Changes to capital requirements are not the only element of Solvency II that insurers should be concerned about. Neil Coulson details the proposals for onerous information sharing.
The Solvency and Financial Condition Report proposals outlined by Consultation Paper 58 as a requirement of Solvency II is a potentially significant additional burden for insurers — with unclear benefits to anybody other than the regulator. In addition, all of this information is proposed to be put in the public domain, prompting significant adverse comment. And the final advice from regulators to the European Commission has only taken limited notice of these comments.
It is one thing for companies to put together a report for the regulator, pulling together numerous documents that illustrate in detail how an entity operates and manages risk. It is quite another for this document to be published for public consumption. Furthermore, the regulators are suggesting that all of this information is duplicated with additional information inserted in a separate 'report to supervisors'.
At a time when many insurers are worried about the growing resource demands of complying with Solvency II, this idea seems particularly burdensome. Much of this information already exists in financial statements but it will be difficult to utilise and avoid duplication since the SFCR is required to be a stand alone document in a highly prescriptive layout.
The European regulators don't seem to register the cost — in both production and manpower — of putting this information in the public domain. Although improving the availability of public information is reasonable, it is a question of scale. This report is potentially a larger document than the financial statements of an unlisted company. And the regulators do not seem to appreciate the considerable additional effort required when preparing information for the public. Insurers will also need to apply similar considerations to those regarding their financial statements as to whether the SFCR is a marketing document or just a bland necessary evil of commercial life.
Although the exact format of certain reporting templates is still being developed the early signs are of this also placing excessive commercially sensitive information into the public domain. For example, insurers will not want to reveal information, like lists of their 10 largest policyholders. Policyholders will also not want this information made public. But it is understandable why the regulator might want to know such information.
The proposals regarding non-disclosure of confidential information do not appear practicable. It is not clear at what level of detail the minimum disclosure will be and how in practice it will be regulated. For the largest insurers, public image may be an influencing factor but this is likely to be weaker for smaller players. Listed insurers may also have the additional challenge of ensuring that any price-sensitive information within these reports is released into the public domain in an appropriately controlled manner.
Too much information means there is a greater risk of readers missing relevant information hidden in the mass. The very extensive list of information that is required within these reports is driven by the regulator's needs. Although it seems reasonable for the regulator to require most of what it requests, there is an inevitable tendency for them to demand every aspect they can think of. All of the detailed disclosure headings need to be covered irrespective of size, with only a generic allowance that disclosures should be proportionate for the business.
It remains to be seen how realistic the regulators will be in allowing proportionate reductions in disclosure. Just because the regulators require this information does not automatically make it appropriate to place it in the public domain.
The extent of the audit requirements for these reports has yet to be finalised and it is unclear exactly what role the regulator will play in assessing the completeness of the disclosures in the SFCR. For example, if a regulator identifies additional information it needs to perform its role will this also have to be added to the public record information? The requirement for potentially significant amounts of this information, both narrative and numeric, to be audited is also likely to further add to the reporting costs.
Who needs what?
The use and readership of these reports beyond the regulator are unclear. The regulator already has access to such information so does not need it to be in the public domain. A large amount of the information (for listed entities) is in the report and accounts already, and this should be the relevant route for informing investors as additional regulatory reports are not required for most other businesses. Rating agencies are given access to a lot of confidential information not in the public domain from the entities they rate, but understand the information and can discuss it with insurers.
Insurance brokers will also have their own contacts with insurers and make their own assessments to varying degrees of depth about the security of different carriers. Some policyholders, such as major companies buying insurance without the assistance of a broker, may be interested in the information — but most other policyholders, such as the buyer of a motor policy, are unlikely to be interested in reading a risk assessment of the company they are buying from and are unlikely to be able to make a meaningful assessment of such material.
While putting information in the public domain is a laudable aim theoretically, there is an obvious cost in doing so and there appears to be no clear identification of who will actually utilise such information. Ultimately, policyholders will bear the cost for something they probably do not want.
Compared to capital requirement changes under Solvency II this may seem a petty criticism of the proposals, but for senior management as well as risk and finance teams, particularly in smaller entities, this potentially carries a further large burden on top of all the other requirements. In addition, the prospect of having to publish within 14 weeks of the year-end will only increase the pressure on insurers at a busy time of year.
Neil Coulson is a partner at accountancy firm Littlejohn
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