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Game, set, and match for Pillar 3 reporting?

Pillar 3 reporting has been the long-neglected aspect of Solvency II and it is now sharply in focus for many firms as they realise the immense effort needed to prepare ahead of 1 January 2016

06 AUGUST 2015 | BY LAURA MCMASTER AND DECLAN LAVELLE


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Photo: Shutterstock


So what are the new reporting requirements, and how do they compare with what is currently required? In a nutshell, much more information must be provided at a more granular level, more often, and in shorter timeframes. This is a challenging combination.

Pillar 3 reporting: the core challenges: 

● Making processes efficient enough to meet the challenging time frames

● Developing new methods and processes to generate additional information 

● Additional validation challenges with more granular data

● Developing data systems for ease of extraction and to record new data

The new requirements

Greater volumes of information 

The volume of information required by Pillar 3 is incomparable with current regulatory returns. Some companies can expect exemptions from some of the reporting requirements owing to their size, but a greater proportion of the market is likely to be submitting more returns more often than they have in the past.

Actuary Table

Quantitative and qualitative 

The new reporting requirements include both qualitative and quantitative elements.

The qualitative requirements include two main narrative reports: the Solvency Financial Condition Report (SFCR) and the Regular Supervision Report (RSR). These two reports will have a similar structure covering business performance, systems of governance, risk profile, the regulatory balance sheet and capital management. The main differences will be that the SFCR will be publicly disclosed while the RSR will be shared privately with the regulator and will include a greater level of detail.

The quantitative requirements are made up of a significant number of quantitative reporting templates (QRTs) as well as further national specific templates (NSTs). The types of template can broadly be categorised as: 

● Actuarial information (e.g. technical provisions and SCR);

● Financial information (e.g. balance sheet); and

● Data (for example, claims triangles, distribution of risks).

QRTs: ‘Actuarial information’


TPs split by:

● Line of business

● Year of account or accident year

●  Premium provision, claims provision and risk margin 

●  Cashflows for premiums, claims, expenses and other income by cashflow year

●  Currency and country of risk

●  Gross split by direct, inwards proportional reinsurance and inwards non-proportional reinsurance

●  Reinsurance split as reinsurance, SPVs and finite reinsurance


SCR split by risk component:

● For standard formula firms including detailed standard formula inputs

● For internal model firms forms to be defined by the regulator


Tighter time frames 
Time frames for submitting the required information will be longer initially, reducing over a period of a few years. By 2019 annual reports will have to be submitted within 14 weeks of the financial year-end and quarterly reports within five weeks of the quarter-end. Lloyd’s Syndicates will have even tougher time frames to meet –  eight and three weeks respectively – and similarly tight time frames may have to be applied by groups to their subsidiaries.


Challenges ahead

So what are the main challenges and how are firms shaping up to address them?


The need for speed
Many firms are currently in, or at the end of, a phase where they have organically grown their current (often manual Excel-based) processes to generate the granular information required by Pillar 3. Although this might have got the job done for now, adding on to and adapting existing processes in this way is unlikely to have resulted in optimal efficiency. Getting reliable, validated output from processes that have evolved in this way is often demanding.

By 2019, when the final time frames are in place, efficiency won’t simply be a nice to have for its own sake, but a necessity to make the task achievable in the time available.

To attain the necessary efficiencies, a fully automated or industrialised process is desirable, where practical. But the extent to which automation can be realised will depend on many factors, including the complexity of the business, the existing data systems, and the scale of improvements needed in current processes.

New approaches
Those designing any new processes, automated or not, may need to consider new approaches to generate the outputs required within the time available. To take just one example, many firms’ technical provisions (TPs) at a particular date have a dependency on the accounting provisions at that date. However, in the limited time frames available, this dependency may become problematic because of a number of challenges. These include, for example:

● The time taken to produce the accounting provisions;

● The requirements of the actuarial function and the associated governance around the production of TPs;

● The additional validation required of the figures to ensure self-consistency; and

● The time needed to audit the returns and get board sign-off.

A possible solution is an early and fast close process. This is where a full analysis is performed on data ahead of the balance sheet date and then rolled forward using an automated approach. Another option may simply be to use the early close figures without rolling them forwards – effectively using projected TPs. Any selected approach will need to be justifiable in the context of the nature, scale and complexity of the business.

Similar challenges will apply to SCR figures, which are often dependent on the technical provisions as well as other items on the balance sheet. Ways of managing these dependencies will require careful thought to meet the required time frames.


Greater validation
Touching on the validation of TPs mentioned above, although the reporting requirements are very granular, many firms will perform modelling at a less detailed level. Allocation techniques will then be necessary to produce the required granularity for reporting. Where approximations are used to generate the required splits, this will create additional challenges to ensure that all the information is self-consistent.

New data
New data may be needed to implement new approaches, to validate results against, and to complete the more data-focused QRTs. The quality, auditability, and speed of production of data will be key. Developing data systems, including solutions such as data warehousing, often requires significant projects running for months or even years. This will be a key focus for those firms not already well advanced in this area.

Communication
The combination of information required by Pillar 3 presents an interesting challenge for communication across the business. Coordinated input is required from the finance, risk management, actuarial and IT/data functions. A case in point is in relation to the SCR data and calculations for a standard formula firm. Identifying clear responsibilities within the firm, including a Pillar 3 project lead, is essential to help overcome the communication and information flow challenges.

Plan ahead
There are many voices urging that work is needed now to prepare for the Pillar 3 requirements. That is certainly true, and a longer-term, strategic rather than reactive approach will help. 
Firms should consider now whether it is actually possible to use or adapt their current processes to meet the new time frames or whether a whole-scale rethink is needed. This will ensure that effort doesn’t need to be repeated in the next few years as the time frames are tightened year on year.

The payoff
While ‘ticking the box’ on reporting will certainly focus minds, the ultimate prize is greater. Those firms that grasp the opportunity now to improve their data and reporting processes will gain a competitive advantage. With IFRS 4 coming hot on the heels of Solvency II, firms will need to run just to keep still.


Laura McMaster and Declan Lavelle are partners at Lane Clark & Peacock LLP