Solvency Assessment and Management: Steering Committee Position Paper 49 1 (v 4) SFCR and RSR, Executive Summary, Business and Performance

Transcription

1 Solvency Assessment and Management: Steering Committee Position Paper 49 1 (v 4) SFCR and RSR, Executive Summary, Business and Performance EXECUTIVE SUMMARY 1. INTRODUCTION AND PURPOSE The purpose of this document is outline the structure of the following sections of the document that has been defined as the Solvency Financial Condition Report by EIOPA. The specific sections covered by this document include: Executive summary Business and Performance Discussion Paper 15 of the Reporting Task group deals with the structure of the Regulatory return and performs a comparison of the proposed EIOPA structure and other Regulatory frameworks. Thus this document will not include information on other Regulatory regimes, but for the proposed EIOPA and recommended South African approach. This document does however discuss measurement of proposed disclosures, where applicable and make recommendations with reference to International Financial Reporting Standards and other reporting frameworks such as Embedded Value, Market Consistent Embedded Value and other. In addition this document assumes that the RSR and SFCR will be combined in the South African environment. Thus the approach adopted in this document has been to consider EIOPA s requirements for both the SFCR and RSR and combining these. 2. INTERNATIONAL STANDARDS: IAIS ICPs Refer to DP15 3. EU DIRECTIVE ON SOLVENCY II: PRINCIPLES (LEVEL 1) Refer to DP MAPPING ANY PRINCIPLE (LEVEL 1) DIFFERENCES BETWEEN IAIS ICP & EU DIRECTIVE 1 Discussion Document 49 (v 4) was approved as a Position Paper by the Steering Committee on 29 February 2012.

2 Solvency Assessment and Management: Steering Committee Position Paper 49 (v 4) - SFCR and RSR, Executive Summary, Business and Performance Refer to DP STANDARDS AND GUIDANCE (LEVELS 2 & 3) 5.1 IAIS standards and guidance papers Not applicable 5.2 EIOPA S CPs (consultation papers) Disclosure requirements are set out in former CP58. Refer to section 6 for detail. 5.3 Other relevant jurisdictions (e.g. OSFI, APRA) Not applicable 5.4 Mapping of differences between above approaches (Level 2 and 3) Not applicable Page 2 of 14

3 6. ASSESSMENT OF AVAILABLE APPROACHES GIVEN THE SOUTH AFRICAN CONTEXT 6.1 EIOPA position and recommended South African approach CP58 Ref EIOPA Advice Task Group Comments Executive summary: SFCR: The description of the contents of the SFCR shall be read taking into consideration the principles of proportionality and materiality. Agreed SFCR: The SFCR shall include a short and easily understandable executive summary aimed specifically at policyholders SFCR: The executive summary shall highlight clearly any material changes that have occurred in the undertaking s or the group s business, risk profile, solvency position and system of governance since the last reporting period. Agreed. Agree at summary level. The ORSA should also explain this, but to a greater level of detail RSR: The undertaking should include an Executive Summary listing those sections of the RSR which have been subject to a material change since the previous report. Agreed. Proposal for South African subordinated legislation: The principles described for the content of the South African Regulatory Report (the Report) should be read

4 taking into consideration the principles of proportionality and materiality. Information disclosed in the Report should be consistent with that disclosed elsewhere (where relevant) such as the ORSA, Annual Reports and other public disclosed information. It is not the aim of the Report to duplicate information disclosed in other reports, thus where applicable the Report can reference to other reports. The Executive Summary section should be aimed at the policy holders and addresses the following areas: Significant changes in the business, risk profile, solvency position and system of governance from the prior reporting period Specific references to section of this report that have changed as a result of the point above. Also include a high level quantitative and qualitative analysis of the impact of significant changes to the business Reference could be made to the ORSA where the impact of above points are also discussed. It should be noted that the Task Group highlighted the fact that certain elements of the disclosure to the FSB should be highly confidential and an appropriate solution should be seeked to safeguard commercially sensitive information. A1. Business and external environment: Suggestion: We add the following two general points: SFCR: A description shall be provided setting out the nature of the undertaking s or the groups' business and external environment, any significant business or external events that have occurred over the year and general information regarding the undertaking or the Information reported in the SFCR need to be consistent with information reported elsewhere To the extent that the information is covered in the ORSA, it does not need to be duplicated in the SFCR. Many insurers, in their Annual Reports already report the information requested. Thus the information reported in the SFCR should be consistent with information reported elsewhere. Page 4 of 14

5 group, which shall include, at least: a) The undertaking s ownership; b) The undertaking s or the group's material lines of business and material geographical area where it writes business (specifically highlighting any material changes over the year); c) Any significant business or external events that have occurred over the year that have had a material effect on the undertaking or the group; This is also information that would be expected in the ORSA, specifically around the changes in risk profile. Suggestion: Subject to general points, we accept the EIOPA advise. d) The main trends and factors that have contributed to the development, performance and position of the undertaking or the group since the previous financial year end ; and e) For undertakings belonging to a group, information of the legal and organisational group structure SFCR: For groups, the descriptions shall also include all material subsidiaries, participations and branches (significant branches both within the group and/or their local markets) RSR: The supervisor should understand the business the undertaking or the group writes. With this information, the supervisor has the possibility to analyse trends on the main business lines to be aware of the undertaking or the group s main profit areas and the potential risks to them. Adverse changes to the trend could be noted and if appropriate, discussed with Proposal: Subject to general points, we accept the EIOPA advise. Agreed as a reporting principle. Page 5 of 14

6 the undertaking or the group s senior management RSR: It is also important that the supervisor is aware of the jurisdictions in which the undertaking or the group writes its business. This will enable the supervisor to have knowledge of obligations to other supervisory authorities and a greater understanding of the undertaking s customer base. This is a duplication of 3.105(b). This is specifically important in Europe, but can also apply to South Africa where South African entities write business in other countries (both in Africa and elsewhere) RSR: A detailed description of activities and sources of This is a duplication of 3.105(b). profits or losses by legal entities is useful information for the supervisors, in order to assess what activities are executed under what supervisory regime. For instance, undertakings or groups may have sourced out certain activities to less regulated entities or entities that are not regulated at all RSR: Supervisors should be aware of external Agreed. environment developments that could impact the undertaking. This could be from regulatory or legal changes or market developments RSR: The supervisor should have an awareness of the strategy that the undertaking or the group has set itself to understand the objectives of the undertaking or the group. This should include the financial and non-financial objectives as well as the undertaking s business continuity plan. This would give the supervisor an idea of possible future developments. Agreed. Proposal for South African subordinated legislation: The principles for disclosure in this section is to enable the Regulator to understand the following aspects: a) The business that the insurer (and group) writes b) The geographical areas (and other supervisory jurisdictions) that the insurer (and group) operates in and the level of activity in those areas c) The sources of income and earnings d) Developments in the external environment that could significantly impact the insurer (and group) Page 6 of 14

7 e) The business strategy and objectives of the insurer (and group) The following specific disclosures are required: a) The insurer s ownership; b) A description of the business strategy, including a description of financial and non financial objectives and business continuity strategy (This should be private disclosures); c) The insurer s or the group's material lines of business and material geographical area where it writes business (specifically highlighting any material changes over the year). This should include a high level qualitative and quantitative analysis (the extent of the disclosures required for segmentation and whether it should be public or private was raised as part of the issues log for further clarification.); d) A description and high level quantitative overview of any significant business or external events that have occurred over the year that have had a material effect on the undertaking or the group (private disclosures); e) A description and high level quantitative overview of the main trends and factors that have contributed to the development, performance and position of the insurer or the group since the previous financial year end (private disclosure); and f) For insurers belonging to a group, information of the legal and organisational group structure (public disclosures). g) For groups, the descriptions shall also include all material subsidiaries, participations and branches (significant branches both within the group and/or their local markets) (public disclosure) A1.2: Performance from underwriting activities: SFCR: A description shall be provided on the undertaking s or the group's underwriting performance over the year which shall include, at least: a) Information on the undertaking or the group's underwriting performance by material line of business Currently (based on European interpretations and informal FSA consultations) underwriting performance is interpreted as shareholder earnings derived from all insurance activities, thus covering both insurance and investment contracts (using IFRS classifications). Solvency II does not distinguish between insurance and Page 7 of 14

8 and geographical area; b) Information on underwriting expenses by material line of business and geographical area incurred over the year, compared to the prior year; and c) For undertakings belonging to a group, information on relevant operations and transactions within the group. investment contracts. Informal FSA consultations indicated that performance should reflect performance as disclosed in the financial statements of an insurer and should include earnings from all insurance underwriting activities (thus no distinction between insurance and investment contracts). It is also noted that this section should be a description and high level qualitative overview rather than detailed quantitative analysis. Proposal: The EIOPA advice is accepted for now, together with providing the clarification above. We should highlight this as an area that is open for interpretation and suggest that insurers disclose the basis used for reporting performance. There should also be a reconciliation of underwriting performance in the SFCR to that disclosed in the financial statements. Note that we should not be asking insurers to disclose any information relating to their underwriting strategies that could potentially disadvantage competitive positions RSR: The supervisor should have knowledge of the underwriting performance by business line and geographical area. The supervisor should be satisfied Agreed as reporting principle. Page 8 of 14

9 with how senior management make underwriting decisions and how the performance matches the undertaking or the group s projections. This should help the supervisor s understanding of profitability and how well the undertaking or the group is managed in this area. This will also help supervisors identify outliers and threats to profitability for the undertaking or the group, as well as the market as a whole. Proposal for South African subordinated legislation: The principle for disclosure underwriting performance is to enable the Regulator to understand underwriting performance by business line and geographical area. The Regulator should also understand how senior management make underwriting decisions and how the performance matches the undertaking or the group s projections. Information should help the Regulator to make an assessment of how well the insurer s (and group s) earnings are managed. Underwriting performance should be discussed quantitatively as well as qualitatively. Quantitative analysis should be at a high level as required. Information provided should be consistent with the basis that insurers (and groups) used for disclosure in their Annual Financial Statements. Where insurers disclose information different from that in the Annual Financial Statements, explanations need to be provided. The supervisor can, however, request further reconciliations where deemed necessary. The following specific disclosures are required: a) Information on the undertaking or the group's underwriting performance by material line of business and geographical area (public disclosure); b) Qualitative descriptions on how management make underwriting decisions (private disclosure); c) Information on underwriting expenses by material line of business and geographical area incurred over the year, compared to the prior year (public disclosure); d) Quantitative information as to how underwriting performance and expenses compare to business projections such as historical budgets (private disclosure); and e) For undertakings belonging to a group, information on relevant operations and transactions within the group (public disclosure). Page 9 of 14

10 The Task Group recognises that the earnings emergence profile under IFRS and an insurer s own economic reporting bases (used for managing the business) may differ. The Task Group also recognises the potential burden on insurers requiring detailed quantitative analysis on two different bases. Thus for purposes of private disclosures to the regulator, an insurer may use the results from its management information system and provide high level explanations of the items resulting in material differences from the IFRS basis. The EIOPA advice in this area is open for interpretation and the views above represents the position of the Task Group. This area will be revisited by the Task Group once all the disclosure requirements have been finalised. Further guidance would be required as to the geographical segmentation required by SAM. The matter was raised in the issues log for further clarification. A1.3: Performance from investment activities: SFCR: A description shall be provided on the undertaking s or the group's financial performance from investments over the year which shall include, at least: a) Information on income or losses from investments and, where relevant, components of such income from appropriate subsets of an undertaking or a group s investments; b) Information showing gains and losses recognised directly in equity; c) Information about transactions with shareholders and members of the administrative, management or This again is an area that is open to interpretation (similar to the above section). Given the aim of the disclosure described in the RSR information it would appear that EIOPA intended the return on total investments (both shareholders as well as policyholders). Further clarification is required and therefore the matter should be included in the issues log. Proposal: EIOPA advice is accepted for now, with the clarification above. This area should also be highlighted as to being open for interpretation and insurers should explain the basis for reporting Page 10 of 14

11 supervisory body, intra-group transactions, distribution to shareholders and profit-sharing with policyholders; d) The impact of amortisation and impairment of intangible/tangible assets and financial instruments on investment performance; e) Information on investment expenses incurred over the year, compared to the prior year and reasons for movements; and f) For undertakings belonging to a group, information on relevant investment transactions and outstanding balances within the group. investment performance in the SFCR. Where there are differences to the investment performance disclosed in the financial statements, reconciliations should be provided. Note that we should not be asking insurers to disclose any information relating to their investment strategies that could potentially disadvantage competitive positions RSR: Supervisors should have knowledge of the undertaking or the group s financial performance from investments. The supervisor should be satisfied with how senior management make investment decisions as well as the key assumptions made with respect to interest rates, exchange rates and market indices. It is important that the supervisor has an idea of profitability and how well the undertaking is managed in this area. Agreed as reporting principle. Proposal for South African subordinated legislation: The principle for disclosure investment performance is to enable the Regulator to understand financial performance from investments. The Regulator should also understand how senior management make investment decisions and key assumptions made with respect to interest rates, exchange rates and market indices. Investment performance should be discussed quantitatively as well as qualitatively. Quantitative analysis should be at a high level as required. Information provided should be consistent with the basis that Page 11 of 14

12 insurers (and groups) used for disclosure in their Annual Financial Statements. Where insurers disclose information different from that in the Annual Financial Statements, reasons and reconciliations need to be provided. Investment performance resulting from the insurer s (groups ) shareholder fund asset base should be discussed separately from performance on assets backing policy liabilities. The following specific disclosures are required: a) Information on income or losses from investments and, where relevant, components of such income from appropriate subsets of an undertaking or a group s investments (public disclosure); b) Information showing gains and losses recognised directly in equity (public disclosure); c) Information about transactions with shareholders and members of the administrative, management or supervisory body, intra-group transactions, distribution to shareholders and profit-sharing with policyholders (public disclosure); d) The impact of amortisation and impairment of intangible/tangible assets and financial instruments on investment performance (public disclosure); e) Information on investment expenses incurred over the year, compared to the prior year and reasons for movements (private disclosure); f) For undertakings belonging to a group, information on relevant investment transactions and outstanding balances within the group (public disclosure); g) Qualitative descriptions on how management make investment decisions (private disclosure); and h) Key assumptions made with respect to interest rates, exchange rates and market indices (public disclosure) The EIOPA advice in this area is open for interpretation and the views above represents the position of the Task Group. This area will be revisited by the Task Group once all the disclosure requirements have been finalised. A1.4: Operating/other income and expenses: SFCR: A description shall be provided on at least the undertaking s or the group's level of material nonunderwriting income and expenses incurred over the Agreed Page 12 of 14

13 year SFCR: For undertakings belonging to a group, a description shall also be provided on the undertaking's material income and expenses incurred over the year including information on material expenses incurred with other group entities. Agreed RSR: The supervisors should be made aware of any material future anticipated non-underwriting income and expenses over the coming reporting period to ensure that the undertaking covers these payments in its liquidity risk and capital management activities. Agreed Proposal for South African subordinated legislation: The principle for disclosure operating/other income and expenditure is to enable the Regulator to understand material future anticipated non-underwriting income and expenses over the coming reporting period to ensure that the undertaking covers these payments in its liquidity risk and capital management activities. Operating/other income and expenditure should be discussed quantitatively as well as qualitatively. Quantitative analysis should be at a high level as required. Information provided should be consistent with the basis that insurers (and groups) used for disclosure in their Annual Financial Statements. Where insurers choose to disclose information different from that in the Annual Financial Statements, reasons and reconciliations need to be provided. The following specific disclosures are required: a) Material non-underwriting income and expenses incurred over the year (public disclosure). b) For undertakings belonging to a group, the insurer's material income and expenses incurred over the year including information on material expenses incurred with other group entities (public Page 13 of 14

14 disclosure); and c) Material future anticipated non-underwriting income and expenses over the coming reporting period (private disclosure) A1.5: Any other disclosures SFCR: Any other disclosures considered important shall be made by the undertaking or the group in this section RSR: This section provides the supervisors with any further relevant information that the undertaking considers would be useful for the purpose of supervision. Agreed. Agreed. 7. RECOMMENDATION Refer to above section. Page 14 of 14