A Review of Solvency II Principles (Supervisory Reporting)
The Solvency II (Directive 2009/138/EC) regulatory compliance framework has put in place a robust ‘Three Pillar’ approach for the regulation of insurance and reinsurance undertakings (Undertakings) operating throughout the European Union (EU). Pillar 1 deals with quantitative requirements (e.g. assessment of own funds, Solvency Capital Requirement (SCR)), Pillar 3 deals with disclosure requirements (e.g. transparency, reporting to the public and to national supervisors), and Pillar 2 deals with qualitative requirements (e.g. Supervisory Review Process (SRP), Governance System). This four part blog series will deal with different Solvency II Principles, namely ‘Systems of Governance’ (PART 1), ‘Forward Looking Risk Assessment’ (PART 2), ‘Internal Models’ (PART 3), and ‘Supervisory Reporting’ (PART 4).
Solvency II Supervisory Reporting
From a high level perspective Article 35 of Solvency II sets forth the minimum qualitative and quantitative information necessary that Undertakings have to report to the supervisory authorities. This includes:
(1) information necessary to assess the system of governance applied by the Undertakings, the business they are pursuing, the valuation principles applied for solvency purposes, the risks faced and the risk management systems, and their capital structure, needs and management; and
(2) the information need to make appropriate decisions resulting from the exercise of their supervisory rights and duties.
Any information that is to be provided by Undertakings must reflect the nature, scale and complexity of the business, and in particular the risks inherent in the business. It must also be accessible, complete in all material respects, comparable and consistent over time. The final requirement is that the information be relevant, reliable, and comprehensible.
The standard supervisory reporting and public disclosure requirements relate to the submission of a Report to Supervisors (RTS) and a Solvency and Financial Condition Report (SFCR).
The RTS consists of a qualitative report submitted via highly detailed and granular quantitative reporting templates as well as a detailed set of qualitative data. This covers areas such as own funds, variation analysis, technical provisions, reinsurance, balance sheet, premium claims and expenses, group reporting, and SCR and Minimum Capital Requirement (MCR). The SFCR consists of a public report specifying detailed information covering an Underaking’s risk profile, system of governance, regulatory balance sheet, business and performance, and capital management.
EIOPA has issued Guidelines on reporting and public disclosure (Guidelines) and CEIOPs has issued Advice for Level 2 Implementing Measures on Solvency II for Supervisory Reporting and Public Disclosure Requirements (Advice).
The Guidelines provide advice as to what supervisory authorities should expect from Undertakings with regards to the content of the SFCR and the RTS, validations to be applied to the annual and quarterly quantitative templates, reporting in the case of predefined events, and an Undertaking’s processes for public disclosure and supervisory reporting.
The Advice specifies that ‘predefined events’ are those that can lead to material changes to an Undertaking’s solvency position or risk profile and may lead to supervisory authorities reassessing the Supervisory Review Process (SRP) on which the frequency and intensity of supervisory actions are based. Such events include, but are not limited to:
(1) changes in business strategy (including delays to implementing strategy);
(2) internal organisational restructure;
(3) significant lawsuits with a reasonable chance of success being brought against the Undertaking;
(4) material changes in own funds levels, MCR, SCR, or Technical Provisions;
(5) new emerging or crystallised material internal or external risks;
(6) emergence of new future material or significant claims (previously not included in the last reported technical provisions);
(7) significant governance failures.
The Advice states that ‘situational enquiries’ mean any assessment of the Undertaking made by the supervisor either during off-site analysis or on-site inspections. It is further noted that enquiries do not have to be part of a formal assessment, and they could include questionnaires being sent to all Undertakings requesting further information on a specific issue, or access to any relevant documents during on-site inspections. Such type of enquiries could be designed for one specific Undertaking, a specific market segment, or all Undertakings.
The new supervisory reporting framework therefore places a heavy burden on Undertakings to comply with the regular reporting timelines. Not only must they be able to source a huge range of information from a multitude of internal and external sources but they may also now be subject to assessments by supervisory authorities, as well as on-site inspections, and also requests for relevant summary or detailed information from Undertakings. There will also be much closer scrutiny by supervisory authorities of the activities of Undertakings following on from changes in business strategy, material changes in funding, the MCR, the SCR, Technical Provision and if there is an internal organisational restructuring.
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