative Impact Studies (QISs), but the new consultation papers switch focus to elements of Pillar 2, governance and risk management and Pillar 3, disclosure and transparency.
I will discuss the new Pillar 2 ORSA consultation papers in a future blog, but today my topic is the perennial bridesmaid of Solvency II: Pillar 3, and financial reporting.
EIOPA Publishes Updated Reporting Guidelines
EIOPA’s new consultation papers cover draft proposals for quantitative reporting templates (CP11/9b) and guidelines for narrative public disclosure and supervisory reporting, pre-defined events and processes for reporting and disclosure (CP11/9f).
The proposals will push reporting to the forefront of Solvency II discussion. They provide a clearer indication of what will be expected both in public reporting through the Solvency and Financial Condition Report (SFCR) and also in private reports to insurers’ supervisors via the Regular Supervisory Report (RSR).
From QIS to QRT
A new joiner to the growing ranks of Solvency II acronyms, Quantitative Reporting Templates or QRTs, are the forms that companies will need to complete. QRTs – no doubt destined to be known as QueRTs – summarize quantitative information including Solvency Capital Requirement (SCR), Minimum Capital Requirement (MCR), assets and technical provisions. Solo re/insurance entities will need to complete over 50 QRTs, while insurance groups will have to do in excess of 35.
Qualitative reporting is also required, including descriptions of risk management. Over 40 guidelines are given covering both the SFCR and RSR.
A Harmonious Outcome?
The guidelines on the SFCR and RSR continue to focus on “harmonizing public disclosure and supervisory reporting”. EIOPA is hoping to achieve this by having minimum content requirements for certain sections of the reports.
The strength of opinion on Solvency II reporting inevitably suggests a likely high response rate to the consultation. Insurers are already uncomfortable at the breadth and detail of proposed public disclosure. EIOPA aims to strike an appropriate balance by focusing on the principles of materiality and proportionality; introducing thresholds for detailed reporting on some forms and reducing disclosure requirements on others.
Companies will be expected to disclose events during the reporting period that have had a “material impact on the undertaking”. The requirement to report a given event will depend on supervisors’ assessment of materiality which is likely to remain a contentious topic. Examples of qualifying events provided are new lines of business, portfolio transfers and loss of control of subsidiaries.
A further reporting headache under Solvency II will be the requirement to report following pre-defined events or PDEs. These are defined to be events which “could reasonably be expected to lead or have already led to material changes in an undertaking’s or a group’s business and performance, system and governance, risk profile, and solvency and financial position”.
Predictably, EIOPA has not given a definitive list of qualifying events but instead expects insurers to exercise judgement and consult supervisors when uncertainty prevails. The broad scope of the list of examples provided suggests a sharp increase in the reporting burden from this strand of the requirements alone. Examples of PDEs include:
- Changes in an undertaking’s business strategy
- A re-run of the ORSA
- Material changes in own funds levels, MCR, SCR, technical provisions and / or other balance sheet items
- Significant governance failures
Supervisors also have the right to require regular reporting on certain PDEs to allow for review of the insurer’s post-event progress. Although this is likely to be applied selectively it won’t ease the workload.
Further Changes Ahead…
EIOPA has highlighted the important caveat that there may still be “future adjustments” as the consultation papers have been based on latest draft Level 2 implementing measures provided by the European Commission (EC). The publication of final Level 2 guidance isn’t expected to prompt material changes to the content of either consultation paper.
Your Chance to Have a Say and Prepare
The public consultation will run to 20 January 2012 and EIOPA expects to submit implementing technical standards to the EC by September 2012, subject to the final publication date of Omnibus II. The CP11 papers are expansive in their coverage and although some uncertainty will remain until the latter part of 2012, insurers should now be able to move forward in their preparation for reporting under Solvency II.
The consultation papers do now allow insurers to kick-start the reporting elements of their Solvency II response. Light has been shed but flexibility is still required.