While most are currently scurrying around pulling together their very first Solvency and Financial Condition Report (SFCR), some firms with non-December year-ends can sit back, relax and generally take it easy (if only, eh?) safe in the knowledge that their disclosure masterpieces are there for the entire world to see…and to be scrutinised.
When we say “for the entire world to see”, it depends upon tenacity. We’ve managed to find over a dozen SFCRs from firms with June and September year-ends, but some of these are, shall we say, ’well hidden' within the worldwide web.*
This isn’t the forum to debate the usefulness or otherwise of the SFCR, but we thought it might be helpful to relay some observations to give those going through the drafting process some food for thought and, potentially, some pitfalls to avoid.
The SFCRs that we’ve found range from 24 to 86 pages. While some of this variation will be due to complexity of the business, we expect much is a result of interpretation and exercising discretion as to what to make public. The regulations prescribe the format of the report and high-level content but firms need to decide on the detail. As expected, the SFCR pioneers have taken different approaches and there is a good deal of variety in style and content in the first-wave.
These differences in approach are evident almost from page one. The regulations require a summary that highlights the key findings of the main report in a clear and concise way that “shall be understandable to policy holders and beneficiaries”. While some published SFCRs provide a full summary others include limited information (largely conveying the purpose of the report) and a couple have omitted the summary altogether.
"SFCR pioneers have taken different approaches and there is a good deal of variety in style and content."
In general, the reports provide clear and informative material on firms’ key characteristics and current financial positions. Narrative disclosures on policies, processes and methods, that are perhaps more open to interpretation, are less consistent. There is obviously a balance to be struck, and we need to consider our old friend ’proportionality’ but we do wonder, for example, whether simply stating a policy exists (rather than at least a summary description of it) is really within the spirit of the requirements. We also found it interesting that many have chosen not to disclose the values of assumptions used in determining the technical provisions, but have simply described how the assumptions have been determined. For those of us ‘geeky’ enough to want to look at the valuation basis, this appears a step backwards compared to the old PRA returns.
The regulations allow firms to cross-refer to other publicly available information to meet the overall requirements. Some firms have used this approach, whereas others have developed a self-contained report. Related to this, some firms have referenced information presented in the public qualitative templates (which most have included as an appendix) rather than repeating content in the body of the SFCR.
Obviously, without having insider knowledge, it is difficult to judge the completeness of disclosures and the materiality of any apparent omissions compared to the regulations.
Having helped our clients with their SFCRs, we know first-hand that the requirements are not always easy to piece together. Even if you know where to look, there will be a bit of head scratching as to what the regulations are really looking for. This will typically be followed by debate as to what should be disclosed and how it should be reported. As we said in a briefing note last year, the effort required really should not be underestimated.
Room for improvement?
While all of the firms that have published SFCRs so far should be applauded for their ground-breaking work...
The structure of the SFCR is set out in Annex XX of Commission Delegated Regulation (EU) 2015/35. Some firms have failed to follow this
The PRA expects a statement from the board acknowledging the board’s responsibility for the SFCR and the firm’s compliance with Solvency II regulations and the PRA handbook. A couple of UK firms appear to have overlooked this requirement
The SFCR should include the public quantitative reporting templates set out in Commission Implementing Regulation (EU) 2015/2452. These templates are not all the same as the similarly numbered ones that must be submitted to the regulator. In addition, figures in the public templates should be shown in £000s
a couple of firms have mistakenly published the non-public versions of the templates, with figures shown to pounds and pence; and
a couple of others appear to have omitted the templates.
We expect the external auditor to identify problems similar to those mentioned above (the UK reports published to date are unlikely to have been externally audited in accordance with the PRA’s requirements).
However, in general, and at risk of repeating ourselves, firms should ensure they devote enough time and resource to completion and review. The SFCRs are in the public domain and what they say and how they say it reflects on the firm. While this will be more important for some than others, most firms will want to avoid unintentional omissions, making risible statements and significant formatting problems that won’t necessarily be identified as part of the external audit.
There will be a flood of reports published on or shortly before the 19 May 2017 deadline for 31 December year-end firms that we expect will also show variance in the level of detail and approach.
Will there be convergence over time? No doubt firms and their advisors will replicate things they like from others’ publications, and the PRA may share some views, but this could take a while.
It’s probably more important that firms learn from their first-year experiences and look to make the process more efficient in future years.
*The SFCRs that we’ve obtained include a mix of both life and general insurance firms from both the UK and other EU member states. Please contact us if you would like a list of links.