The Solvency II solvency and financial condition report (SFCR) is causing consternation among insurers. How do participants balance the requirements of disclosure with confidentiality, or interpret this most loose fitting of regulatory diktats? With the first set of reports already published, the answer seems to be, not very happily. Sarfraz Thind reports
Nobody said Solvency II reporting was going to be easy. Another first for insurers comes this May when the deadline for the first batch of solvency and financial condition reports (SFCR) hits. Some have already published their SFCRs and the variations in quality and consistency of reports has been significant enough to show this is by no means a tick-box exercise.
The aim behind the SFCR is to provide greater transparency to analysts and stakeholders into an insurer's Solvency II-related state-of-health. But, for a first time exercise, the rules around disclosure, language, content and consistency have all been quite vague. Insurers must disclose information on everything from key lines of business, underwriting and investment performance, systems of governance, risk exposures all the way to remuneration – and the loose requirements have been confounding many.
"It is hard to do because it's the first time they're doing this kind of narrative reporting," says Olivier Cornet, director at Invoke, a vendor of financial reporting systems. "The Eiopa [European Insurance and Occupational Pensions Authority] guidelines provided the overall structure and headings – but it's up to insurers to complete the different chapters which leaves considerable leeway to the reporting entities."
Reports already published by the likes of Wren, Evolution, Hansard, Vitality Life and Fidelity International attest to the room for interpretation.
"This has required a great deal of involvement from senior management, as it requires careful consideration of whether any of that information is commercially sensitive".
"I've seen a wide range of detail in the reports that have been published so far," says Ciaráin Kelly, consulting actuary at Milliman in Dublin. "There is variation in the published SFCRs in terms of the complexity of language. The fact that there is room for interpretation on Eiopa's demands and no regulatory feedback on variations has led to communication challenges."
Most of the reports to-date have come in at the shorter end of the expected 20 to 50 page scale – mainly between 20 to 30 pages – and, says Kelly, many appear to be just "meeting the basic requirements" without including supplementary detail or commentary around the reported information.
For Vitality Life, whose SFCR has been called one of the best laid out and most consistent so far, one of the key challenges was to present enough data to keep the regulatory authorities happy without disclosing information which could help the competition. Striking a balance between too-much and not-enough is very important, says Deepak Jobanputra, deputy-chief executive at Vitality Life.
"The most significant change with the SFCR is the step change in the volume of information and level of detail that now has to be made public by insurers," says Jobanputra. "This has required a great deal of involvement from senior management, as it requires careful consideration of whether any of that information is commercially sensitive and whether that information has been positioned and explained in such a way that it is clear and meaningful for a member of the public."
Vitality was able to get its report out early by dint of a thorough planning process. Jobanputra says that the time and effort required had been largely anticipated by the business because of this and its participation in industry forums. Efforts were made across the Vitality group with a number of different departments involved in drafting documents and peer reviewing by a series of governance committees and the board. But getting a consistent format of document across the group still proved a challenge.
"A further challenge was ensuring consistency and appropriateness of the document format needed to balance robust version control with the flexibility to allow each department to update and amend its contributions over time," says Jobanputra.
In general terms, having a template which can be followed by all the different subsidiaries within a group – some of which may be located in different geographic regions with different technical skills – is one of the main issues companies have been facing up to.
While getting the underlying data to include in the SFCR is not difficult – nearly all of it should already have been used in the production of their quantitative reporting templates (QRTs) and other Solvency II reports – bringing the data together has been taxing insurers with their many affiliates and business lines.
"Group reporting is one of the technical challenges with this," says Milliman's Kelly. "It can be tricky to ensure consistency where you have a parent using a defined template which it wants the subsidiary companies to follow."
Coordination is key
RSA kicked off its SFCR process in early 2016 with a dry run and production of the year-end 2016 report began in November last year. Despite its preparation, getting the various different departments to co-ordinate for the real thing has proven tricky.
"Perhaps, as expected, it has been burdensome, particularly considering the challenge of producing these reports across the group and other legal entities," says Karun Deep, Solvency II reporting manager at RSA. "Our approach for the pilot reports has involved a central team for coordination and overall responsibility – however individual sections are owned by the appropriate subject matter experts in the business."
The issue for insurers is not just getting the work done, but getting it done in the short time-span available to them. Milliman conducted a survey last year which suggested it would take 11 to 15 man days to produce the report. However, with the reality that people will be working on several things on top of the SFCR – including their QRTs and regular supervisory reports (RSRs) – not everyone will be able to meet all the demands, says Kelly.
Deep says the company has had a "large number of individuals" involved in the production of information. While he says the company will meet the deadline, it has required a lot of coordination and upfront planning.
Others have been looking to the already published reports to get a guide on their own. Kevin Borrett, chief risk officer at Advantage Insurance Company in Gibraltar, says the company has paid attention to the small number of SFCRs already published. The key conclusion seems to be to tailor it to the expected audience – not easy across a report which involves describing things like solvency capital ratio diversification or hedging.
"It's not intended to be a detailed technical report but should be understood by policyholders and key interested parties," says Borrett. "So we are focusing on communicating in a way that it can be understood by those who are not schooled in the insurance industry."
The company currently has 12 people working on its SFCR. Borrett says that Advantage's report will be at the shorter end of a 40 to 80 page range but that "if you plan content well and with careful use of graphs and tables you can do this."
To audit or not
Another key area much discussed by the industry is whether to audit the SFCR. Eiopa recommends it and some jurisdictions do insist upon it, but having an audit may be useful anyway in allowing companies to get an independent view by somebody who has seen other reports.
"We are using the Advantage external audit firm as part of the validation and quality control," says Borrett. "It's good practice given they are also auditing other reports so it gives you assurance you're on the right track."
Not everyone has taken the auditing route, though. Vitality's Jobanputra says the company used alternative approaches for its board to get comfortable with the SFCR – principally through "significant and robust internal reviews."
Creating a report to allow it to be auditable also presents its own challenges.
"You can't use any technical stuff in a non-auditable way," says Thorsten Hein, principal industry consultant, risk research and quantitative solutions at SAS. "Using stand-alone Excel does not provide auditability features. As you can't apply auditability that easily to your internal guidelines and policies, which apply to the narrative part of the report, you need to explain to the audience why this content makes sense without disclosing too much of your internal strategies."
A question of style
"It's not intended to be a detailed technical report but should be understood by policyholders and key interested parties,"
Style, format and layout – while they may seem initially trivial – are further concerns. Many of the published reports to date have been done on Word with only a few companies choosing an automated software to produce them. Companies relying on a shared Word document template may find it difficult when there are manifold parties involved in the process, says Invoke's Cornet.
"For example with the layout and style, you want to make it nice to read but keeping consistency is hard. Two different paragraphs written by two different people can be challenging. I have seen some of the published ones and have been surprised by the way they look. Clearly, at the moment, the focus seems to be on the structure and content, rather than on final layout."
Cornet has been working with a handful of insurers on the SFCR this year. He says that companies have taken different approaches to assembling the report with some giving responsibility to different stakeholders for different parts while others putting one department or an individual in charge of the whole thing – the latter can be an advantage when there is multiple party collaboration on a Word document.
With time almost up, it seems there will be a final scramble to get things ready for the May deadline. Given the pressures on firms, few will have had the time to implement an industrialised process which could be used in future report processes.
Nonetheless, in the long run, most agree that the goal of harmonising public reporting across the insurance industry, to allow for greater comparability between firms, is an important one. And indeed once insurers get to grips with it, SFCR production is something likely to play out for the overall benefit of the industry in years to come.
"The harmonisation achieved in the first year is likely to be restricted, as firms will have limited scope to understand the interpretation applied by others in the industry," says Vitality's Jobanputra. "Progress is more likely to come in later years as an industry wide consensus is reached."
For certain, there will be a lot of scrutiny on the initial round of SFCRs from rivals, regulators and stakeholders. The wide audience will add to the anxieties for insurers, as they claw their way up the learning curve.
Quantitative reporting goes annual
The SFCR is by no means the only Solvency II reporting challenge that EU insurers are facing this quarter. Underwriters will also have to deliver their first regular supervisory report (RSR) – like the SFCR but for regulators' eyes only – and their first annual quantitative reporting templates (QRTs).
While insurers will be familiar with the task of delivering quarterly QRTs by now, the annual QRTs represent a step-change in volume and supervisors are becoming less tolerant of mistakes.
Germany's industry is generally well prepared for filing, says Ruediger Lambrecht, senior manager for the Abacus S2 software at vendor BearingPoint. But he adds "many insurers are still very busy in preparing for their first annual reporting. Hence, they currently do not put much priority on optimising infrastructure, workflow or processes yet. Some of them are still using a tactical reporting solution that they plan to replace at a later point."
The workload is stretching some underwriters. Arkk Solutions has supported preparations for more than 60 insurers across the EU and Danielle Cyrus, head of sales and business development, says many employees have Solvency II-related tasks on top of their day jobs "especially at smaller insurers that do not necessarily have the budget for the extra work. No matter how prepared firms wish to be for pillar III, it can be a last-minute struggle to get data to the regulator on time."
The burden has attracted considerable ire from insurers. In responses to UK consultations on the future of Solvency II, Axa UK complained of "excessive granularity...the cost of implementation is also significant, and the benefit not immediately realised".
London-listed insurer Prudential said that "additional processes, at additional cost, are having to be put in place to enable the data to be conveyed to senior management for governance purposes".
After examining its pillar 3 information, Prudential found "no internal uses" for it, and urged regulators to amend requirements "where the data is not being used".
Stripping down Solvency II
This year insurers will need to report Solvency II figures without the benefit of the long-term guarantees (LTG) package or transitional measures.
According to data presented in the Eiopa stress test, UK firms' aggregate solvency ratios drop to 51% once these adjustments to the Solvency II discount curve are stripped away. Although the market reaction has so far been muted, more decisive repricing to UK insurers' share price may come about once firms report a purer mark-to-market solvency ratio in their final year results, according to analysts at Bernstein.
Chief risk officers are largely responsible for which elements of optional adjustments to Solvency II discounting are used and so will likely play a big part in justifying their use to investors.
The ability of investors to compare insurers across European nations will continue to be difficult given the different ways in which Solvency II has been interpreted. Their ability to strip out elements of the LTG package might therefore be useful to compare European firms on an entirely market-consistent basis.
This would, however, ignore the benefit of the LTG measures such as the matching adjustment in the UK which firms argue is a sound economic reflection of annuity business' ability to invest in long-dated, illiquid assets. European firms make similar arguments about the volatility adjustment.
Tom Wilson, chief risk officer at Allianz, is confident that greater disclosure will not lead to major stock repricing.
"There are two schools of thought. The extra disclosures this year could either play out as meaningful discussion of the economics, or could provide a few titbits to throw to the analyst community," he says.
"I am kind of more in the latter camp – in my experience what is important at a high level is whether or not the capital regime has the potential to trigger capital diluting exercises or dividend deferrals. So it's the final Solvency II ratio that matters to the market and existing sensitivity disclosures provide ample information compared to the minutia of the public QRTs [quantitative reporting templates]."
More meaningful comparisons could be made between firms without the benefit of transitional measures, given these run-off over time. Rating agencies Moody's, Fitch and Standard & Poor's have all previously said that they are more likely to compare firms on a "fully loaded" solvency basis without the benefit of transitional measures.
Callum Tanner, David Walker, Sarfraz Thind