siis discussion paper

An industry-wide challenge

Solvency II reporting

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Solvency II reporting – an industry-wide challenge Solvency II reporting (the third of the three ‘pillars’ comprising Solvency II) has taken a back seat to the capital requirements (Pillar 1) and risk management (Pillar 2) requirements up to now.

The delays in Solvency II implementation allowed insurers to make significant progress in embedding and refining their Pillar 1 and Pillar 2 projects into the businesses, and realise real benefits from these tools.

Most insurers did not take a similar view to the reporting piece but now as the final implementation date of less than two years away looms large, Pillar 3 is taking a prominent role in insurers’ implementation plans.

ContentsSolvency II reporting – an industry-wide challenge 1

Introduction 2

Increased regulatory demands 2 Increased frequency, scope and granularity 2 Data governance 2 New reporting format 3 Remaining uncertainties 3

Current status 4 The supervisors 4 Industry 5

Successful Pillar 3 implementation 6 1. Availability of data 6 2. Co-ordinated technical lead 6 3. Detail quarterly and year-end reporting timelines 6 4. Resource allocation 7 5. Implementation plan 7

Conclusion 8

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IntroductionThe breakdown in the Solvency II political process at the end of 2012 saw the credibility of the entire Solvency II project called into question. However, successful trialogue negotiations and the publication of the European Insurance and Occupational Pensions Authority (EIOPA) Interim Measures in 2013 put Solvency II back on track.

The strong majority in the European Parliament in March 2014 for the Omnibus II package confirmed Solvency II’s revival for implementation on 1 January 2016 (albeit with significant transitional arrangements).

While 2013 saw most insurers pause their ‘non-essential’ Solvency II workstreams, restarting Pillar 3 projects is now a real focus for much of the industry. This paper looks at the regulatory challenges, supervisors’ expectations, the industry response and best practices for Solvency II implementation.

Increased regulatory demands

Increased frequency, scope and granularity The current level of reporting requirements varies widely across the EU. However, even where the requirements are most onerous, Solvency II will be a huge increase in the disclosure burden.

This will not be just restricted to the increased frequency, scope and granularity in the reported numbers; insurers will also need to provide an extensive narrative report covering many commercially sensitive topics such as risk profile, risk and capital management systems and controls, key assumptions and performance projections.

Much of this will also be available in the public filing which provides a further challenge for insurers as the increased transparency is expected to impact share prices and valuations.

Data governanceSolvency II places a significant emphasis on data management within insurers. A core tenet of the Directive is that data used for calculating technical provisions and use in the internal model must be “accurate, complete and appropriate.”

The associated draft delegated acts implement the requirement for a data directory of all technical provisions and internal model source data, a written data policy and appropriate documentation of all material limitations of the data.

Additionally, Solvency II requires insurers have effective systems and controls in place to ensure that submitted data is accurate and timely.

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New reporting formatIn 2011, EIOPA selected eXtensible Business Reporting Language (XBRL) as the reporting format for Solvency II. Although XBRL has been in use for statutory and tax reporting for several years, the Solvency II taxonomy is of considerably greater scale and complexity.

The recent experience from the first CoRep reporting (the banking equivalent of Solvency II, which also mandates XBRL reporting) revealed the problems that can occur when implementing a large-scale XBRL project. In early April 2014 the European Banking Authority (EBA) announced it had identified that approximately a quarter of its taxonomy validation rules were incorrect and consequently delayed the submission dates by two months to allow firms to reconfigure their systems.

Remaining uncertaintiesWhile the reporting requirements are still to be finalised, the reporting elements have been relatively stable for some time now. With the exception of additional group structure disclosures, Omnibus II left Pillar 3 largely untouched. While some changes could still take place, the final published requirements are not expected to make anything other than minor amendments to the drafts already (officially and unofficially) consulted on.

National-specific templates (NSTs) however are still a genuine uncertainty. Some National Competent Authorities (NCAs) have stated that they won’t, at least in the short term, request NSTs, but others, such as the Prudential Regulation Authority (PRA) and the Autorité de Contrôle Prudentiel (ACP), definitely will. Little clarity exists presently in this area.

European Central Bank (ECB) reporting requirements are also still to be decided but it seems likely that when these are formally confirmed, expected October 2014, the ECB will accept the Solvency II reports, at least for the immediate future. However, over time, the ECB is likely to impose additional reporting requirements specific to its needs.

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Current status

The supervisors

While many insurers across the EU are still unsatisfied with the level of supervisor interaction, supervisory engagement has shown a marked recent uptick.

In the UK, firm supervisors at the PRA are said to be engaging much more with insurers and several welcome initiatives have been instigated by the PRA, including the establishment of a Solvency II Reporting working group.

This small group, with representatives from the Association of British Insurers (ABI), Lloyd’s, the Investment Management Association (IMA) and a handful of large insurers as well as number of PRA staff, met in December 2013 and March 2014. Detailed notes from each meeting have been published, as well as a Q&A document of questions submitted by industry representatives, which provide useful information on the PRA’s position on various industry concerns.

In Germany, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) provided a very helpful accompanying publication to its “comply or explain” responses to EIOPA’s Interim Measures. As well as providing certainty around the expectations (such as obliging all insurers to participate in the reporting exercise), BAFIN broke down the requirements into 15 thematic blocks and German insurers can expect additional practical guidance on each.

De Nederlandsche Bank (DNB) included data quality as one of its key focus topics for 2013. Requirements for firms to produce an ORSA-like report has also been incorporated into Dutch law and this report must be submitted from 2014 onwards. Dutch insurers were also required to submit their Standard Formula Solvency Capital Requirement (SCR) for 2013.

The ACP in France has been perhaps the most aggressive of all regulators in pushing ahead with Solvency II implementation. All French insurers are compelled to complete a full ORSA in 2014 and the first reporting deadlines have been brought forward to September 2014 for all insurers.

At the European level, EIOPA has set up a Q&A facility for the Interim Measures reporting requirements. Although answers can take some time, due to the fact of it being a European body, market participants are finding this a useful tool.

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Industry

After the pause in Pillar 3 projects in 2013, project work is now being revisited as firms restart these workstreams. Most insurers are, for now, using internal resources to carry out the gap analyses and related tasks. There is growing confidence in the market that the QRTs published by EIOPA in July 2012 are as near as final to be used for planning purposes.

Most firms are planning a dry run towards the end of 2014. Lloyd’s syndicates are required to submit 2013 numbers for the EIOPA Interim Measures QRTs in September 2014. Different approaches are being taken as to the scope of the dry-run; some firms are including the full suite of Solvency II QRTs, while most are focusing on the Interim Measures subset.

In most cases, firms will re-engineer existing working processes and systems rather than trial end-state Solvency II operating models. The key implementation challenges envisaged by insurers in meeting the reporting requirements centre around:

x data availability

x ensuring data quality

x redesign of reporting processes

x alignment with Pillars 1 and 2

x resource strain

A further challenge is ensuring that other related long term goals are considered e.g. IFRS 4 Phase II.

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Successful Pillar 3 implementationBest practice identified in the industry can be broken down into the following key thematic areas:

1. Availability of dataA gap analysis is the first step in assessing the data needs. Insurers must be careful to also consider what data is required for the narrative reporting as the Solvency and Financial Condition Report (SFCR) and Regular Supervisory Report (RSR) also entail a number of quantitative disclosures.

While many of the additional reporting fields are available within insurers’ internal systems; determining where and what data transformation processes are required is an important early step.

Certain data points will not be available internally and will require third parties such as asset managers, coverholders and brokers to provide additional information. Engaging with data providers and taking advantage of industry solutions (such as the IMA data exchange template) will be crucial for successful implementation. Data licensing (e.g. rating agencies) should also be considered at an early stage to avoid nasty surprises further down the road.

Although gap analysis is an integral part of this process, it is often only when insurers start interrogating the data in a dry-run process that issues are flushed out. Scheduling a dry-run, even if using stale data, as early as possible will prove invaluable.

2. Co-ordinated technical leadBeing a principles-based regulation at its heart, many of the Solvency II requirements are not well-defined but rather they are open-ended and open to interpretation.

Not over-engineering the implementation by accepting uncertainties in the regulations and taking a pragmatic, practical (and appropriately documented) view will save insurers considerable time and effort.

To a large part, this is a lesson already learned by insurers through their Pillar 1 and Pillar 2 work and it will be important that Pillar 3 workstreams follow best practice in channelling all such issues to a single technical lead to avoid getting bogged down in regulatory interpretation themselves.

3. Detail quarterly and year-end reporting timelinesEnsuring the short reporting timelines are in fact realistically achievable and putting resolution plans in place where necessary can sometimes be overlooked in project planning. Early implementation of data feeds and transformation processes will be key to identify problems such as data aggregation issues where data from different systems is in a different format.

Taking into account resource strains for dual reporting in 2015 and 2016 is also an important exercise. A co-ordinated approach across finance, risk and actuarial is vital to ensure the business has a holistic view of the end-to-end reporting process.

Groups reporting has its own challenges. Harmonising the closing date for accounts and establishing a common understanding of business terms across the group are among the early requirements for a successful group implementation.

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4. Resource allocationMost firms are intending to rely on internal resources for their Pillar 3 programme. Cost is not the only consideration behind this decision. Much of the gap analysis and scope work is best done by those within the business familiar with the data and systems. This does however, place a strain on internal resources that will have to cope with dual reporting, operating model changes and increased external and internal reporting demands.

It will also be important to carefully manage areas where potentially too much resource will be available. Narrative reporting is one area where too many contributors and ill-defined remits could cause problems. Ensuring the narrative reporting tells a coherent story, and aligns with other disclosures such as the ORSA, will be very challenging and needs careful consideration.

Given the sensitivity of some of the disclosures — fungibility of group capital, how risk management is embedded in the organisation etc. — insurers also need to carefully balance compliance against disclosure of commercially sensitive information.

5. Implementation planOne of the biggest and most important challenges is deciding the scale of systems and processes transformation the business could and should target. This is a complicated decision and clearly strategic commercial considerations (such as business model changes) must be taken into account, in addition to the insurer’s existing IT infrastructure and operating model.

A single data warehouse can simplify the on-going data governance requirements as controls and additional transformation processes are applied once to a conformed data model. However, implementation can take months or years and squeeze already stretched resources.

Many insurers are holding off instigating a strategic end-state systems overhaul until more clarity emerges on the operational challenges of Solvency II and other related requirements such as IFRS 4 Phase II. Others are modularising their implementation and phasing in the end-state solution gradually.

Whichever approach is taken it is important that the data architecture is documented meticulously Regulators are increasingly demanding insurers document the data lineage throughout the business. Being able to demonstrate the data flows, controls and transformations made to data will likely become a standard requirement and so documenting this in the build phase will save insurers time and effort in the long run.

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ConclusionSolvency II reporting will be a big challenge for insurers of all sizes. Increased demands and tighter timelines will necessitate fundamental systems and process changes and increased governance and culture changes regards data.

The run up to implementation it will be crucial for firms to take a full and coherent view of the data demands and manage the workstreams carefully and holistically.

How Solvency II Solutions and Tabular can help:

x Low IT footprint — up and running within minutes

x Fits easily with insurers’ existing working processes

x Allows insurers maximum flexibility in designing their Solvency II end-to-end reporting processes

x Adjustments can be made quickly yet in a controlled environment using Tabular’s in-built data governance tools

x Assists firms in keeping track of data flows through a comprehensive and user-friendly process management module

x Full audit log with roll-back to any point in time

x Facility to run predefined and customisable cross cycle trend analysis

x Collaborative tools to allow multiple users to contribute to the same reporting file in parallel

x XBRL submission file generation is completely automated through Tabular’s XBRL engine

x All EIOPA data checks, taxonomy validations included at point of data entry/import with extensive ancillary data accuracy tools to aid root cause analysis

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