Solvency II public reporting PDF
Preview Solvency II public reporting
MARGIN MARGIN Solvency II public reporting Getting over the line December 2017 kpmg.com/uk 0 | Solvency II public reporting MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN Executive summary Our impressions The new regulatory regime for insurance companies The better SFCRs tended to be those that presented in Europe, Solvency II, became effective from 1 a good balance between quantitative and qualitative January 2016. One of the three pillars of Solvency II information. While longer narrative disclosures do not requires insurers to be transparent and provide always mean good quality, we found through our comprehensive quantitative and qualitative benchmarking that disclosures around the following information around their regulatory financial position areas could be improved: and capital management. This information is made — Adequate quantitative disclosures to explain the public through the Solvency and Financial Condition key differences between valuation for statutory Report (SFCR) which insurers had to publish for the financial reporting purposes and valuation for first time earlier this year. solvency purposes As required by the Prudential Regulatory Authority — Identification of assets and liabilities which are (PRA), the Valuation for Solvency Purposes and valued using alternative valuation methods, the Capital Management sections of the SFCR were assumptions used and description of the subject to audit. As one of the leading audit firms for valuation uncertainty the FTSE 100 insurance sector, we reviewed a significant share of the SFCRs published in the UK. — Information on capital management objectives Additionally, for the purpose of this report, we and policies reviewed a sample of SFCRs which were not audited — Description of the degree of subordination of own by KPMG in order to obtain a broader view of the fund items other than ordinary share capital market. — Availability of own funds around the group While the structure and content of the SFCR are prescribed in detail under Solvency II regulation, the As insurers prepare for the second year of publishing rules leave much room for interpretation when it the SFCR, we hope this publication will assist them comes to the length and depth of narrative in focussing on the areas where they can add value disclosures. Overall although we found that most by improving their disclosures. insurers had provided the necessary disclosures to meet the reporting requirements, we also noted substantial variance in the extent and depth of disclosures. © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 | Solvency II public reporting MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN Contents Benchmarking approach 3 Valuation for solvency II purposes 5 Capital management 9 Looking ahead 13 © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Solvency II public reporting | 2 MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN Benchmarking approach Our focus Benchmarking approach Data The objective of Solvency II In order to quantify our We applied those questions to a public disclosure is to provide observations for trend analysis, sample of 30 solo and 10 group various stakeholders a sound we have set up a catalogue of UK-based insurance understanding of insurers’ questions against which we have undertakings. Our sample was solvency positions. benchmarked the disclosures. split equally between life and Those questions reflect areas general insurance businesses and In particular, the disclosures where we observed differences comprised both KPMG and non- relating to valuation for solvency in approach between insurers KPMG audit clients. II purposes and capital during the course of our audits of management are of primary Our analysis addresses only the the relevant elements of the importance due to their inclusion data published in the SFCRs with SFCR. in the scope of audit. Therefore financial year end 2016. for the purpose of this analysis, our focus is on these two sections only. © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3 | Solvency II public reporting MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Solvency II public reporting | 4 MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN Valuation for solvency II purposes Solvency II pSubhloicrt rheepaodrtlinge | 5 MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN “Only half of companies in our sample provided full and clear numerical disclosures explaining adjustments between IFRS or local GAAP and Solvency II” Bases, methods and assumptions Quantitative disclosures All insurers were required to provide disclosures The objective of the numerical disclosures is to around the bases, methods and assumptions provide the reader with an understanding of the underlying the valuation of their non-technical assets material differences between IFRS/ local GAAP and and liabilities. Solvency II. However, we noted great variability in depth and To achieve this objective, the Valuation for Solvency substance of those disclosures, with some Purposes section provides a reconciliation between companies providing exhaustive and detailed the IFRS/local GAAP balance sheet and the Solvency explanations and others providing just enough II balance sheet. Only half of our sample companies information to cover the requirement. provided full and clear numerical disclosures explaining adjustments between IFRS and Solvency The disclosures of bases, methods and assumptions II. Nonetheless, the level of detail varied and some could be improved by clearly explaining the sources opted to disclose the bare minimum. of the differences between IFRS or local GAAP and Solvency II, rather than leaving those differences In a significant number of cases, we also noted that open for interpretation. the reconciliation did not follow the format of the Balance Sheet QRT, and instead followed the IFRS or We also noted that the disclosures of the basis of local GAAP balance sheet format. This made it valuation for certain material classes of assets and difficult for a reader to understand any liabilities were sometimes grouped together into a reclassifications made when going from IFRS/local single note and this did not allow for sufficient level GAAP to Solvency II. of detail to be provided for each line item individually. How well are bases and methods of How clearly are quantitative differences valuation disclosed? explained? 18% 44% 12% 50% 61% 9% 3% 3% Disclosure provided for all material assets and liabilities Full table provided with Solvency II line items and referencing/ No or little disclosure made explanation in narrative section Disclosure provided for only some material assets and Table provided, however GAAP line items used instead of liabilities Solvency II taxonomy Cross reference made to accounts Table provided, however little or no cross-referencing in narrative section to explain differences Little or no numerical disclosures provided © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Solvency II public reporting | 6 MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN “In more than 90% of the SFCRs reviewed, we noted that insurers have used one of the prohibited valuation methods as ‘proxy’ for fair value” Market consistent valuation Fair value hierarchy Under Solvency II assets and liabilities should be Under Solvency II, assets and liabilities are valued valued at a market-consistent or fair value. The using a valuation hierarchy, with quoted market Solvency II rules specifically prohibit certain valuation prices in active markets being the default method of methods such as historic cost, depreciated cost or valuation. Around 73% of insurers in our analysis amortised cost. provided some form of disclosures on valuation hierarchy and over half of them provided an However, in more than 90% of the SFCRs reviewed, explanation of how they assess that the market they we noted that insurers have used one of the derived inputs from is an active market. prohibited valuation methods as ‘proxy’ for fair value. For example, the depreciated cost of plant and However, we also noted that around one in ten equipment has been deemed to be materially insurers instead used the IFRS 13 Fair value hierarchy equivalent to fair value in many cases. as disclosed in the IFRS financial statements. Although the Solvency II hierarchy is similar to IFRS For two-thirds of insurers who used that 13 fair value hierarchy, there are some key approximation, an explanation was provided for using differences, notably in the second level of the a cost method as proxy for fair value, and the hierarchy where Solvency II is more stringent around dominant rationale was the short-term maturity of the the requirement for prices to come from ‘active’ asset/liability. It is worth also highlighting that in most markets, whereas IFRS 13 allows a valuation model cases, the assets which were valued using this to be used as long as the inputs are observable. approximation did not form a significant part of the overall insurer’s balance sheet. Is use of cost approximation method as How was valuation hierarchy disclosed? proxy for fair value justified? 27% 27% 40% 76%% 66% 23% 10% Reason for using cost approximation disclosed Disclosed Solvency II fair value hierarchy with explanation of active markets Reason for using cost approximation not disclosed No reference made to fair value hierarchy No cost approximation valuation method applied Disclosed Solvency II fair value hierarchy however with no definition of active markets Used IFRS 13 fair value hierarchy instead of Solvency II fair value hierarchy © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7 | Solvency II public reporting MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN MARGIN MARGIN MARGIN MARGIN “Around 40% of the insurers in our analysis disclosed that they did not use an Alternative Valuation Method” “Around 40% of the insurers in oouurr aannaallyyssiiss ddiisscclloosseedd tthhaatt they did not use an Alternative Valuation Method” Alternative valuation methods (AVMs) How well have the alternative valuation methods been explained? 80% of insurers in our analysis who used an AVM ApArlotveidrenda dtisvcelo vsuarleusa atriooun d m theet bhaosdidss sa n(dA VmVMeMthsso))d of How well have the alternative valuaattiioonn valuation as well as the valuation uncertainty methods been explained? 80% of insurers in our analysis who used ann AAVVMM associated with their chosen valuation method. provided disclosures around the basis aanndd mmeetthhoodd ooff Insurers used AVMs mostly for valuation of property, valuation as well as the valuatioonn uunncceerrttaaiinnttyy derivatives or subordinated liabilities. associated with their chosen vvaalluuaattiioonn mmeetthhoodd.. IHInasluf roefr sth ues ceodm ApVaMnise sm tohsatl yd ifsocrl ovasaleluudaa tihiooannt oothffeppyrro ouppseeerrdtty y,, dAdeVrMivast aivlseos odorirssculobsoerd iansasteudmlpiatbioilnitsie asn. d reasons for 39% 42% using these AVMs. These disclosures were Half of the companies that disclosed that they used presented within particular notes in sections D.1 AVMs also disclosed assumptions and reasons for 39% Assets, D.3 Other Liabilities or D.4 Alternative 42% using these AVMs. These disclosures were Valuation Methods of the SFCR. presented within particular noteess iinn sseeccttiioonnss DD..11 Arsosuentsd, 4D0.%3 O otfh tehre L inasbuiliriteiers ionr oDu.r4 a Anlalteleyrrsnniasat tdiivviesec losed VtVhaalut athtieoyn dMide nthoot duss eo fatnh eA VSMFC. RT.h. is is because the assets on their balance sheets comprised either 6% 13% Around 40% of the insurers in our analysis disclosed assets and liabilities for which quoted market prices that they did not use an AVM. This iiss bbeeccaauussee tthhee w asesret sa voani l athbeleir obra wlanhnceceree s thee ats sceotms paprnrisdse elidabeilitiththiersr 6% 13% were short term in nature. assets and liabilities for which qquuootteedd mmaarrkkeett pprriicceess wWweer ehaavvea inlaobtleedo trhwath seoreme teh eceo amsspeatnsi e asnn d i lsliiacablboiilsliitteiieedss in sweecrteiosnh Dor.4t ttehramt tihne nya htuarvee. not used AVMs when in Full explanation provided including assumptions and reasons fact they did. Based on the disclosure notes in We have noted that some companies discloseedd iinn Some explanation provided around basis and method of valuation section D.1 or D.3 we could infer that the company section D.4 that they have noott uusseedd AAVVMMss wwhheenn iinn FCFurollsesx rpelafenraetniocne pmroavdidee tdo ifnacirlu vdailnuge adsisculmosputirioenss ina nthde r easons valued, for example, property or investments in fact they did. Based on the disclosure nnootteess iinn accounts unlisted equities by using valuation methods that Some explanation provided around basis and method of valuation section D.1 or D.3 we could infer that the ccoommppaannyy No AVM to disclose would qualify as AVMs. These inconsistencies Cross reference made to fair value disclosures in the valued, for example, property oorr iinnvveessttmmeennttss iinn suggest that companies may still struggle with the accounts unlisted equities by using valuation meetthhooddss tthhaatt disclosure requirements and approach regarding No AVM to disclose would qualify as AVMs. These incoonnssiisstteenncciieess AVMs and this is an area for further improvement in suggest that companies may stil struggle with the future SFCRs. disclosure requirements and approach regarding AVMs and this is an area for furrtthheerr iimmpprroovveemmeenntt iinn future SFCRs. Solvency II public reporting | 8 © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Solvency II public reporting | 8 MARGIN MARGIN MARGIN MARGIN CROP MCARROKPS MARKS CROP MCARROKPS MARKS MARGINMARGIN MARGINMARGIN CROP MCARROKPS MARKS CROP MCARROKPS MARKS MARGINMARGIN MARGINMARGIN MARGIN MARGIN Capital management Solvency II pSubhloicrt rheepaodrtlinge | 9 MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN CROP MARKS CROP MARKS MARGIN MARGIN
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