Ciara Russell contributed to the writing of this blog post
2013 saw confirmation that Solvency II will become reality from 1 January 2016. EIOPA published its preparatory guidelines and, in response to this, the Prudential Regulation Authority (PRA) released a Supervisory Statement. It is no longer sufficient for Solvency II to sit on firms’ agendas; action must now be taken and progress demonstrated.
Here we focus on the guidelines surrounding the submission of information to the PRA, outlining what these mean for insurers and how we can help.
Who is impacted by these guidelines?
Not all firms will be required to submit information to the PRA; just those falling within the thresholds set by EIOPA, summarised in the following table. The PRA determines which firms are the “chosen ones” and they were notified by 31 January 2014.
This does not mean that firms outside the thresholds can sit back and relax. Once Solvency II is in place all firms will have to report in line with the requirements. Given this, it is important that all firms understand the guidelines and strive to meet the full requirements in good time ahead of 2016.
What information is required?
Despite the guidelines being clear in what they require, there are still areas of uncertainty that remain for insurers:
- Most importantly, the rules for calculating Pillar 1 have not yet been agreed. EIOPA is planning to consult on Implementing Technical Standards (ITS) in two stages. The proposed ITS relating to Pillar 1 are expected to be available in December 2014.
- The treatment of groups and ring-fenced funds with respect to quantitative reporting is still open for discussion.
- For internal model firms, agreement will need to be reached on the template for reporting the SCR under their internal model (they will also be required to report an SCR using the standard formula).
- It is not known whether the PRA will develop any national specific templates that firms will have to complete during the preparatory period. Any such templates would be subject to consultation and the question would be raised whether it is reasonable for these to be completed during the preparatory period.
The PRA encourages early interaction and engagement to discuss such issues to ensure the guidelines can be applied in an appropriate manner.
The guidelines set out timescales that insurers falling within the thresholds should be aware of in the run up to Solvency II implementation. Key points to note are that:
Annual reporting must first be carried out in respect of the 31 December 2014 year-end, firms with a year-end other than 31 December will be contacted by the PRA; and
Quarterly reporting must first be carried out in respect of the quarter ending 30 September 2015.
What are the PRA’s expectations for UK firms?
At a high-level, the PRA expects all firms to be prepared to “deliver high-quality information”, which involves establishing systems and structures that enable accurate and complete reporting. The main expectations are summarised in the following table.
Preparatory reporting information provided to the PRA will only be used for the purpose of assessing and improving firms’ preparedness for Solvency II, rather than for supervisory purposes. It is not expected to be subjected to external audit and the PRA is not expected to take enforcement action as a result of the information submitted.
What should firms be doing?
There are a number of specific actions firms can take now to ensure compliance with the guidelines:
- Understanding the draft Solvency II technical provisions and capital calculations and, if relevant, the issues associated with group solvency, ring-fenced funds or internal models. EIOPA’s forthcoming technical specification should help clarify these points.
- Becoming familiar with the reporting requirements and EIOPA’s reporting templates.
- Performing a gap analysis to highlight areas where development is required to meet the desired level of preparedness.
- Establishing dialogue with the PRA on specific areas mentioned above and any other aspects of reporting where additional clarity is required.
- Developing systems and structures to enable efficient reporting e.g. extracting necessary information from systems, drafting narrative templates and becoming familiar with the XBRL tool.
- Revising and testing policies and procedures for reporting alongside the governance requirements.
How can Barnett Waddingham help?
- Identifying the gaps between firms’ current positions and where they need to be at various stages during the preparatory phase and, ultimately, by Solvency II implementation on 1 January 2016.
- Assisting firms with drawing up implementation plans to address the gaps identified.
Systems and structures
- Developing templates for the narrative information component, considering firms’ systems of governance and key points that could be considered in respect of capital management and valuation for solvency purposes.
- Setting up checklists and controls for use by firms to ensure complete and accurate information is submitted.
Reporting policies and procedures
- Assist firms in creating reporting policies or reviewing policies drafted by firms to assess whether they set out clear goals, roles and responsibilities.
- Assist firms during the trial process and assess the suitability of revised policies.
- Our Insurance Actuarial team offers a wide range of services, we can assist with Solvency II development or if resources become strained in other areas.