19 May 2014

Risk.net: Firms prepare for Solvency II pillar III scrutiny

With widespread progress reported on Pillars I and II of Europe’s Solvency II directive, the industry has been turning its attention to Pillar III. Much of the effort so far has been on the mechanics: how will the information be marshalled to complete the reporting templates? But there is a wider, and perhaps more worrying, question: how will the market react to what is reported? Pillar III requires disclosure of far more detailed information than any previous regime, much of it for the first time. Not only regulators, but analysts, investors, competitors and others will be poring over the pages and dissecting the contents of insurance company disclosures. Risk managers, therefore, will need to concern themselves not only with the content they must provide for Pillar III, but also with managing the impact as the reports are released into the market.

Pillar III will require insurers to produce a private regular supervisory report (RSR) every three years, with an annual supplement, a public solvency and financial condition report (SFCR) annually, and quantitative reporting templates (QRTs), mostly annually. The templates will form part of the RSR, with some also included in the SFCR, and will include detail on the market-consistent balance sheet, own funds, technical provisions, reinsurance, available capital, source of earnings and investments, as well as the solvency capital requirement (SCR) and minimum capital requirement (MCR).

"Pillar III reporting will be significant because, for the first time, there will be a consistent basis of measurement across Europe for life and general insurance", says Barney Wanstall, director at PwC, who is based in London. Up until now, insurers’ public reporting has been based largely on accounting standards, which vary by territory and are far less prescriptive. "Because Solvency II’s economic measures are at its heart, Pillar III reporting will be powerful in terms of enabling comparison between insurers of balance sheets and period-to-period economic movements", Wanstall says.

Although a number of major European insurers have been publishing their solvency ratios and economic capital based on their internal model calculations for the past few years, some firms are now beginning to include more Solvency II-type disclosures in their reporting. In its annual report for 2013, published in March, UK insurer Prudential reported an economic capital surplus of £11.3 billion, and an economic solvency ratio of 257 per cent calculated using a methodology closely aligned with Solvency II (with an assumption of US Solvency II equivalence with respect to US business results, no restrictions placed on the economic value of overseas surplus, and using an internal model that has not yet been reviewed or approved by the UK’s Prudential Regulation Authority). The company made its motivation for the disclosures clear. "By disclosing economic capital information at this stage, the directors of Prudential are seeking to provide an indication of the potential outcome of Solvency II based on the group’s current interpretation of the draft rules", said the company in its report.

Full article (subscription)

© Risk.net