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Solvency II: The reporting minefield

Insurance undertakings, as part of their preparations for Solvency II compliance, have focused until now mainly on the internal model preparation and approval, Own Risk and Solvency Assessment (ORSA) and on some aspects of the data requirements - all on Pillar I and II.

The supervisory reporting and disclosure as part of Pillar III has not been a priority area so far, but further down the line might be too late to ensure seamless connection of the three Pillars towards Solvency II compliance. This article attempts to bring out, through a few examples, why Pillar III reporting aspects should also be in the line of sight at this stage of the Solvency II preparations.

The requirements for supervisory reporting and public disclosure under the Solvency II 
regime are dealt with under Pillar 3. 
The advice for reporting and disclosure is covered under Article 35 of the Solvency II Directive and elaborated under the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) - now European Insurance and Occupational Pensions Authority (EIOPA) - Advice for Level 2 Implementing Measures for Solvency II: Supervisory Reporting and Public Disclosure requirements, for both groups and solo entities.

As part of this Level 2 Advice, the information to be received by the supervisory authority is provided along with the frequency of reporting. The reporting required, which is based on the periodicity of reporting, is depicted in Figure 1.

Figure 1

Present status of supervisory reporting and disclosure
After issue of the Level 1 and Level 2 advices by EIOPA, comments had been sought by EIOPA from different stakeholders, and impact assessments were done. The comments are to be addressed by the Level 3 advice for Supervisory Reporting and Disclosure.

Insurance undertakings have primarily focused until now on the Pillar I and Pillar II activities under their Solvency II compliance activities. This is mostly due to the need to ensure that their internal models are ready and approved, required data is being readied and the overall governance requirements have been addressed.

With this focus, insurers may have forgotten why the whole Solvency II exercise is being undertaken - with the final objective of being able to report compliance and financial status to the supervisors. No doubt that the output from the Pillar I and Pillar II activities will be important, but the need at this stage for insurers is to also start putting in some focus on the overall reporting requirements.

The reporting minefield
There are two top priority areas that insurance organisations will have to start working on now, to ensure that they are able to fulfill the reporting criteria required by supervisory bodies from 2013:

A. Understanding the detailed requirements as part of reporting and tying them back to Pillar I and Pillar II activities

As part of the reporting to be done at different periods, insurers will have to be prepared for the level of detail and the periodicity requirements of the supervisors. The Report to Supervisors (RTS) and Solvency and Financial Condition Report (SFCR) are two of the main reports that need to be focused on and will constitute one of the biggest steps towards navigating the minefield of reporting.

Both these reports are similar in structure, with a significantly high level of detail that needs to be analysed and reported on. For the purposes of this article, we will look at four sample areas within these reports that are appropriate candidates for starting analyses on immediately, so as to tie back to the Pillar I and Pillar II activities:

i. Risk management system: The reporting guidelines require the undertaking to have a risk management system in place along with risk strategies and policies. All risks covered in Pillar I by the standard formula or internal model have to be described along with any other material risks. The identification, measurement, monitoring, managing and reporting of risks on a continuous basis at both individual and aggregate levels, have to be clearly outlined. In addition, the asset-liability management procedures have to be provided in this report.

ii. ORSA: The requirement is to describe the integration of the ORSA process into the overall management process and decision-making of the firm, coupled with strong integration with the risk management system. The report has to explain the determination of solvency needs for specific risk profiles and how the capital management system takes into account the risk management approach

iii. Internal control system: This includes administrative and accounting procedures for timely financial reports, operation of the compliance function and how the organisation considers it has appropriate data quality together with the associated process for validation.

iv. Complying with intra-group transactions and risk concentrations: Insurance undertakings that are part of groups, or that will be reporting in groups, will have to comply additionally as per the EIOPA Level 2 Advice on Supervision of intra-group transactions and risk concentrations and Assessment of Group Solvency. Some of the focus areas that insurance undertakings could consider under this are the treatment of participations in calculation of group Solvency Capital Requirement (SCR), treatment of own funds, and reporting and accounting procedures to manage and monitor intra-group transactions and risk concentrations.

Each of the four items described above - risk management system, ORSA integration with other systems, internal control system and the intra-group transactions - are by themselves large components in the overall SFCR and the RTS reporting. In addition, they are not just standalone components, but need to be analysed with respect to their interactions with other assessments and systems.

Insurance undertakings will require a stronger focus on the Level 2 Advice for Reporting to understand the detailed reporting requirements' fine print, assess the dependency of reporting requirements on Pillar I and Pillar II components and link these together.

B. Data availability - data flow and linkage between source systems, internal models and reporting components

Figure 2 outlines the priority areas, depicts the linkages, the key focus areas and provides an overall framework of focus for Pillar III activities.

1. Connect the dots, assess reporting dependencies on Pillar I and II

2. Understand the detailed requirements for reporting

3. Ensure data flow and linkage between source systems, internal models and reporting components.

Figure 2 Considering the complications of multiple interactions between reporting components and involvement of information from Pillar I and Pillar II, the challenge will be to ensure not only availability of source data but availability as per requirements - both for the analyses in the internal models and for direct reporting under Pillar III. This availability requirement will be governed by the reporting frequencies which will be specified by supervisors.

Insurance undertakings will have to ensure that as part of the data exercise and process being undertaken to address Pillar I and Pillar II activities, the data flow mapping is done end-to-end - from source through storage through modeling and also reporting, thus involving the Pillar III requirements in the initial stages itself.

For example, quantitative reporting templates require data that can come from the source systems directly without the processing in the internal models (claims, expenses, premiums) and also data which are generated from the internal models (technical provisions for risk margins and best estimates). Failure to connect the data requirements and flow end-to-end at this stage of preparation might lead to ‘last mile' data unavailability and quality issues for reporting purposes.

The priority areas of (A) understanding the detailed requirements and dependencies; and (B) ensuring data flow and linkages, should be focused on jointly, rather than looking at them as individual activities to ensure dependencies are managed across activities and Pillars.

Conclusion
Insurance undertakings will have to start work on Pillar III of Solvency II compliance for Supervisory Reporting and Disclosure at the earliest without waiting for completion of the Pillar I and Pillar II related activities. Preparatory work on the Pillar III reporting should ideally commence now and run in parallel with Pillar I and Pillar II work.

The Level 3 advice for Supervisory Reporting and Disclosure will only add to the level of clarity for reporting, but the ground details are available to start preparations for the reporting and disclosure components. To that effect, insurance undertakings who start preparatory work for Pillar III reporting now stand to gain a significant head start in their readiness to meet this complex regulatory directive.


1 CEIOPS' Advice for L2 Implementing Measures on SII

2 Directive 2009/138/EC of the European Parliament and of the Council, November 25 2009, ‘Official Journal of the European Union'