NBA Alert 40 Audit of Solvency II Supervisory reporting by insures

Transcription

1 Unofficial translation NBA Alert 40 January 26, 2017

2 Status of NBA Alert This is a translation of a non-regulatory NBA publication. NBA Alerts are published in response to new developments. This publication may be issued in advance of changes in regulations, specific rules or a professional practice note from the NBA. This Alert is a translation of the official Dutch version. The Dutch version is leading when discussions take place how to interprete the Alert. NBA Alerts always expire after one year, unless the duration is specifically extended. Royal NBA 2

3 Contents 1 Introduction 4 2 Scope of the Alert 5 3 Audit Solvency II Supervisory reporting Supervisory reporting forms Materiality Solvency II audit approach Estimation uncertainty Audit of solvency in group reporting Evaluation of misstatements Supervisory reporting forms not within the scope of the audit Audit file 10 4 Reporting Auditor s report Detailed report / other communication of the auditor on Solvency II supervisory reporting 12 5 Other matters Public report / Solvency and Financial Condition Report Solvency II outcomes in management board report and financial statements NBA Practice Note Digital certification 14 Appendix A Overview of reporting forms part of the audit scope 15 Appendix B Overview of reporting forms part of the audit scope (limited risk insurers) 17 Royal NBA 3

4 1 Introduction The Solvency II Directive was implemented in the Dutch Financial Supervision Act (Wet op het financieel toezicht) and lower-tier legislation as of 1 January Initial experience of Solvency II was often acquired by statutory auditors with the Solvency II Day One reports prepared by (re)insurers in 2016, on which agreed-upon procedures were performed. Insurers must periodically submit reporting forms (below: supervisory reporting ). The statutory auditor performs audit procedures on part of the Solvency II supervisory reporting 1 for 2016, and supervisory reporting for solo entities must be submitted by 20 May 2017 at the latest. The group supervisory reporting must be submitted by 1 July 2017 at the latest. The provisions of Solvency II apply to the Directive insurance firms (Richtlijn Verzekeraars). Two groups of insurers are outside the scope of Solvency II owing to their limited size (insurers with limited risk) and/or the sector in which they operate: Small insurance companies with gross annual premium income of less than EUR 5 million and technical provisions below EUR 25 million (with no coverage from non-life insurers for liability, credit and suretyship insurance risks, unless as ancillary risks), as well as exempted insurers; and Funeral expenses and benefits in kind insurers. Insurers with limited risks (Basic insurers) are subject to a regime enshrined in the Financial Supervision Act. The determination of the solvency position for those insurers largely conforms to the provisions of the Solvency II Directive. 1 Supervisory reporting: periodic reporting forms to be prepared by insurers under the Financial Supervision Act. Royal NBA 4

5 2 Scope of the Alert This NBA Alert comprises instructions and considerations for statutory auditors involved in the audit of the supervisory reporting for insurance companies and provides instructions to support the professional judgement of these statutory auditors in planning and performing audit procedures and reporting. NBA Alerts are produced under the NBA s responsibility. Auditors are expected to take cognizance of these instructions and considerations insofar as relevant for the engagement. An auditor who does not apply these instructions must be prepared to explain how compliance was nonetheless achieved with the obligations, basic principles and essential procedures arising from laws and regulations discussed in further detail in these instructions. The NBA Alert does not have the status of a professional regulation. The audit requirements and audit subject matter included in the Regulation on Statements of Financial Undertakings under the Financial Supervision Act 2011 were published by De Nederlandsche Bank (DNB) on 12 January 2016 by means of an amendment to the Regulation on Statements of Financial Undertakings under the Financial Supervision Act. In a letter dated 19 May 2016, DNB informed the institutions about changes in the auditor s certification of the supervisory reporting forms. Consequently, experience of performing the Solvency II supervisory reporting audit is still limited. The NBA has decided to issue this Alert to provide professional practice with further guidance for designing the audit of the supervisory reporting forms. Partly on the basis of experience acquired in the audit of the Solvency II supervisory reporting forms for the 2016 financial year, an updated NBA Practice Note 1104 (Specific statutory obligations of the internal auditor and the statutory auditor in the financial sector) to be issued in 2017 will address the audit procedures in more detail. Following the change in legislation as of 1 January 2016, NBA Practice Note 1120 (Using the procedures of the certifying actuary in the audit of the financial statements and the reporting forms of pension funds and insurance companies) is no longer applicable insofar as it relates to insurance sector practice. Royal NBA 5

6 3 Audit Solvency II Supervisory reporting 3.1 Supervisory reporting forms Up to and including the 2015 financial year, institutions were required to prepare reporting forms annually under the Financial Supervision Act (application of Solvency I). These forms consisted of a complete set and a public set of reporting forms. The forms were accompanied by a report on compliance with the Financial Supervision Act issued by an statutory auditor. Specific rules also applied with regard to the audit and the certification of those forms. Under Solvency II, the new provisions relating to the supervisory reporting forms for solo entities are included in Section 3:72 (3) and (7) of the Financial Supervision Act and Section 130 (3) and (4) of the Decree on Prudential Rules under the Financial Supervision Act (BPR). The forms that are within the scope of the auditor s procedures are determined in Appendix 7 to the Regulation on Statements of Financial Undertakings under the Financial Supervision Act 2011 (the Regulation) applicable from 1 January The Regulation draws a distinction between group and solo entities, of which an overview is included in Appendix 1 to this NBA Alert. The forms to be submitted by insurers with limited risk are also subject to audit. The forms that are within the scope of the auditor s procedures are determined in Section 2.4 of the Regulation on Prudential Supervision of Insurers with Limited Risks. The overview from Appendix 3 to the Regulation on Prudential Supervision of Insurers with Limited Risks is included in Appendix 2 to this NBA Alert. 3.2 Materiality It is important to note that with regard to the considerations set out below concerning materiality, the statutory auditor must take account of the limited distribution (i.e. the institution and the DNB) of the auditor s report to be issued (see also Section 4.1.2) and of the increased import assigned to the application of materiality than is usually customary. A distinction is drawn with regard to the materiality to be applied between: a Information that is directly related to the Solvency Capital Requirement (SCR) ratio; b Information that is not directly related to the Solvency Capital Requirement (SCR) ratio. Re a) Determining materiality is a matter of professional judgement. The SCR ratio is a key premise in determining materiality. This SCR ratio is the quotient of the Eligible Own Funds (EOF) to be considered and the calculated Solvency Capital Requirement (SCR). Materiality is based on an analysis of the circumstances relating to the solvency position. With regard to the solvency position, it is significant that any error occurring may result in: the user wrongly arriving at a specific decision; intervention wrongly being omitted. Therefore, a range can be utilized to determine materiality in an amount of EUR to assess acceptability of this materiality for the SCR ratio. The actual materiality to be used by the auditor as an acceptable deviation of the SCR ratio (in percentage points) depends on both qualitative and quantitative factors. A range between 2% and 5% of the SCR ratio is indicative of a range for the audit in the context of this NBA Alert. The extent of the range depends on the margin existing in relation to intervention thresholds set internally or in relation to the 100% ratio required by law. For example: the level that is significant in deciding whether or not to proceed to distribute capital or dividend; the level at which the institution will intervene to improve the solvency position by raising additional risk-bearing capital or reducing the risk position; the 100% ratio required by law. In addition, the relationship between premium-setting and solvency can for instance also be taken into consideration for healthcare insurers. If the solvency position is stronger, the auditor could consider materiality at the high end of the range between 2% and 5% to be acceptable (and the following deviation in percentage points of the SCR ratio). Royal NBA 6

7 As the SCR ratio does not have an absolute value in euros the tolerable misstatement applied will be converted into an audit materiality for both the EOF and the SCR. Because the risk will trend primarily towards overstatement of the solvency position, the statutory auditor must take account in determining those materiality levels of the risk of an overestimation of the EOF and an underestimation of the SCR. Additionally, the auditor should consider the possible misstatement concerning the absolute value in euros of the EOF and the SCR, as that value is reported in the set of supervisory reporting forms to be audited. In the event of a misstatement in the market value balance sheet and hence on the EOF, applying the standard formula will often produce a compensating effect on the SCR. The auditor should take this into account in determining the tolerable misstatement. The EOF can be derived from the economic balance sheet ( Excess of assets over liabilities ), taking account of the caps included in the Solvency II regulations with regard to capital components. This economic balance sheet is based on the balance sheet that was audited as part of the financial statement audit, adjusted where necessary by valuations and classifications to arrive at a fair value balance sheet on the basis of requirements of the Solvency II Directive. In determining the audit materiality to be applied in the audit of the economic balance sheet, the statutory auditor should therefore take account of the materiality applied in the audit of the financial statements. The materiality applied in the audit of the financial statements can be the starting point for the audit of the financial statements. If the mark-to-market valuation has a significant influence, determining materiality as a percentage of the excess of assets over liabilities can also be considered for the audit of the economic balance sheet. That percentage could then, as a starting point, be equal to the materiality amount applied in the audit of the financial statements expressed as a percentage of equity. If the SCR ratio is lower than the legal requirement of 100% (or is expected to fall below that level) the statutory auditor should explicitly consider the margin to MCR in determining materiality. Example to illustrate the above The solvency ratio of the position to be audited is 200%, determined by the EOF (200) and the SCR (100). In the audit, the statutory auditor considers, in the first instance, adopting the materiality for the financial statement audit (set in the example at 4 (2% of equity) for the audit of the EOF and the SCR. The statutory auditor considers the maximum effect on the SCR ratio and qualitatively assesses this on the basis of intervention thresholds. Also, consideration is given on the basis of qualitative aspects (type of business, the level of the SCR ratio) to whether the effect is within a tolerable range. The statutory auditor should modify the materiality for the audit of the supervisory reporting forms if there is cause to do so on the basis of the calculations. On the basis of the internal intervention position which has been set, for example, at 175%, the auditor can determine a misstatement of up to 5% of the SCR ratio (5% of 200%) to be acceptable. The scope after the accepted misstatement in relation to the internal intervention level will thus continue to be comfortably sufficient. Position to be audited Financial statement materiality Effect of materiality on components misstatement in % In the example, a deviation of 4 in eligible own funds (the biggest risk is a lower position) is taken into account. As a next step, a monetary equivalent deviation of the SCR is used (the biggest risk is a higher required capital). This initial choice implicates that the deviation of the ratio can exceed 10 percentage points. In order to remain within the range set for materiality (between 190 and 210%) in this example, the maximum misstatement in the EOF or the SCR will have to be less than the amount used. For the purposes of designing the audit, the auditor can opt to lower both or one of both amounts, as a result of which the maximum misstatement will remain within the 5% of the SCR ratio judged to be acceptable within this example. It appears to be a plausible principle that an adjustment, if any, of materiality will be applied to the SCR because that measure is related less directly to the regular financial statement audit. Royal NBA 7

8 In determining performance materiality, the statutory auditor should use his understanding of the entity, as well as the nature and extent of the misstatement identified in previous audits, including the financial statement audit. With regard to the audit of the solvency information, the statutory auditor should take into account his review of the quality of internal control processes (as acquired, for instance, when performing the agreed-upon procedures in respect of Day One reporting) and of the sensitivity of the outcomes to specific risks or estimates/assumptions applied. In determining performance materiality, the statutory auditor should take account of the extent to which this determination of solvency at the institution is the subject of an audit for the first time. It is important that the statutory auditor shares his view of the applicable materiality with the institution in a timely manner. The institution itself will also apply a materiality in determining the solvency position. This must be lower than the misstatement tolerated by the statutory auditor. Early sharing of the audit plan of the statutory auditor with DNB will inform the supervisor so that, if required, a (tripartite) dialogue can be conducted with this user of the supervisory reporting forms if, in the supervisor s view, differing materiality considerations should also be taken into account in the specific circumstances. Such coordination is particularly important if the statutory auditor s analysis leads to a materiality outside the indicated range. This may for example occur in situations where the SCR ratio exceeds 200% and/or is sensitive to a limited extent to adverse developments. Additionally, the auditor himself will also have to assess, if applicable, the extent to which the materiality applied for the audit of Solvency II reporting can be higher or lower than the materiality for the financial statement audit, in view of the disclosure of the solvency position in the annual report (see also Section 5.2). Re b) This information concerns the presentation in the supervisory reporting forms of balance sheet items and other quantitative information that does not affect the SCR ratio. The audit procedures can identify presentation netting or classification differences that relate to these items and quantitative information. The reporting materiality applied for these items should be equal to the higher of the materiality selected for the audit of the EOF and the SCR or 10% of the item concerned. In accordance with Standard 450 (Evaluation of misstatements identified during the audit), the statutory auditor is required to request the management to correct those misstatements. Uncorrected audit differences must be reported in the detailed report/other communication of the auditor (see Section 4.2). 3.3 Solvency II audit approach The audit approach for the Solvency II supervisory reporting forms comprises, first, the review of the organizational structure and risk management of the institution with regard to the preparation of the supervisory reporting forms, including the audit of the operating effectiveness of these internal controls and, secondly, (substantive) audit procedures in respect of the supervisory reporting forms, including the core elements of the economic balance sheet, equity, solvency capital requirement and minimum capital requirement. The requirements concerning the organizational structure and risk management for institutions subject to the scope of the Solvency II Directive are included in the Financial Supervision Act and lower-tier regulations and the Solvency II Directive and the Delegated Regulation. Article 22 of the Decree on Prudential Rules will continue to apply to institutions with a limited risk or branch offices (as referred to in Article 17). Article 22 states that the engagement issued to an statutory auditor shall provide for an assessment and review in outline with regard to the adequacy of the organizational structure and risk management. The audit of the Solvency II supervisory reporting forms cannot be seen in isolation of the audit procedures that are already carried out in respect of the financial statements as well as the overall control framework and system of internal control at the institution. Audit procedures that are relevant and have already been performed and the results arising from them for the audit of the financial statements shall be included both in the design of the audit and the evaluation of the (un)adjusted audit differences and findings. The auditor should ensure that he takes account in his audit of subsequent events occurring in the intervening period since the audit of the financial statements. In determining the solvency capital requirement, the institution can use the standard formula, an internal model or a partial internal model. For components where the standard formula is used, the Royal NBA 8

9 statutory auditor must establish that the institution has, in implementing the provisions of the Solvency II Directive, taken account of the delegated regulation, the guidelines issued by EIOPA and the Q&As published by DNB. The statutory auditor must take cognizance of other requirements and permissions obtained from DNB and verify their correct application in supervisory reporting. The statutory auditor must verify, with regard to an internal model or a partial internal model, that this internal model has been validated by the supervisor and that the supervisor has agreed to its use. The statutory auditor should establish that the approved model has actually been implemented. The statutory auditor should also establish that changes carried out subsequently, insofar as determined to be non-material by the institution, have been notified to the supervisor and that the other amendments have been approved by the supervisor. In order to obtain sufficient appropriate audit evidence, the statutory auditor should establish that the permanent effective operation of the models is ensured by adequate internal change management procedures. Expertise concerning the purpose of the models, the calculation rules and the parameters that can significantly affect the outcomes is important. An audit of the models as such is not part of the audit of the forms, as explicitly stated in the auditor s report (see separate Section 4.1.3). In preparing the economic balance sheet and determining the SCR with the aid of an internal model, a partial internal model or the standard formula, use will be made of the data collected for that purpose. In view of the importance, the statutory auditor will need to obtain assurance on their reliability. If necessary the statutory auditor should include the underlying systems and processes, to the extent that these have not yet been audited in the course of the financial statement audit, in his audit procedures. No mandatory independent (external) actuarial certification of the supervisory reporting forms takes place under the provisions of Solvency II. Therefore, issuing a separate assurance report on the administrative source data is no longer prescribed. With a view to the regulatory requirements, the institutions have set up the actuarial function that fulfils a second-line role. As the actuarial function is part of internal controls, it does not qualify as a third party for whom an assurance engagement can be performed. In reviewing internal control (including the process for management, legal and compliance assumptions) the statutory auditor must also evaluate the design and existence of the actuarial function. On that basis, the statutory auditor should decide to what extent the assessment of this internal control will be utilized to address the risks identified. 3.4 Estimation uncertainty The economic balance sheet is drawn up on the basis of the fair value assets and liabilities, in conformity with the requirements of the Solvency II Directive. Estimates are also utilized for some elements in determining the SCR. The standard on auditing concerning estimates Standard 540 (auditing accounting estimates, including fair value accounting estimates, and related disclosures) continues to apply in full for the audit of supervisory reporting forms. In the preparation of the supervisory reporting forms and specifically the SCR and the EOF, the insurance company will use (management s) accounting estimates. On the basis of the Delegated Regulation and Standard 540, the management of the insurance company is expected to have documented and quantified estimation uncertainties with regard to the supervisory reporting forms and their preparation, as well as changes in accounting estimates. As part of the procedures of the statutory auditor, he should also review the controls implemented by management. The statutory auditor should perform the procedures stated in Standard 540 with regard to those accounting estimates that have a significant influence on the EOF and the SCR. In line with Standard 540, the statutory auditor can evaluate the reasonableness of (management s) accounting estimates by developing a point estimate or applying a range and sensitivity analyses. The estimation uncertainty that emerges in the course of doing so can, despite the assumptions falling within an acceptable range, exceed materiality. This is not qualified as an audit difference. The existence of this estimation uncertainty will give the auditor cause to estimate an increased risk of a material misstatement. In accordance with Standard 540, the auditor will address this. In evaluating accounting estimates, the statutory auditor must clearly focus on the risk of a trend in the estimates by considering the entirety of all estimates. Royal NBA 9

10 In view of the complex nature of the calculations of the technical provisions and other elements based on accounting estimates included in the supervisory reporting, the statutory auditor must ensure that where necessary experts have been added to the audit team or outside experts are engaged, taking account of Standard 620 (Using the work of an expert engaged by the auditor). 3.5 Audit of solvency in group reporting Title III of the Solvency II Directive sets out the requirements in connection with the supervision of insurance groups and reinsurance groups. In the audit of a group report, the statutory auditor will observe the provisions of Standard 600 if use is made of other auditors in the audit. For the identification of significant group components, the statutory auditor analysis the risk of a material misstatement for both the economic balance sheet and the factors on the basis of which the SCR is determined at the group level. The statutory auditor must determine a materiality at the level of the group report and the materiality to be applied by the component auditor(s) in the audit of the economic balance sheet and the SCR or factors that influence the SCR calculation at the group level. The statutory auditor must also determine, for both the economic balance sheet and the SCR, the decisive factors or level above which misstatements identified must be reported to the auditors of group components. The statutory auditor should determine for each significant component whether a full audit is required to be performed, an audit of one or more data fields or elements of the SCR calculation or specific audit procedures with regard to identified significant risks. The statutory auditor must perform analytical reviews for the other group components. The statutory auditor should evaluate whether sufficient appropriate audit evidence is obtained by this combination of procedures and the audit of the internal controls for the group as a whole and the consolidation to form an opinion on the reporting by the group. 3.6 Evaluation of misstatements In closing the audit, the auditor should perform an evaluation of the identified misstatements in accordance with Standard 450. The basic principle will be that identified misstatements will be corrected. The statutory auditor should request management to correct the identified misstatements. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor should obtain an understanding of the management s reasons for not making the corrections, and shall take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement. 3.7 Supervisory reporting forms not within the scope of the audit Only a portion of the supervisory reporting forms to be submitted by the institution fall within the scope of the auditor s report. As the auditor s report is included in the supervisory reporting, in which, in addition to the audited financial statements, the other financial statements are also included, Standard 720 (The auditor s responsibilities relating to other information) applies. This means that the auditor is required to read the supervisory reporting forms that are outside the scope of the audit and consider whether they are free of material inconsistencies and/or misstatements. In view of the nature of the information in the other statements, the statutory auditor must also include the internal consistency of the information in full-year supervisory reporting submitted by the institution in his procedures. 3.8 Audit file The auditor should be aware of the fact that the audit file must contain all relevant audit information that substantiates the opinion on the supervisory reporting. This implies that where the auditor relies for his audit on the procedures performed during the financial statement audit, the relevant audit information is also included in the audit file. Royal NBA 10

11 4 Reporting 4.1 Auditor s report Statutory provisions Section 3:72 (7) of the Financial Supervision Act provides that certain Solvency II supervisory reporting forms must be audited by the statutory auditor and that rules shall be laid down by or pursuant to a governmental decree as regards the audit and the certification of the supervisory reporting forms. In accordance with the provisions for Solvency I, Section 133 of the Decree on Prudential Rules provides that the audit of the supervisory reporting forms must be performed once a year. The Decree stipulates a statement concerning the fair presentation. The supervisory reporting forms are not general purpose financial statements. Whereas, according to the definition in Standard 700, general purpose financial statements relate to a financial reporting framework designed to meet the common information needs of a wide range of users, the supervisory reporting forms are intended only for DNB. Because the supervisory reporting comprises no accounting policies or other notes it has been agreed with DNB, in line with what was customary in prior years under Solvency I, that a compliance statement will be sufficient. In view of this, in accordance with the existing NBA Practice Note , Standard 800 (Special considerations audits of financial statements prepared in accordance with special purpose frameworks) is used as a basis with regard to the auditor s report. Under that standard, a statement of fair presentation or a compliance statement can be used. For a statement of fair presentation, the reporting is required to be based on a fair presentation framework. The term fair presentation framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, and that acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework Opinion The supervisory reporting forms (see Appendix 1 and Appendix 2) to be audited are based on a special purpose framework. Because this is not a fair presentation framework, the opinion will include the phrase that the forms have been prepared in all material respects in accordance with the provisions of and pursuant to the Financial Supervision Act. As the auditor s report is not prepared for a financial reporting framework designed to meet the common information needs of a wide range of users, it is not mandatory to prepare an entity-specific auditor s report with materiality, scope and key audit matters 3 in accordance with Standard 701. The user of the reports, De Nederlandsche Bank, will be informed by means of a detailed report/other communication of the auditor (see Section 4.2). As was the case under Solvency I, the opinion in the auditor s report is an opinion on the forms that were included in the statutory auditor s audit and not on the process of preparing the supervisory reporting forms. Any findings concerning the quality of the process are included in the detailed report/other communication of the auditor with findings Use of internal models or partial internal models for the calculation of the SCR If one or more internal models are used for the calculation of the SCR, the auditor s report should include a reference to one or more internal models approved by DNB. The following sentence should be added in the section Auditor s responsibilities in the auditor s report: Our audit does not comprise an independent validation of the internal models used by (client s name). These internal models accepted by De Nederlandsche Bank including the related process descriptions were used as a standard in our audit. 2 NBA Practice Note, Section The revised Standard 701 also states that including key audit matters is appropriate if required by law or regulation or the auditor decides to communicate them. Royal NBA 11

12 If internal models are used, the following sentence should be added to the opinion paragraph in the auditor s report:, including the internal models accepted by De Nederlandsche Bank, including the related process descriptions Statement of the basis for financial reporting and restrictions in use and distribution in the auditor s report The supervisory reporting forms falling within the scope of the auditor s report are prepared for supervisory purposes and are intended for DNB. The basis for financial reporting and restrictions in use and distribution are included, in accordance with the existing practice, in a separate paragraph of the auditor s report. The wording of the auditor s report will be published at a later time by the NBA, following consultation with the NBA working group for audit reports. 4.2 Detailed report / other communication of the auditor on Solvency II supervisory reporting By means of the auditor s report on the financial statements, the management letter and other communication of the auditor (accountantsverslag), the statutory auditor reports on the results of the audit procedures performed as part of the auditing process for the financial statements. As already provided in the existing NBA Practice Note 1104 (24 July 2015) Section , detailed requirements are set out concerning the reporting of findings arising from the audit of the supervisory reporting forms by the statutory auditor. This is in line with the auditor s responsibility to report to those charged with governance (Standard 260). Communication takes place via a detailed report/other communication of the auditor, providing more scope for including observations and findings regarding the preparation, controls, assumptions and calculations regarding the supervisory reporting forms. To the extent that findings have already been included in the reporting referred to previously, they do not need to be repeated in this report, as the other reports are also already available to the supervisor. In the detailed report/other communication of the auditor the statutory auditor shall report, insofar as not already included in other reporting, on the: 1 Engagement, scope, audit approach regarding the supervision forms, including materiality, identified audit risks, findings and recommendations. Preferably, this focuses on the interpretation of and compliance with the detailed rules, the quality of the reporting processes, the ICT, the controls that are relevant for the quality of the reporting and the extent to which deficiencies in the internal organization affected the audit procedures, for instance because more substantive and supplementary audit procedures needed to be performed as a result. At institutions where a (partial) internal model is applied, the statutory auditor is required to report on any changes implemented that have been determined to be non-material by the institution and have therefore not been approved by DNB via an application process. 2 Auditor s report and opinion. In the event that the statutory auditor does not issue an unqualified auditor s report, the reasons for this must be disclosed in detail. 3 Notification(s) to supervisor pursuant to Section 3:88 of the Financial Supervision Act. 4 Other. Emphasis that the financial statements have been prepared in conformity with a special purpose framework and restrictions on distribution and use. 4 See also Section of NBA Practice Note 1104 for a banking sector analogy. Royal NBA 12

13 5 Other matters 5.1 Public report / Solvency and Financial Condition Report The Solvency II Directive (Article 35) and the Delegated Regulation No. 2015/35 of the European Union on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II) (Article 304) contain the requirements for the insurance institutions established in the Netherlands to prepare and publicly disclose a Solvency and Financial Condition Report (SFCR) (Section 3:73c of the Financial Supervision Act). Pursuant to an Implementation Decision of the European Commission, this report must also include a number of the prescribed supervisory reporting forms. It includes no legal requirement regarding the audit of this public information by the statutory auditor. The requirements in Section 3:73c of the Financial Supervision Act do not apply to insurers with limited risks. These insurers are required, pursuant to Section 2:440 (10) of the Dutch Civil Code, to include in the notes to the financial statements the disclosures applicable pursuant to Section 3:73c of the Financial Supervision Act and Section 134e of the Decree on Prudential Rules regarding solvency and financial position in the notes to the financial statements. Therefore, the information concerned is, as part of these financial statements, subject to audit. 5.2 Solvency II outcomes in management board report and financial statements 2016 Insurance companies are obliged pursuant to existing laws and regulations to disclose the solvency information in the management board report (DAS : situation at the balance sheet data (solvency and liquidity)) and in the notes to the financial statements (Section 2:441 (9) of the Dutch Civil Code, DAS and ), the minimum solvency the company must have, the available solvency and the solvency deemed to be necessary by the management board. For the sake of completeness, it should be noted that Article 2:441 (9) of the Dutch Civil Code (and the DASB provisions in 605) are not applicable to insurers who, with reference to Article 2:362 (8) of the Dutch Civil Code, prepare their statutory financial statements on the basis of EU-IFRS. Naturally, the basic requirement of Book 2 in Part 9 of the Dutch Civil Code concerning the view to be provided and the disclosure requirements concerning capital management as stated in EU-IFRS do apply to these insurers. The disclosure requirements for insurers with limited risk and small insurers are detailed in DAS b and DAS a, respectively. Solvency information that is an integral part of the notes to the financial statements is by definition within the scope of the regular financial statement audit and the related auditor s report. Particularly in the first year in which the amended solvency information is included in the disclosures, the statutory auditor is expected to state the procedures performed concerning solvency in his auditor s report as a key audit matter. If information about the solvency position is part of the management board report, that information should be reviewed by the statutory auditor on the basis of Standard (The auditor s responsibilities relating to other information). On the basis of this standard, the statutory auditor is required to determine whether the management board report contains all required information and is free of material misstatement. As the solvency position will also be subject to audit, users might expect the statutory auditor to have audited the position included in the management board report. In order not to give rise to unjustified expectations, the statutory auditor must ensure that the institution adequately explains to what extent the solvency information has already been subject to audit. The statutory auditor should consider on the basis of the information included to what extent the nature of the procedures performed in respect of this information should be expressed in the auditor s report. 5.3 NBA Practice Note 1104 As NBA Practice Note 1104 (24 July 2015) has not been withdrawn, elements from it continue to apply as well. This includes matters relating to confirmation of engagements, notifications and information provided to and consultation with supervisors, procedures of internal auditors in accordance with 5 Standard 720 is expected to be amended in Royal NBA 13

14 Standard 610 (Using the work of internal auditors) and the confirmation letter for the supervisory reporting forms. 5.4 Digital certification On 19 May 2016, DNB published a letter within the insurance sector in which the changes in the auditor certifications of the Solvency II supervisory reporting forms are explained. Given the changed process for filing supervisory reports by institutions based on the XBRL standard, via the Digital Reporting Portal, significant changes in the certification process are also to be expected. Consultation is taking place within the profession to examine the feasibility of the use of electronic signatures and professional certificates to be used by statutory auditors in the certification process for the supervisory reporting forms. Further information on this will be published by the NBA at a later date, following completion of the consultation with DNB concerning the technical implications. Royal NBA 14

15 Appendix 1 Overview of reporting forms part of the audit scope Regulation on Statements of Financial Undertakings under the Financial Supervision Act 2011: Overview of the reporting forms that the auditor includes in his audit Royal NBA 15

16 Royal NBA 16 NBA Alert 40

17 Appendix 2 Overview of reporting forms part of the audit scope (limited risk insurers) Regulation on Prudential Supervision of Insurers with Limited Risk: Overview of the reporting forms that the auditor includes in his audit Royal NBA 17

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