Pillar 3 reporting requirements – inventory of the unknown

It is often said that the Solvency II reporting requirements – Pillar 3 – are the forgotten element of the new regime. Some of the larger insurers have spent years preparing themselves for the task but many others will have put it at the bottom of their Solvency II ‘to do list’.

Complying with the requirements will not be easy for insurers and the need for both annual and quarterly reporting means that insurers will need to develop sustainable capabilities and processes and embed them as business as usual.

Pillar 3 requires insurers to report more data and information, in a structured electronic format, more quickly and more often than they have in the past. In addition, the reporting will also be subject to greater scrutiny than ever before.

The requirements mean that insurers are required, for example, to disclose asset data by each individual security held and the granularity of the required data includes not only the name of the security but pieces of data such as ID codes and the security’s rating in addition to the cost and valuation details. The underlying asset data also needs to be presented using the ‘look through’ principle for collective investment funds. Such items are not part of the normal accounting records of an insurer and will require a close relationship with the asset manager to obtain the required data on a regular and timely basis.

The asset data issues are well publicised but less well known are some of the issues related to the reporting of liabilities. Line of business reporting is a requirement and depending on how many lines of business a company underwrites there could be several thousand data entries required to complete the reporting templates. Doing business in multiple currencies and multiple geographic locations adds to the complexity of the liability reporting as some data has to be reported in original currency – not just the accounting reporting currency – and by original country of the risk.

The complex data requirements may mean that the insurer’s data governance needs to be enhanced to ensure that all this data is accurate, complete and appropriate as required by the Solvency II directive. However, the granularity of the detail required and the requirement for this to be delivered to meet the five week quarterly reporting deadline means that people, processes and technology are going to have to be utilised effectively to ensure ‘business as usual’ reporting can be achieved on a timely basis. The alternative of all hands to the pump and a proliferation of spreadsheets to manipulate data to the required format will be unsustainable in the long run. The scope of the reporting will increase dependencies on IT systems whilst at the same time reducing the number of windows for changes to be made.

As a response to the complex technical issues that are evident in Pillar 3 the Prudential Regulatory Authority (PRA) set up an industry working group in November 2013 so that these issues could be aired and experience shared. Key issues identified by the PRA included areas where ‘policy is clear but data is difficult to provide or does not currently exist within the firm’ and ‘to gain technical input on specific issues such as the reporting templates and taxonomy’.

A review of the notes of the first meeting of the industry working group and related material highlights some of the issues being faced by insurers as they try to get to grips with the requirements.

A key issue for all insurers is the current stability of the requirements given that EIOPA is only planning to release the interim guidelines for reporting in May 2014 and the final Solvency II templates in December 2014. In addition, the related Implementing Technical Standards and Guidelines are not expected to be published for consultation until December 2014.

Adding to the uncertainty is the PRA’s own development of any national specific reporting that might be required which it expects to start consulting on in July this year. This lack of stability in the final requirements has knock on effects for potential software providers for the required structured electronic reporting in XBRL and for insurers in selecting their XBRL provider and implementing an effective IT solution.

Other issues highlighted include a general uncertainty over the use of data purchased from data vendors such as ratings agencies. Some firms were having issues with the look through principle particularly where there was more than one layer of collective fund. Intragroup transactions and the availability of timely and historic information were also highlighted as potential issues. The lack of detailed guidance also meant that assumptions on issues such as materiality were being made.

All of the above suggests that depending on the complexity of your business the Pillar 3 aspects of Solvency II need to be moved up the agenda. Those with less complex business models might be able to wait for more certainty before they invest time and resource. However, firms with complex business models need to raise the stakes to ensure they can meet the requirements. No one should be dismissive of the potential issues and an early start will pay dividends in the long run in industrialising the processes that will be required.

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Charles Portsmouth

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Insurance Day article by Charles Portsmouth