The Solvency II Directive increases the requirements for transparency vis-à-vis both the regulatory authorities and the stakeholders, including policyholders, financial analysts and investors. In this context, insurance undertakings and groups were, for the first time, required to publish a narrative report no later than 19 May 2017, known as the Solvency and Financial Condition Report – SFCR.
Insurance undertakings are still in a transitional phase in which the publication deadline will become shorter each year until the 2019 reporting date deadline. This year, the timeframe has been shortened by two weeks, and insurers will have to issue their solo Quantitative Reporting Templates – QRTs – and the narrative report no later than 6 May 2018.
This report, addressed to the market, is strategic and should be prepared in good time.At the end of 2017, EIOPA analysed a sample of SFCRs published in the 2016 reporting period and issued a number of findings and recommendations:
The majority of insurance undertakings and groups published the SFCR on a timely basis and generally complied with the regulatory requirements.
Publication of the report on a website is essential to ensure that the report is widely accessible to the market.
The reports in the sample follow the structure published in Annex XX of the Delegated Commission Regulation (EU) 2015/35 of 10 October 2014. However, undertakings should clearly indicate items for which the information doesn’t apply.
Having a single report for all types of stakeholders makes it difficult for undertakings to define the style and content of the SFCR.
The SFCR is addressed to a diverse public; policyholders and financial analysts have different expectations and different levels of expertise.
EIOPA notes that policyholders are the main addressees of the Summary, while the rest of the report should primarily address financial analysts and investors. In particular, it is unnecessary to reproduce legislation in the SFCR, and the report should focus on undertaking-specific information.
The need for a coherent, fit-for-purpose Summary
This summary must at least include:
- The key elements and drivers of the undertaking’s business model and business strategy;
- Main indicators for the undertaking’s financial and underwriting performance;
- Any material or significant events that have an impact on solvency over the reporting period;
- The key elements of the system of governance;
- Information about the undertaking’s key risks;
- Solvency ratio with and without volatility or matching adjustment;
- Mention of any use of transitional arrangements, including the solvency ratio without the transitional adjustment to the rate curve and the solvency ratio without transitional measures on technical provisions;
- The amount of the Solvency Capital Requirement (SCR) and the eligible amount of own funds, classified by tiers;
- The amount of the Minimum Capital Requirement (MCR) and the eligible amount of own funds, classified by tiers;
- Information about any non-compliance with the MCR or SCR over the last reporting period.
Publication of QRTs in the SFCR
The publication of QRTs in an Annex to the SFCR, although a good practice, should not prevent undertakings from providing quantitative and qualitative information in the narrative part of the SFCR. Relevant background information, whether or not covered by the QRTs in the Annex, should be included if it provides better understanding of these tables (particularly in the Capital Management section of the report). The initial format of the QRTs must be generally respected.
Information on the own-risk and solvency assessment (ORSA) is by its very nature undertaking-specific. Information specific to the process itself needs to be included.
At the very least, the process for performing the ORSA, including involvement of the administrative, management or supervisory body; any link to the business strategy and how the main risks of the strategy are considered in the ORSA, namely in the overall solvency needs, as well as timing, frequency and triggers for performing a fresh ORSA, should be included in the SFCR.
Information on sensitivity to different scenarios or stress tests, including the sensitivity of the SCR, should be better structured and more comprehensive.
EIOPA expects the SFCR to contain at least a description of methods used; relevant information on the underlying assumptions of the methods used; the impact of sensitivity as an amount and as a percentage of the SCR; plus an interpretation of the results considering the strategy and business model of the undertaking and the way in which the most material sensitivities are reflected in risk management.
Information on the bases, methods and main assumptions used for the valuation.
Such information should include undertaking-specific information and address the uncertainties around the valuation, in particular for financial assets, deferred taxes and technical provisions.
Information on eligible own funds.
This should address the management of own funds by the undertaking in the context of its strategic planning, as well as a description of significant changes over the reporting period and qualitative explanations of the most material own funds items, including availability, time horizon, any volatility in particular as regards a reconciliation reserve that is linked to the asset-liability management of the undertaking.
Mandatory comparative information regarding the preceding reporting period will be published from the next financial period.
Comparative information is expected on the qualitative and quantitative information on underwriting performance, at an aggregate level and by material line of business and material geographical area; qualitative and quantitative information regarding financial performance; material income and expenses; any material changes in the assumptions made in the calculation of technical provisions; and for each tier, information on the structure, amount and quality of own funds.
The full EIOPA report is available here.
In addition, Mazars has published a survey of the SFCRs published by 17 insurers and mutual and provident societies active in the French life and non-life insurance market. The analysis is available here: Analyse des rapports sur la solvabilité et la situation financière des entreprises d’assurance (in French).