We referred to ICP 20 which deals with public disclosures and is therefore directly comparable to the SFCR.

Transcription

1 Solvency Assessment and Management: Pillar 3 Sub Committee Reporting and Disclosure Task Group Discussion Document 52 (v 4) Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk EXECUTIVE SUMMARY 1. INTRODUCTION The purpose of this document is to discuss the SFCR and RSR detailed requirements specifically with regards to disclosures relating to an entity s risk profile. The above is highlighted within the Level II implementation guidance for Solvency II entitled; Supervisory Reporting and Public Disclosure Requirements published by CEIOPS (Former Consultation Paper 58), specifically in the Level II text, par to (for the SFCR), and in Level II text, par to (for the RSR). This will be compared with the IAIS Insurance core principles dealing with reporting and disclosure, the current regulatory returns as well as with International Financial Reporting Standards ( IFRS ). 2. INTERNATIONAL STANDARDS: IAIS Insurance Core Principles ( ICPs ) We referred to ICP 20 which deals with public disclosures and is therefore directly comparable to the SFCR. We referred to ICP9 which deals with supervisory review and reporting and is therefore directly comparable to the RSR. The ICP 20 and ICP 9 requirements are discussed in further detail in section EU DIRECTIVE ON SOLVENCY II: PRINCIPLES (LEVEL 1) SFCR Article 51(1)(c) of the Level I text requires that: Member States shall, taking into account the information required in paragraph 3 and the principles set out in paragraph 4 of Article 35, require insurance and reinsurance undertakings to disclose publicly, on an annual basis, a report on their solvency and financial condition. That report shall contain the following information, either in full or by way of references to equivalent information, both in nature and scope, disclosed publicly under other legal or regulatory requirements: (a) (b) (c) a description, separately for each category of risk, of the risk exposure, concentration, mitigation and sensitivity;

2 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk RTS Article 35 of the Level I text requires that: Information to be provided for supervisory purposes Member States shall require insurance and reinsurance undertakings to submit to the supervisory authorities the information which is necessary for the purposes of supervision. That information shall include at least the information necessary for the following when performing the process referred to in Article 36: (a) to assess the system of governance applied by the undertakings, the business they are pursuing, the valuation principles applied for solvency purposes, the risks faced and the risk-management systems, and their capital structure, needs and management; (b) The information referred to in paragraphs 1 and 2 shall comprise the following: (a) qualitative or quantitative elements, or any appropriate combination thereof; (b) historic, current or prospective elements, or any appropriate combination thereof; and (c) data from internal or external sources, or any appropriate combination thereof. 4. The information referred to in paragraphs 1 and 2 shall comply with the following principles: (a) it must reflect the nature, scale and complexity of the business of the undertaking concerned, and in particular the risks inherent in that business; (b) it must be accessible, complete in all material respects, comparable and consistent over time; and (c) it must be relevant, reliable and comprehensible MAPPING ANY PRINCIPLE (LEVEL 1) DIFFERENCES BETWEEN IAIS ICP & EU DIRECTIVE Please refer to section 5 for a detailed discussion. 5. STANDARDS AND GUIDANCE (LEVELS 2 & 3) Items 5.1 to 5.4 per the standard discussion document template are covered in the table below where applicable. CP 58 Ref EIOPA (Former CEIOPS) Advice Risk - Article 51(1)(c) The undertaking or the group shall provide a description, separately for each category of risk below, of the risk exposure, concentration, mitigation and sensitivity (where applicable): Task Group Comments ICP 20 par requires an insurer to disclose sufficient information, including quantifiable information for its exposure to certain risk Page 2 of 10

3 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk groups Any other disclosures considered important to be made by the undertaking in this section. C.1 Underwriting risk exposure, concentration, mitigation and sensitivity C.2 Market risk exposure, concentration, mitigation and sensitivity C.3 Credit risk exposure, concentration, mitigation and sensitivity C.4 Liquidity risk exposure, concentration, mitigation and sensitivity C.5 Operational risk exposure, concentration, mitigation and sensitivity C.6 Other material risks exposure, concentration, mitigation and sensitivity In the RSR, the undertaking shall provide details to explain to the supervisor the undertaking s risk exposure, concentration, mitigations and sensitivity for the above risk categories. This information shall include any material future anticipated risk. IFRS 4.37, IFRS4.39, IFRS7.31 C.1 Underwriting risk material exposure, concentration, mitigation and sensitivity ICP 20 Par , , , Sub categories of risks that will be included as part of Underwriting risk: For Life Companies Mortality, Morbidity, Expense, Revision, Lapse and Catastrophe risk For Non Life Companies Premium, Reserve and Catastrophe Risk C.2 Market Risk material exposure, concentration, mitigation and sensitivity ICP 20 par , , , , IFRS7.32,IFRS7.33, IFRS7.34, IFRS7.40, IFRS7.41 Page 3 of 10

4 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk Included in market risk is Interest Rate Risk, Equity Risk, Property Risk, Spread Risk, Currency Risk and Market Risk Concentrations For C.2, the undertaking or the group shall include how it considers that assets have been invested in accordance with the prudent person principle C.3 Credit Risk material exposure, concentration, mitigation and sensitivity ICP , ICP , IFRS7.36, IFRS7.37, IFRS7.38 C.4 Liquidity Risk material exposure, concentration, mitigation and sensitivity ICP20.5.8, IFRS For C.4, the undertaking or the group shall disclose a description of how the undertaking manages the liquidity risk (including maturity analysis) C.5 Operational Risk material exposure, concentration, mitigation and sensitivity C.6 Other Material Risks material exposure, concentration, mitigation and sensitivity ICP20.5.8, IFRS7.31, IFRS For C.6, information shall be provided on material risks other than those listed in C.1 to C.5 such as concentration risk, reinsurance/mitigation risk, risks arising from off balance sheet transactions, reputational risk and strategic risk For C.6, in relation to material off balance sheet transactions or similar arrangements, the undertaking or the group shall provide: a) Information on material risks arising from any derivative and similar instruments used in the reduction of risk or facilitation of efficient portfolio management; and ICP 20 par b) Information on the risks from any material off balance sheet arrangements such as SPV s. Full disclosure shall include how any interests with an SPV Page 4 of 10

5 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk are aligned, and any relationship between the parties. The undertaking or the group Shall disclose information on the risk transferred, the finance raised from investors, the financial interests it has in the SPV and how the SPV is fully funded; Proposal for South African subordinate legislation: SFCR In general we found that the level 2 text requirements align to ICP 20. Also, the level 2 text in most instances aligns with IFRS and the current statutory returns. For the areas that are covered by either ICP20, the current regulatory returns or IFRS, we assume that given the existing disclosure requirements, these requirements from the level 2 text could be adopted as is. However, the following areas of disclosures are not covered by ( or differ from) either ICP 20, the current regulatory returns or IFRS: Operational risk disclosures; Dealing with Other Risks, like Reputational Risks and Strategic Risks; Dealing with Group risks; and The level of detail required in terms of mitigation techniques etc. Operational risk disclosures This is a disclosure requirement not covered by ICP 20. Furthermore, requirements from the current statutory return and from IFRS are limited. However, we believe that companies would not be able to disregard these disclosure requirements, without having an impact on third country equivalence, and therefore support the inclusion of these disclosures. We note that operational risk disclosures have been part of the banking environment for a considerable period already. Other Risks, like Reputational Risks and Strategic Risks These risks are covered in the current regulatory return, but to a limited extent. We support the inclusion of these risks. Level of detail In the current regulatory returns, reinsurance risk mitigation techniques are not available to the public. Although we support the general principle that this be available to the public, we question to what level of detail this should be done. Therefore, in writing the level 3 advice, this item needs to be reconsidered. RSR Page 5 of 10

6 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk We support the more forward looking approach for the RSR as this is confidential information. Material Risk Exposure For each of these risk exposures, the undertaking or the group shall disclose by risk category at least: a) Information on the nature of the measures used to assess the risk within the organisation including any material changes from the previous reporting period; b) Information on the material risks classified by submodule of risk; c) If the quantitative data disclosed at the end of the reporting period is not representative of an undertaking s exposure to risk during the period, the undertaking or the group shall provide further information sufficient to give a true picture of its exposure; d) Information on the nature of the material risk exposures on the undertaking or the group and how these have developed over the past year; Information on how the undertaking or group manages material sources of operational risks; For groups, the same level of detail as at solo level shall be provided for material group specific risks (e.g. strategic risks, concentration risk and reputation risk); and Groups shall provide a quantification and a description of the main sources of group diversification effects, including a description on how the effects are distributed among the undertakings of the group. Details on how the administrative, management or supervisory body expects material risk exposures to further develop over the next few years (including the process for identifying emerging risks) given the undertaking s business strategy and how these are being/will be managed. An overview of risks arising from any derivative and similar instruments used in the reduction of risk or facilitating efficient portfolio management and the strategies that undertakings employ when using such instruments in its ICP 20 par & ICP 20.8 IFRS4.37, IFRS7.33 Page 6 of 10

7 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk portfolio. Proposal for South African subordinate legislation: We support the disclosure of material risk exposures and would expect that the items mentioned below should be addressed. Details of the risk limits and risk appetite imposed by the undertaking in relation to its overall business objectives (e.g. chosen lines of business/products), setting out the level of risk the undertaking is prepared to accept and is financially able to be exposed to for each risk module and how these tolerances are enforced throughout the business. This analysis should take into account its financial strength and the nature, scale and complexity of its risks, the liquidity and the resources it needs to adequately manage its risks. Details that enable supervisors to evaluate the nature and extent of risks arising from financial instruments to which the undertaking is exposed at the end of the reporting period, including any material changes from the previous period. In relation to off-balance sheet transactions or similar arrangements, the undertaking should provide details of all current and future risks that the undertaking considers it may be exposed to over the life time of its existing off-balance sheet contracts, and how these have been captured in its overall solvency needs. This should include those risks arising out of any off-balance sheet financing activities. An overview of risks arising from any derivative and similar instruments used in the reduction of risk or facilitating efficient portfolio management and the strategies that undertakings employ when using such instruments in its portfolio. For operational risk, information should be provided on the gross operational loss amount suffered by undertakings, the number of operational loss events, how the undertaking monitors, classifies and collects data on operational loss events and some detail of operational losses suffered compared to own funds. For each type of risk arising from financial instruments, an undertaking should disclose: (i) summary quantitative data about its exposure to that risk at the end of the reporting period. This disclosure shall be consistent with the details provided internally to key management personnel of the undertaking, for example the board of directors or chief executive officer; and (ii) concentrations of risk, if not apparent from (i). Material risk concentration The undertaking or the group shall provide information on material risk concentrations to which it is exposed, including ICP 20 par & 13 Page 7 of 10

8 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk at least: IFRS4.39, IFRS a) A description of the kinds of risk concentrations to which the undertaking or the group is exposed and how significant these are; b) A description of the methods used and assumptions made in calculating quantitative data on concentrations and a description of how management determines concentrations including an analysis of relevant and material contagion lines (for example, across the financial sector); and c) A description of the concentration of underwriting risk A description shall be provided detailing any material future anticipated risk concentrations anticipated over the coming reporting period given the undertaking s business strategy and how these are being/will be managed. Proposal for South African subordinate legislation: We support the disclosure of the undertakings material risk concentrations and the methods use by the undertaking to managing these risk concentrations. Material risk mitigation The undertaking or the group shall provide a description of its risk mitigation practices, including at least: a) A description of the methodologies for mitigating risk, and the processes for monitoring the continuing effectiveness of these risk mitigation strategies; b) A description of whether and how it uses reinsurance or other methods of risk transfer to help control its exposure; Information in addition to that disclosed in the SFCR on the techniques used to mitigate risks and the effect that these tools have on the undertaking s risk profile. ICP 20 par 20.8 & ICP IFRS4.39, IFRS7.33 ICP 20 par 20.8 & ICP IFRS4.39, IFRS7.33 Page 8 of 10

9 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk A description shall be provided detailing any material future risk mitigation practices that the undertaking is considering entering into over the coming reporting period given the undertaking s business strategy and the rationale and effect for these risk mitigation practices. A description shall be provided detailing the carrying amount of financial assets it has pledged as collateral for liabilities or contingent liabilities. When an undertaking or a group holds collateral (of financial or nonfinancial assets), and in the absence of a default is permitted to sell or repledge the collateral, it shall disclose: (iv) The fair value of the collateral held; (v) The fair value of any such collateral sold or repledged, and whether the undertaking or the group has an obligation to return it; and (vi) The terms and conditions associated with its use of the collateral; and When an undertaking or a group obtains financial or nonfinancial assets during the period by taking possession of collateral it holds as security or calling on other credit enhancements, and such assets meet the recognition criteria in financial reporting standards, an undertaking or a group shall disclose: (iii) The nature and carrying amount of the assets obtained; and (iv) When the assets are not readily convertible into cash, its policies for disposing of such assets or for using them in its operations. Proposal for South African subordinate legislation: We support the disclosure of the undertakings risk mitigation practices. We further believe that details should be provided of assets given as collateral or pledged as security. Where the entity holds collateral, the fair value of such collateral, the fair value of collateral sold or Page 9 of 10

10 Discussion Document 52 (4) - Solvency Financial Condition Report and Report to Supervisor Detailed Requirements - Risk pledged and the terms and conditions associated with the use of collateral. Where an entity took ownership of assets as a result of collateral called, the nature and carrying amount of the assets obtained, and if the assets are not readily convertible into cash, its policy for disposing of such assets. Risk sensitivity The undertaking or the group shall disclose information about the sensitivity of risks (where applicable) on its solvency positions to changes in variables that may have a material effect on their business, including any material changes from the previous period. The undertaking or group shall provide details of any risk sensitivity analyses and how the undertaking or group is monitoring these sensitivities. IFRS and 39A, IFRS7.40, IFRS7.41 IFRS and 39A, IFRS7.40, IFRS7.41 Proposal for South African subordinate legislation: We support that risk sensitivities should be included as far as it is practically possible. 6. ASSESSMENT OF AVAILABLE APPROACHES GIVEN THE SOUTH AFRICAN CONTEXT 6.1 Discussion of inherent advantages and disadvantages of each approach Please refer to section 5 above. 6.2 Impact of the approaches on EU 3rd country equivalence Please refer to section 5 above. 6.3 Comparison of the approaches with the prevailing legislative framework Please refer to section 5 above. 6.4 Conclusions on preferred approach Please refer to section 5 above. 7. RECOMMENDATIONS We agree that the Level II text can be accepted. Page 10 of 10