Tag Archives: Pillar 3 reporting blog series

EIOPA provides feedback on SFCRs

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

The European Insurance and Occupational Pensions Authority (EIOPA) has recently provided feedback to the industry on the first batch of published Solvency and Financial Condition Reports (SFCRs). The findings are based on observations from a sample of the 2016 group SFCRs and also from similar reviews of solo SFCRs by various national supervisors.

In order to support the industry in preparing future SFCRs, EIOPA has published a Supervisory Statement with its findings. It should be noted, however, that the findings are nonbinding on companies. Nonetheless it is reasonable to expect that supervisors might expect the industry to at least consider these findings when drafting their next reports.

This blog post outlines some of the highlights from the supervisor’s feedback:

• Where a reporting item is not applicable, it is important to have a clear indication that the information is not applicable. Examples would include pointing out that an internal model, the matching adjustment or the volatility adjustment are not applicable for a given company.

• Companies should take care in setting the content and language styles of the reports, particularly the Summary section. Policyholders should be the main addressees of the Summary, and EIOPA has outlined the minimum content it expects to see in this section of the report. The remaining sections can be addressed to analysts and investors, so it is not expected that legislative definitions or detailed requirements need to be explained in the main body of the SFCR.

• While it is good practice to include Quantitative Reporting Templates (QRTs) in the Appendix to the SFCR, it should not prevent companies from including quantitative information in the body of the report. If appropriate, parts of the QRTs should be repeated or complemented by the narrative information in the SFCR.

• It is expected that the sensitivity to different scenarios or stresses is disclosed in a structured format. Within the chapter on Risk Profile, information on the overall impact should be provided under each risk section.

• EIOPA would like to see more undertaking-specific information regarding valuation of investments, valuation of deferred tax assets and liabilities and valuation of technical provisions.

• Within the section on Valuation of Technical Provisions, the SFCR should provide a description of the level of uncertainty in the calculations. The degree of uncertainty should be at least linked to the assumptions underlying the calculation, such as economic and noneconomic assumptions, future management actions and future policyholder behaviour.

• Undertakings should also include comparative information against the previous year’s submission in certain areas of their 2017 SFCRs. EIOPA recommends that companies provide comparative information in table format as much as possible. Qualitative information on material differences between two reporting years is also expected to be included in the report.

Companies should, where possible, bear this feedback in mind when preparing their next SFCRs.

RSR feedback from Central Bank of Ireland

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

The Central Bank of IreIand (CBI) recently completed a review of 2016 Regular Supervisory Reports (RSRs) and has now written to companies with its feedback. To recap, the RSR is a private report submitted to the supervisor, and the Solvency and Financial Condition Report (SFCR) is the publicly disclosed equivalent of this report.

The CBI’s review focussed on the following:

• Confirming that each of the headings and subheadings required by the regulations were addressed in the reports
• Assessing the completeness and quality of responses under each of the main headings
• Checking that the details provided were in line with the CBI’s understanding of the firm

The letter sent to each company detailing the supervisor’s feedback can be found at the CBI’s website here. A key point highlighted is the requirement that the RSR be forward-looking, focussing on the business planning horizon. Companies should include detailed analyses of the risks facing their businesses over this period.

Companies should bear this feedback in mind when preparing their next RSRs, where possible.

RSR reporting frequency
Under Solvency II regulations, companies must prepare a full RSR at least every three years. However, the frequency of the RSR is at the discretion of the local supervisor, which can request more frequent reporting. Based on this review, the CBI is happy that a three-year cycle is appropriate. However, it will look to spread reporting across the three-year period by requesting some companies to report an RSR in 2018 and some in 2019. Therefore the CBI has outlined in the letter when it expects firms to submit their next RSRs.

For companies not required to submit a full RSR in a given year, they should instead provide summaries of material changes. The summary must detail any material changes that have occurred over the reporting period relating to topics covered in the RSR and provide a concise explanation about the causes and effects of such changes.

Central Bank shines a light on anomalies in Solvency II Pillar 3 reporting

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

The Central Bank of Ireland (CBI) held an industry workshop on 21 November aimed at practitioners who prepare the Quantitative Reporting Templates (QRTs) and, to a less extent, the Solvency and Financial Condition Report (SFCR). Despite the wet and wintry conditions, the session was very well attended and there was plenty of engagement from industry attendees. The CBI expressed concern regarding the level of errors in the Solvency II submissions, calling into question the processes, review and governance in place in (re)insurance companies.

This blog post outlines some of the highlights from the workshop:

• There has been a surprisingly high rate of resubmissions of quarterly and annual QRTs to date. For Q1 2016, it was as high as 70%. There is now a consistent resubmission rate at approximately 30%.

• The CBI pointed out that it commits significant resources to identifying and querying errors each quarter. In turn companies also spend time and effort remediating these issues. They see this as an unanticipated cost for both themselves and the industry.

• The most common errors relate to missing data on the list of assets template (S.06.02) and confusion around country classification for premiums, claims and expenses (templates S.04.01, S.05.01 and S.05.02).

• The CBI believes it has taken a pragmatic approach to QRT errors for the first 18 months of reporting, working with companies to remediate errors. However, it was clear that it would consider taking a harder line from next year onwards.

• The CBI specifically pointed to the Directors’ Accuracy Certificate, which relates to annual reporting only. In cases of persistent reporting errors by a company, the CBI intends to contact signing directors and may ask them to outline the governance and review processes in place.

• The CBI is carrying out some on-site inspections in relation to Solvency II reporting processes, with a particular focus on governance and review of submissions.

• In addition to the automatic cross-checks on the CBI’s Online Reporting System, it also outlined some of the additional quality assurance checks it carries out on receipt of QRTs. In order to assist companies in this regard, the CBI has prepared a spreadsheet with a list of these checks. It expects companies to build in these checks to their own processes before submitting templates.

• The CBI has also added an SFCR repository to its website. This contains the SFCR reports of insurance companies that are regulated by the CBI and is a useful resource for the industry. The CBI’s SFCR repository can be found here.

As such, a clear message has been sent to the industry regarding Pillar 3 reporting. The challenge will be in automating processes, streamlining review and tightening up the governance in this area.

I include links to both the slides from the industry workshop and the additional quality assurance checks spreadsheet.

Milliman STAR Solutions® – VEGA® is an automated Pillar 3 reporting and standard formula aggregation system. One of the key features of VEGA is inbuilt XBRL functionality and validations, ensuring the QRTs meet the CBI’s requirements before uploading to the Online Reporting System.

SFCR: Sales insights

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II, I look at premium income figures as reported by Irish insurance companies.

The figures below are based on an analysis of 47 Solvency and Financial Condition Reports (SFCRs), which cover all the major Irish-domiciled insurers.

Life Breakdown
Based on the SFCRs in our analysis, total premiums received in respect of life business during 2016 were €40.2 billion. This reflects all premiums, including both new business and regular premiums and top-ups on existing business, and is gross of outward reinsurance. We believe this represents approximately 85% of the total Irish-domiciled market, implying total premiums of approximately €47 billion.

Cross-border companies are an important feature of the Irish insurance market and this is reflected in the premium figures, with 68% of premiums written outside of Ireland and the remaining 32% written in Ireland.

The majority of cross-border business written from Ireland is written in the Italian market. Almost three-quarters of cross-border premiums in 2016 were to the Italian market. The next largest cross-border life market is the UK, with 11% of cross-border premiums.

In terms of types of business sold, there is a wide range of business sold by Irish life insurers. While the SFCR disclosures don’t necessarily disclose the exact details of products sold, they do provide a breakdown of premiums by Solvency II line of business. It should be noted that a single product may be unbundled across several lines of business in these statistics e.g., a unit-linked product with a return of premium guarantee will be split across ‘unit-linked’ and ‘other life insurance.’

Perhaps not surprisingly, life premiums are dominated by unit-linked business (82.6%). Of the remainder, reinsurance business accounts for over 14% between life and health business, reflecting Dublin’s position as a centre for reinsurance.

Please note that private health insurance is classified under non-life business and health insurance here refers to products such as long-term care.

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SFCR: Under the bonnet – insurers’ assets

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II, here’s a look at a breakdown of investment assets held by Irish insurance companies.

All companies
The figures below are based on an analysis of the investment breakdowns found in the Solvency and Financial Condition Reports (SFCRs) of 51 insurance companies in Ireland, which include all the major players in the Irish insurance market. Please note that these investments do not include assets held for unit-linked or index-linked contracts. Instead they represent the assets backing technical provisions and shareholder investments.

Note: The chart above shows the net derivatives position, i.e., derivative assets less derivative liabilities.

On average, Irish insurers are heavily invested in bonds, with 41% in government bonds, followed by 35% in corporate bonds. There are also significant holdings in cash and deposits (9%), listed equities (4%) and collective investment undertakings (5%).

The chart below shows the various market sectors in more detail.

Domestic life companies are heavily invested in government bonds, which account for 64% of their total investments, followed by corporate bonds, making up 22%.
• For life cross-border companies, there is a wider distribution across investment types, with the highest allocation of investments to government bonds (32%), followed by corporate bonds (23%), cash and deposits (17%), collective investment undertakings (11%) , listed equities (10%) and derivatives (6%).
Reinsurers are heavily invested in corporate bonds, which account for 56% of their investments on average, followed by 33% invested in government bonds. This may indicate that the large global reinsurers are prepared to take on a little more risk, in order to gain a higher spread.
• When we look at non-life companies, we can see their investments are almost equally split between government bonds (37%) and corporate bonds (38%).

In terms of more unusual assets, we see a wide range of assets included in the ‘Other’ category in the market sectors chart above, although these investments are typically low. Investments in the ‘Other’ category include property, mortgages/loans and collateralised securities in the form of mortgage-backed securities.

The public disclosure templates do not reveal the duration of investments held. Therefore it is not possible to get a picture of how well matched the asset portfolios are to the associated liabilities. However, a comparison with the investment mix and the market risk component of the Solvency Capital Requirement (SCR) of the various market sectors shows the following:

• For non-life insurers, the market risk component of the SCR is much lower than for life insurers even though the investment mix is broadly similar. This is typically due to the fact the non-life insurers invest in short-term assets, which tend to attract lower capital requirements.
• For life insurers, the domestic insurers have a higher market risk component than the cross-border insurers. This is counterintuitive to the asset mix, which shows that the domestic insurers are more heavily invested in government bonds that are traditionally considered to be less risky and attract no capital charge for spread risk under the Solvency II standard formula. It is not clear from the SFCRs what is causing this but it may be that the domestic insurers are investing in assets of a longer duration to back long-term liabilities, such as annuities, or it could be that the unit-linked policyholders of the domestic insurers are investing in riskier assets than their cross-border counterparts.

SFCR: Capital insights

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II, we look at the quality of the Own Funds on Irish company balance sheets.

All companies
The figures below are based on an analysis of 46 Solvency and Financial Condition Reports (SFCRs), which cover all the major players in the Irish insurance market. The headline statistic is that Tier 1 unrestricted Own Funds account for 93.7% of capital on Irish insurers’ balance sheets, as shown in Figure 1. Tier 1 restricted (1.1%), Tier 2 (2.9%), and Tier 3 (0.8%) make up the remainder of basic Own Funds. The small level of ancillary Own Funds (1.5%) shows that very few companies have applied to include additional ancillary items on their balance sheets.

Solvency II_Own Funds Breakdown_All Companies
Figure 1

Life industry
It is useful to consider companies selling life business in isolation. We have included 25 published SFCRs within this category.

Firstly, in Figure 2, we look at domestic life companies selling in Ireland. For these companies, a minimum of 90% of Own Funds is Tier 1 unrestricted capital. Please note that Irish Life redeemed €200m of Tier 1 restricted capital in February 2017. Thereafter their Own Funds were 100% Tier 1 unrestricted capital.

Figure 2

In fact, as seen in Figure 3, all these domestic companies are covering 100% of the Solvency Capital Requirement (SCR) using Tier 1 unrestricted capital.

Solvency II_SCR coverage
Figure 3

We see a similar picture in Figures 4 and 5 for the cross-border life market in Ireland, with very few cases of lower-quality capital on the balance sheet. Again, all the companies examined cover the SCR using 100% Tier 1 unrestricted capital.

Figure 4
Figure 5

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