The first public submissions of the Solvency and Financial Condition Report (SFCR) for the majority of firms were published in late May this year. In this series of blogs we present the key findings of our analysis of each section of the SFCR. The focus of this blog is the System of Governance (SOG) section.
Firms are required to provide the following information around the system of governance in this section:
- General information on the Company’s structure, the Board’s roles and responsibilities, the remuneration policy and any material changes in the SOG
- A description of the fit and proper requirements and the process for assessing people against this
- A description of the firm’s risk management system
- Information on the process for conducting the firm’s Own Risk and Solvency Assessment (ORSA)
- Information on the internal control system, internal audit, actuarial function and any outsourcing
- An assessment of the adequacy of the SOG with regards to the nature, scale and complexity of the business
This section of the SFCR covers the broadest range of information and includes a number of topics that firms have disclosed previously. Many firms include descriptions of Board roles and responsibilities and remuneration policies within their annual results’ pack and as such, we find that firms are willing to provide significant levels of detail when discussing these points.
At the heart of Solvency II, the ORSA is a set of processes constituting a tool for decision-making and strategic analysis. It aims to assess the overall solvency needs and risks of the company in a continuous and prospective way. The ORSA is a new and important part of the disclosure within the SFCR that firms are undertaking for the first time in 2017. Our review of the SFCR within this blog will focus on the details firms provided about their ORSA, as this is a new process under Solvency II and has resulted in some variation between companies.
Firms are required to provide the following information about their ORSAs:
- A description of the process including how it is integrated into the firm’s organisational structure and decision making process
- Details on how often the assessment is reviewed and approved
- How the firm has determined its solvency needs and how capital management activities and risk management interact
It will come as no surprise that the approach for describing the ORSA was done in varying detail.
The ORSA process is a wide ranging tool which should feed into many areas of the business. From our review, one of the clearest and most engaging ways to describe the ORSA is to present the interdependencies of the different areas of the business within a diagram; however, only 28% of SFCRs within our review made use of such diagrams. Those firms which did include diagrams went on to provide further details of each process to better explain the importance of the ORSA to the business.
Figure 1 - Example diagram showing ERM framework
One approach to providing further details of the operational uses of the ORSA was to include details of the annual reporting and business strategy timelines. One firm provided a timeline setting out the aspects of the risk management framework, which proved to be a very useful approach to communicating the process; other firms should consider doing the same going forward.
One of the key requirements of firms is to describe how the ORSA brings together risk management, capital management and business strategy. We found significant variation in firms’ descriptions of how the ORSA feeds into key decision making and details of roles and responsibilities; 10% of firms did not cover this at all, while at the other extreme there were firms who provided detail of the actions that were taken during the year due to output from the ORSA. In reality most firms sat somewhere in between and included a simple statement that the ORSA feeds into decision making without further details. The diagram below illustrates the varying levels of detail.
Figure 2 - Varying detail on ORSA integration with business strategy
Firms are required to detail how often the assessment is reviewed and approved. The requirements in this section are open to interpretation and this is reflected in the comments within the SFCR. Many firms took this to mean that companies must state that the ORSA is reviewed annually by senior management; however, some firms have gone further and explained the processes for reviewing the underlying ORSA policy, rather than just the results of the process. In our opinion, the best SFCRs commented on both aspects and going forward, firms should consider disclosing the requirements to review the underlying policies rather than just the results of the process. This should help to give confidence that the ORSA is still suitable and firms are not simply going through the motions.
One of the areas in which we have seen the most variation is in disclosures regarding how firms determine their own solvency need. Fewer than 50% of reviewed firms explained how they had determined their own solvency needs. Most of those who did provided short, high level commentary which met requirements without providing any insight into the business. A small number of firms provided further detail, such as the differences between the Own Solvency assessment and the Standard Formula or a description of an additional capital buffer.
While the system of governance section of the SFCR covers a wide range of requirements, the ORSA is a clear area of inconsistency, particularly where firms are required to explain how processes are implemented. Our key findings are:
- Firms should consider using diagrams to describe the ORSA processes and how these fit into the wider business
- Firms should consider disclosing the requirements to review the underlying risk and ORSA policies rather than just the results of the processes
- Over time we expect firms to provide more information on the ORSA process
- Many firms state that they are doing something without explaining how
You can read more of our findings on the different sections of the SFCR by clicking on the links below.