This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.
Over the next few weeks, companies will be finalising their first sets of annual Quantitative Reporting Templates (QRTs) to be submitted under Solvency II. For companies with a financial year-end of 31 December, the reporting deadline is 20 May 2017.
A key part of preparing the annual (or quarterly) QRTs is ensuring the accuracy of the information provided. In this blog post, we highlight some validation processes available to companies.
In recent speaking engagements and publications, the Central Bank of Ireland (CBI) has underlined the importance of ensuring that the supervisory returns are validated and that there is appropriate governance in place so that the directors, who sign off on the annual QRTs, are satisfied that the returns are accurate and complete. In its recent Insurance Quarterly bulletin, the CBI stated that its ‘experience to date has shown that successfully meeting the dual requirements of “fit for purpose” and “right first time” requires firms to manage much better the governance and operational risks around the reporting process.’
Pressure to put in place a validation and governance process also comes from the board as the annual QRTs must be approved at a board level under the Solvency II text. In addition, in Ireland three named directors are required to submit an accuracy certificate on the annual QRTs. The CBI points out that ‘while those signing off returns may not be the people reviewing them, they should ensure that they have a clear process that they can rely on.’
With this in mind, we outline three levels of validations below:
1) EIOPA validations
When submitting the annual QRTs (or quarterly QRTs) on the CBI’s Online Reporting System (ONS), a set of taxonomy validations are applied and each one must be passed before the file will be accepted. These validations cover items such as missing templates, incorrect format of entries, and inconsistent entries between templates. To see a full list of the current set of European Insurance and Occupational Pensions Authority (EIOPA) validations, please see here.
Rather than using the ONS to validate their templates, companies are expected to carry out their own sets of validations prior to uploading. In most cases, the software packages used to convert the templates into eXtensible Business Reporting Language (XBRL) will include the EIOPA validations and any issues can be ironed out at this stage.
It should be noted that the EIOPA validations are not an exhaustive or complete list of possible validations. It’s possible that annual returns may be accepted by the ONS, while still containing some errors.
Following uploads by companies, the CBI carries out additional accuracy and reasonable checks. We saw this in action for the quarterly templates during 2016, with the CBI following up with individual companies with questions a few weeks after the quarterly reporting deadline. We expect that the CBI will carry out similar checks on the annual reporting templates.
As mentioned above, the EIOPA validations are not an exhaustive list of all possible validations that can be performed on the annual QRTs. Even where reporting software is used which includes additional validations, it is worthwhile understanding what cross-checks are in place and if your company would benefit from an additional set of checks.
Given that different templates may be completed by different staff or departments within the business, the need for cross-checks to ensure consistency is paramount.
Some high-level examples of cross-checks are shown in the table below.
3) Reasonableness checks
The validations outlined above cover internal consistency within the templates. However, companies should also include some reasonableness checks and validations against other sources.
The first key check would be to ensure that the figures are consistent with those submitted at previous reporting dates—so previous quarterly QRTs, or annual QRTs (in future years). Any significant change may be due to genuine business changes or to a potential error in the inputs.
Secondly, the annual QRTs should be cross-checked against other sources. A few examples are provided below, but the more the better.
The validations outlined in this blog are only a flavour of those which could be applied. Ideally companies will tailor these examples to their own systems and data sources.
The Central Bank is facilitating external User Acceptance Testing (UAT) on the ONS from 17 April to 21 April 2017 so companies will have a chance to test their annual QRTs during this time.