Including updates on Solvency II reporting requirements take shape

  • Solvency II reporting requirements take shape
  • EU Council adopts amendments to Financial Conglomerates
  • FSB sees progress on international cooperation and information exchange
The European Insurance and Occupational Pensions Authority (EIOPA) is consulting on draft proposals on qualitative and quantitative reporting under Solvency II, following an intensive period of informal consultation and discussions with relevant stakeholders for the past two years. The proposals define the content and format of insurers' Solvency II reporting, both on a private basis to their supervisors in the form of the Regular Supervisory Report (RSR) and for public reporting to all stakeholders in the Solvency and Financial Condition Report (SFCR).

In both these reports, insurers are required to disclose quantitative and qualitative information about the risk position and related capital adequacy with a description of risk management processes related to their business.

Quantitative reporting takes the form of the Quantitative Reporting Templates (QRTs). The QRTs are a set of 62 forms of which up to 52 will be required to be completed by individual insurers and up to 38 by insurance groups. The QRTs capture information on balance sheet, assets, the Solvency Capital Requirement (SCR), the Minimum Capital Requirement (MCR), technical provisions, variation analysis and reinsurance.

EIOPA addresses the lack of previous guidance on applying the principle of proportionality and materiality to QRTs (an issue which was raised by some firms), by creating thresholds for detailed reporting on certain forms and also by reducing public disclosure requirements on many forms.

EIOPA’s proposals also detail a number of guidelines surrounding the preparation of the qualitative or narrative reporting in the RSR and SFCR, which are aimed at achieving harmonisation ‘to the extent that further clarification and detail to the delegated acts are necessary’. The proposals comprise of 27 guidelines dealing with narrative reporting in the SFCR, with a further 16 guidelines specific to the RSR. These are grouped under the standard headings to be used in the RSR and SFCR:
  • Business and performance
  • Systems of governance
  • Risk profile
  • Valuation for solvency purposes
  • Capital management
Given that the delegated acts have not been published (and are not expected to be published until after the consultation period closes) it is arguably hard to form a definitive view as to whether EIOPA’s guidelines are necessary or sufficient to achieve their stated purpose. The latest draft of the delegated acts was submitted by the European Commission to Parliament at the end of October 2011. However, these remain a private document and it is not expected that they will be formally published until spring 2012.

This consultation is significant for insurers. The reporting regime underpinning Solvency II is extremely important and represents a major milestone in the development of the regime as the implementation date draws near. While, EIOPA is not anticipating the need for any significant changes as a result of this round of consultation, a number of uncertainties remain, particularly around: variation analysis templates, reporting risk concentration for groups, the treatment of eligible own funds and the design of non-life catastrophe risk templates. These, and other minor issues, will have to be ironed out before the regime takes effect.

Insurers should not underestimate the work required in gearing-up for the new regime, as Solvency II reporting will be much more detailed and exhaustive than current requirements. Insurers should view this consultation, and the additional clarity it provides, as the much-needed trigger to get their reporting workstreams on track.

The proposals are open for comment until 20 January 2012 and EIOPA plans to finalise reporting requirements in summer 2012. In terms of additional data requirements for financial stability purposes, EIOPA is also currently working on another consultation which is expected in December 2011.


EU Council adopts amendments to Financial Conglomerates

The Council of EU Finance Ministers (Council) has adopted amendments to the Financial Conglomerates Directive (2002/87/EC) (FCD), paving the way for transposition into national law by mid-2013.

The original FCD introduced a prudential regime for financial conglomerates to address problems arising from the risks associated with large cross-sector operations, and to remove the possibility for such firms to engage in ‘double gearing’ (using the same capital to meet different sectoral regulatory requirements).

The revisions seek to close many of the loopholes in the previous regime and facilitate appropriate supplementary supervision of financial entities in a financial conglomerate. The changes also amend the relevant legislation on banking and insurance supervision, namely the Capital Requirements Directive and the Directive on Supplementary Supervision of Insurance Undertakings in Insurance Groups. The amendments were agreed by the European Parliament and Council in June of this year with little change from the Commission’s original text.

The principle revisions to the FCD include:
  • the inclusion of asset management companies in the threshold tests for identifying a conglomerate
  • a waiver for smaller groups if the relevant supervisor assesses the group risks to be negligible
  • allowing for risk-based assessments, in addition to existing definitions relating to size, in identifying financial conglomerates
  • allowing for both sector-specific (banking and insurance) supervision and supplementary supervision of the financial conglomerate's parent entity, or if it concerns a holding company. Under the current rules, supervisors have to choose which supervision they apply when a group acquires a significant stake in another sector and when the parent entity is a holding company

FSB sees progress on international cooperation and information exchange

Most countries are compliant with prudential standards and cooperation principles, according to the Financial Stability Board (FSB). The FSB has evaluated the top 61 countries in terms of financial importance, and reports that the majority of countries are making good progress on cross border cooperation on financial supervision.

Of the sample covered, 41 jurisdictions (including the US, UK, Germany and Japan) have already demonstrated sufficiently strong adherence with international standards on cooperation and information exchange. Another 12 countries (including Greece and the Bahamas) are taking action to strengthen their adherence in areas where previous assessments have identified weaknesses. Four countries (Argentina, China, Indonesia and Malaysia) are being assessed by the FSB for the first time. The FSB assessments are based on selected principles established in existing international standards on which the World Bank/IMF Financial Sector Assessment Program has been based for many years, namely:
  • Basel Committee on Banking Supervision’s Core Principles for Effective Banking Supervision- covering principles related to licensing and structure, methods of ongoing banking supervision and consolidated and cross-border banking supervision
  • IAIS Insurance Core Principles- outlining principles on supervised entity, system and ongoing supervision
  • International Organisation of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation- detailing principles for the enforcement of securities regulation and cooperation between regulators.
The Basel Committee, IAIS and IOSCO were consulted by the FSB to identify which elements of these frameworks should be used to make these assessments. Arguably, these constitute ‘minimum’ standards. They encompass group as well as solo supervision, but do not provide all the necessary underpinning for the operations of supervisory colleges of globally systemically important financial institutions (G-SIFIs). While the FSB’s active monitoring of international cooperation is beneficial, ongoing concerns, as reiterated at the G20 summit in Cannes, over ‘too big to fail’ would suggest the need to raise the bar to ensure that supervisors can effectively supervise these entities wherever they operate. Legal agreements between countries need to be in place sooner rather than later.