Solvency II will have far reaching implications for all types of insurers. Courtney Marsh discusses the reforms and what advisers can expect.
Now that 2016 is upon us Solvency II is officially in force, with important implications for product providers and financial advisers. After initial uncertainty as to how Solvency II would apply to the health cash plans market, it has brought about significant change.
Solvency II is the EU Directive that is designed to harmonise EU insurance regulation across member states, in particular the amount of capital that EU insurance companies must hold to reduce their risk of insolvency. There are three main pillars:
• Pillar 1 consists of the quantitative requirements (such as the amount of capital an insurer should hold);
A company that is Solvency II-compliant will have put in place a robust framework that analyses their risks and will have increased their in-house expertise of risk analysis to help them to do so.
• Pillar 2 sets out requirements for the governance and risk management of insurers, in particular the Own Risk and Solvency Assessment (ORSA) process;
• Pillar 3 focuses on the requirements for disclosure and transparency.
Companies' work on the first two pillars should be broadly complete, with most insurers now concentrating on the third pillar. Companies will need to get to grips quickly with the XBRL reporting (eXtensible Business Reporting Language) through the Bank of England's Bank of England Electronic Data Submission (BEEDS) portal.
The deadline for day one reporting is just around the corner in spring (20 May 2016), with quarter one reporting due a few days later (26 May 2016). The deadline for reporting the first year end is 19 May 2017.
Firms will also need to produce their first Solvency Financial Condition Report (SFCR), Regular Supervisory Report (RSR), Quantitative Reporting Templates (QRT) and National Specific Templates (NST). However, waivers are available for small firms on quarterly reporting and for all firms on the public SFCR.
The ORSA process
Companies should have been through the ORSA process at least a couple of times and have an ORSA report available at the request of the regulator, which is looking to review all firms by the end of 2016. Firms must also produce a record of the ORSA. This allows a third party to come to the same conclusions as the board when signing off its ORSA report.
Initial feedback on ORSAs from the regulator stated that ORSAs should include a clear summary of the data being reported on, specifically highlighting the key messages. The ORSA should not be too long, and any supporting documentation should be signposted and the board sign off of the ORSA should be included. ORSAs should also demonstrate whether the standard formula is applicable or not, and look at the emerging risks for the business, existing key risks and any management actions.
A wide range of stress testing should also be included, as well as reverse stress testing, alongside a forward assessment of a company's own risks.
Although much of the reporting information produced will remain between the insurer and the regulator, Solvency II aims to deliver more transparency to all stakeholders. A good example of this is the Solvency and Financial Condition Report (SFCR). The SFCR will be published annually and will be a publicly available document. It will contain information on business and performance, systems of governance, the company's risk profile, and a company's solvency position both today and in the future.
Insurers will be able to apply for waivers to avoid releasing any commercially sensitive information. However, the information contained within the SFCR will allow interested parties to obtain a much more informed picture as to how a company manages the risks it faces, the capital it holds and the underlying performance of the business. It should therefore enable a more transparent comparison between insurers.
Impact on advisers
