KPMG LLP November 2011 Solvency II Reporting EIOPA consultation on Pillar 3 disclosures Introduction On 8 November EIOPA released a public consultation document covering: Draft proposals on Quantitative Reporting Templates; and Draft proposals for Guidelines on Narrative Public Disclosure and Supervisory Reporting, Predefined Events and Processes for Reporting and Disclosure. These long awaited detailed reporting requirements follow from the CEIOPS Final Advice (former CP 58) on Level 2 issued in 2009, which included an Annex on Quantitative Reporting Templates, as well as two rounds of informal consultations with major European stakeholders in the summer of 2010 and Q1 2011.The latter was until today the main source of information for the industry on the expected quantitative reporting under Solvency II. Feedback from these consultations has been taken into account by EIOPA in order to provide a largely stabilised package to facilitate the preparatory work of (re)insurance undertakings for Solvency II. This public consultation is being organised before the agreement on the Omnibus II Directive and before the adoption of the proposal for the Delegated Act by the European Commission.The draft proposals are based EIOPA on Pillar 3
on the latest status of the above, but any future adjustments to the Delegated Act ( Level 2 ) will be taken into account in the final reporting requirements after the public consultation. It is expected that these adjustments should not have a material impact on the content of the QRTs and the guidelines; however EIOPA has listed the areas where impacts should be considered. EIOPA is looking for stakeholders feedback on the package as a whole and in particular on the issues that are not yet fully settled: variation analysis templates, own funds (eligibility, reconciliation reserve), quarterly reporting of the balance sheet, risk concentration, non-life catastrophe risk SCR, ring-fenced funds reporting and narrative reporting guidelines. Future developments The consultation will end on 20 January 2012. EIOPA will consider the feedback received and expects to finalise the Pillar 3 package in the summer 2012. Pending final confirmation of the deadlines in the Omnibus II Directive, EIOPA expects to submit the Implementing Technical Standards ( Level 3 ) for endorsement by the European Commission by September 2012.The potential impact of changes in the Level 2 will be taken into account where relevant. EIOPA stated in the cover note that it is currently working on additional data to be collected for financial stability purposes (that are not currently covered by the set of templates). EIOPA has scheduled to publicly consult on those additional reporting requirements from December 2011 to provide stakeholders with the complete set, which will be as close as possible to the overall reporting needs under Solvency II. Scope This consultation, similar to the former pre-consultation with key stakeholders, covers the qualitative and quantitative reporting requirements. EIOPA has also shared an Impact Assessment document (an analysis of the impact of proposed policies together with the chronology and results of previous consultations). Quantitative Reporting Templates (QRTs) The draft proposal on QRTs includes: excel spreadsheets setting out the templates; and accompanying cell definitions and summary documents. The Technical Annex provides the list of all templates and their applicability to solo undertakings/groups, their frequency and scope of public disclosure. Narrative reporting, pre-defined events and processes The draft proposal covers: narrative Solvency and Financial Condition Report (SFCR) and Regular Supervisory Report (RSR) further details on the requirements building on the SII Directive (Level 1) and the Delegated Act (Level 2); reporting upon the occurrence of pre-defined events; and processes with regards to disclosure and reporting further guidelines on disclosure and reporting policies, non-disclosure of information, references to other documents in the SFCR, additional voluntary disclosures, RSR as a stand-alone document, and approval of the RSR by the administrative, management or supervisory body. 2 EIOPA on Pillar 3
Key messages We have identified the following key changes in relation to the reporting and disclosure requirements, compared with previous guidance available: Overall the number of the QRTs remains at a similar level and the revisions to most templates are not significant. The outstanding Variation Analysis template has been developed but needs consideration by the reporters and users. EIOPA seeks feedback in particular on the new/ revised templates. The number of QRTs applicable to groups was reduced; to some extent this is only due to the consolidation of templates. The idea of reduced, half-year reporting by groups, does not feature in the consultation paper. It is therefore expected that groups, along with solo entities, will report selected QRTs to the supervisor on a quarterly basis. Separate reporting on each material ring-fenced fund (RFF) was introduced, covering the balance sheet, own funds, SCR and technical provisions. When required, sub-groups should complete the groupspecific and solo templates applicable to groups. IGT templates also apply to mixed-activity holding companies. Larger insurers (to be determined by the application of the proportionality principle by the supervisor) are required to provide a detailed list of assets (investments) on a quarterly basis. All insurers need to provide a detailed assets list annually. Groups are relieved from the requirement to produce technical provisions templates. The group-specific templates have been revised in response to feedback received. Additionally solo templates applicable to group entities have been adjusted to support reporting at group level. SFCR now requires additional disclosures in relation to own funds. Detailed disclosures are required in relation to intra-group transactions and balances in both the SFCR and the RSR. Detailed disclosure requirements relating to valuation of assets and liabilities are provided. EIOPA is looking for stakeholders feedback on the package as a whole and in particular on the issues that are not yet fully settled. EIOPA on Pillar 3 3
Quantitative Reporting Templates The table below presents a summary of changes in the set of QRTs compared with the pre-consultation material. Subject Current Consultation Informed pre-consultation Balance sheet Same 3 forms 3 forms on BS, off-bs and assets and liabilities by currencies Country/cover 3 forms, A1 split into annual and quarterly 2 forms: K1 Country and A1 Cover Own funds Variation analysis 4 forms, split into annual and quarterly, solo and group 4 forms: overall, changes in BOF due to investments,tp and other (including own debt) 2 Own Funds forms 3 VA forms SCR and MCR Same 12 forms 10 SCR and 2 MCR forms Assets 9 forms with D1 and D2 split 7 forms: D1, 1A, 2, 3, 4, 5, 6 Technical provisions Same 7 life forms, all only solo 8 non-life forms (E5 removed, E7 split), all only solo 7 life forms and 8 non-life, some applicable to groups Reinsurance Same 4 forms 4 reinsurance forms, incl. SPVs Group-specific Overall 10 forms with G10, 15, 30 and 2 IGT forms removed/consolidated Total of 64 templates, including: public disclosure of 9 QRTs (solo) or 8 QRTs (groups); 35 forms applicable to groups (25 solo ones and 10 group-specific). 15 forms, including 6 for IGT Total of 63 templates, including: public disclosure of 13 QRTs (solo) or 21 QRTs (groups); 52 forms applicable to groups (37 solo ones and 15 group-specific). 4 EIOPA on Pillar 3
Highlights by section Area Key findings KPMG comment Impact on clients Guidelines on General Reporting Requirements Applicability the applicability of QRTs to solo undertakings and groups, as well as the frequency of reporting to the supervisor and public disclosure is set out in the Technical Annex table. 4th quarter the explanatory text confirms that quarterly templates are submitted for all 4 quarters in the year. Group templates the group templates are also submitted by sub-groups and mixed financial holding companies, where relevant. There is flexibility in the scope of supervision applicable to sub-groups. Ring-Fenced Funds solo insurers need to submit specific QRTs for each material ring-fenced fund (RFF) on an annual basis. National specificities QRTs will replace current Solvency I reporting across Europe, except where national legal requirements of local market specificities oblige the supervisor to collect additional data. The consultation does not repeat the previously seen concept of infra-annual (halfyearly) reporting for groups. The quarterly QRTs applicable to groups will need to be submitted on a quarterly basis (3 mandatory QRTs + 4 QRTs with possible exemptions). The explanatory text clearly states that reporting at group level includes aggregated figures for the group as a whole, which includes all related entities (e.g. nonregulated entities, third country subsidiaries, etc.). Potential changes to working assumptions regarding: Inclusion of non-regulated and non-eea subsidiaries in group reporting. Quarterly versus halfannual group reporting. More specific reporting requirements for firms with RFF. Continued uncertainty regarding national reporting requirements. Balance sheet Balance sheet (C1) the template has changed slightly and additional lines were added for details on the composition of investment funds. A balance sheet will be disclosed annually by all solo entities and groups. However a quarterly balance sheet is only required if the reconciliation reserve cannot be explained sufficiently by the information on assets and liabilities that is reported in other quarterly templates (Assets, TP, OF). A balance sheet will be required for each material ring-fenced fund (RFF). Off-balance sheet items (C1B) the template is now only submitted annually to the supervisor (no quarterly or public disclosure). Assets and liabilities by currency (C1D) the materiality threshold was revised and the template is completed for the most important currencies representing up to 90% of both assets and liabilities (in SII value). Additional analysis required on a quarterly basis to verify if the exemption criteria for the quarterly balance sheet are met. More detail on the face of the balance sheet regarding investment funds. Potential exception from quarterly reporting. Additional balance sheets for firms with RFF. Country/Cover Activity by country (K1) the template was revised to present premiums and claims data on a gross basis only (previously also net). Activity by country is not disclosed to the public any more and this only applies to solo entities. Premiums, claims and expenses (A1) the template is now split into the annual and quarterly format (A1A and A1Q). The shorter, quarterly form is used for public disclosure within the annual SFCR (instead of K1 Country). The materiality threshold for the data split by country of risk localisation was revised and requires reporting on the 5 major countries by amount of gross written premiums or until 90% of written premiums is covered. Template A1 is now more specific regarding the disclosed expenses. The annual form requires breakdown into administration, investment management, claims management, acquisition costs and overheads. Disclosure of information in form A1 appears better suited to the needs of the users of SFCR. A1 requires detail on expenses by SII lines of business. EIOPA on Pillar 3 5
Area Key findings KPMG comment Impact on clients Own funds Own Funds Annual (B1A) and Own Funds Quarterly (B1Q). The templates have been revised to align with new definitions of own funds items, reconciliation reserve breakdown, and the introduction of Expected Profits Included in Future Premiums (EPIFP). The template now requires movements in the period to be explained by each component of own funds. Both the annual and quarterly templates now have two variants for use by solo and group entities. The latter have additional fields added to allow for group-specific items (e.g. non-available own funds, own funds of other financial institutions). The shorter, quarterly form is used for public disclosure within the annual SFCR by both solo entities and groups. An Own Funds template is required for each material ring-fenced fund annually. The templates have been substantially revised, introducing some clarifications and adding new requirements. There are still areas of uncertainty as parts of the templates are still being developed (participations treatment, analysis of the reconciliation reserve). Formula driven cells have been clearly highlighted. This includes the automatic calculation of eligible own funds. The revisions to the templates require detailed consideration by firms. SCR and MCR Solvency Capital Requirement (SCR B2A,B,C) the templates have been revised to allow groups to provide an additional split of non-insurance capital requirements and disclosure of non-controlled participations. Separate lines were added for diversification within RFFs. The application of each of the templates (B2A for undertakings on SF or partial IM, B2B for partial IM and B2C for full IM) was clarified firms on partial internal models will complete both B2A and B2B and all firms that are also required to report an estimate of the SCR using the SF will need to complete B2A too. Solvency Capital Requirement (SCR B3A-G) limited changes made to most of the templates on different types of risks (except B3F below), mainly additional explanations added and terminology aligned. SCR Non-life catastrophe risk (B3F) the template was significantly revised following revisions to Level 2 guidance on the CAT risk module. A series of SCR templates will be required annually for each material RFF (notional). Minimum Capital Requirement (MCR B4A,B) minor changes in the template, including alignment of LOBs and revised definitions. Additional cells and explanations provided will aid the implementation efforts of (re)insurers. It has been clarified that the MCR is not reported at group level. Changes to SCR templates should be welcomed by firms. Revisions to CAT risk require further consideration. More specific reporting requirements for firms with RFF. Variation Analysis Variation Analysis (VA C2A-D) the analysis is split into 4 templates: summary of changes in basic own funds (BOF) and three templates for BOF changes due to each of: investments, technical provisions, own debt and other items. The VA templates analyse the variances related to business activities, while the capital items are analysed within the Own Funds template. The Variance Analysis is reported at solo level only; however the application to groups remains an open issue. EIOPA expects that the VA templates would only be required in the second year of Solvency II implementation (i.e. at the end of 2015, if first annual reporting occurs at the end of 2014). It is a significant and awaited improvement from the pre-consultation version. It remains to be seen how practicable the template is for (re)insurers. Comments on VA templates are of particular interest to EIOPA. The template is practically new to most firms and requires careful consideration, including links with the regular ORSA. 6 EIOPA on Pillar 3
Area Key findings KPMG comment Impact on clients Assets Investments Data portfolio list Annual (D1) a detailed list of investments is still required annually. Investments Data Quarterly (D1Q) requires a quarterly detailed list of investments or a summary of investments following the structure of the investments section of the balance sheet (C1). Structured products data portfolio list (D1S) This template has been renamed, previously: D1A (Structured products data Portfolio list). Derivatives data open positions (D2O) and Derivatives data historical derivatives trades (D2T) D2 has been split into D2O and D2T. D2O reports the derivative contracts which were open at the reporting period end. D2T reports the derivative contracts which existed during the reporting period but were closed prior to the reporting period end. Clarification of notional amount, premium paid/received provided. D1 still requires a detailed list of investments. This is not in line with ECON s proposed amendments to the draft Omnibus II. We welcome more clarifications provided on some cells in the assets templates. Firms still have to provide a detailed list of assets annually. Larger firms will have to produce a detailed list of investments on a quarterly basis. Whether D1Q requires a detailed list or a summary list will be decided by the supervisor taking into account the proportionality principle. Technical provisions (Life) Life and health SLT Technical Provisions Quarterly (TP-F1Q) should now be publicly disclosed on an annual basis. LOGs some changes to LOGs in relation to definitions and explanations. None of the life technical provision templates are applicable to groups (in the pre-consultation papers the groups were required to report on F1 and F2). Public disclosure requirement following the simpler quarterly template is a change from the preconsultation issued in December 2010. Groups are now relieved from the requirement to produce technical provision templates. Public disclosure requirement of the quarterly template is a change from the pre-consultation issued in December 2010. However, the template has now been simplified. Groups are now relieved from the requirement to produce technical provision templates. Technical provisions (Non-life) Non-life insurance premium and expense information (TP-E5) this template has been removed. Non-life Technical Provisions Quarterly (TP-E1Q) should now be publicly disclosed on an annual basis. Underwriting risks peak risks (TP-E7A) and Underwriting risks mass risks (TP-E7B) TP-E7 has been split into E7A (peak risk) and E7B (mass risk). None of the non-life technical provision templates are applicable to groups (in the pre-consultation papers the groups were required to report on E1, E1Q and E2). Public disclosure requirement of the simpler quarterly template is a change from the preconsultation issued in December 2010. Groups are now relieved from the requirement to produce technical provision templates. Public disclosure requirement of the quarterly template is a change from the preconsultation issued in December 2010. However, the template has now been simplified. Groups are now relieved from the requirement to produce technical provision templates. EIOPA on Pillar 3 7
Area Key findings KPMG comment Impact on clients Reinsurance Facultative covers (J1) the template has been revised and now requires facultative covers presented on a prospective basis, consistently with J2. The template needs to be re-submitted at the end of the year if actual top 10 covers started and/or terminated during the year have differed from what was expected initially. Requirement to disclose more detailed information about the reinsurer and the broker and explanation about the facultative cover and the underwriting model. Reinsurance treaties (J2) new requirement to disclose more detailed information about the reinsurer and the broker. More clarity has been provided on line of activity and the type of reinsurance treaty. Similarly to J1, the template now requires disclosure of the type of underwriting model in order to assess the possible retention of the insurer. Share of reinsurers (J3) requirement to disclose more detailed information about the broker. SPVs rhe template now specifies that it needs to be reported from the perspective of the cedant to SPVs that are used as pass-through vehicles for transferring insurance risks from insurance undertakings and securitisation vehicles using a legal entity, other than SPVs. The template has been substantially changed to disclose more information about the identification of the SPV, the type of risks ceded and risk transferred, the list of assets for settling cedant specific obligations and the recoverable(s) from the SPVs. The template has been substantially revised adding new requirements. The template will have to be completed on a prospective basis and will have to be reconsidered to assess whether any significant change has occurred from what was expected in the initial J1. No changes of substance but further analysis is required. J1 and J2 are no longer required at group level. No changes of substance. The template has been substantially revised adding new requirements. The revisions to the templates require detailed consideration by firms. More specific reporting requirements for firms with SPVs J1 and J2 are required to be filled by undertakings transferring underwriting risk whose period of validity includes or overlaps the next reporting year. 8 EIOPA on Pillar 3
Area Key findings KPMG comment Impact on clients Group-specific Undertakings in scope of the group (G1) individual undertakings performance information (underwriting, investment, total) now included on G1 rather than on G10, which has been deleted. Additional clarifications provided: template is completed by parent, no reporting thresholds, includes non-eea entities, national reference numbers to be used, should be completed in group currency. The template applies to sub-groups if undertaking subject to sub-group supervision. Overview of solo solvency requirements and own funds within the group (G3 and G4) inclusion of national identification codes for undertakings included. Technical data for (re)insurance undertakings (G10) this QRT was deleted, information now included on G01. Contribution to group technical provisions by entity (G14) significant changes to headings into which analysis is required: no separate disclosure of reinsurance recoveries, new disclosure of amounts including and excluding inter-group transactions, no longer requirement to separately disclose risk margins. Subordinated liabilities (G15) form deleted. Contribution to group SCR with deduction and aggregation (G20) additional clarifications provided: cells relating to the capital charges for risk modules should be reported only for undertakings for which the SCR is calculated using the standard formula. The total SCR should be reported using the standard formula or an internal model (full or partial). Group own funds (G30) form deleted. Intra-group transactions templates number of templates reduced from 6 to 4 along with number of items in each template. Clarification of reporting period for templates all significant IGT in-force at the start of the reporting period or occurring during the reporting period have to be reported. Clarification the IGT templates apply to: group reporting of sub-groups (where applicable); IGT reporting where the parent undertaking is a mixedactivity insurance holding company (where applicable); and any ad-hoc reporting. IGT involving equity-type transactions, debt and asset transfer (IGT 1) extended to include debt and asset transfers. Derivatives (IGT 2) new template (previously no IGT derivatives template, IGT 2 was previously IGT on loans). No changes of substance. No changes of substance. Analysis required is different from previous versions. Clarification only. Whilst the number of templates and number of items in each template has reduced, a detailed review will be required to ensure information is available to report in the required format. Further detail on materiality thresholds is expected: The materiality thresholds shall be set by the group supervisor in consultation with the other supervisors concerned, the group and where applicable, EIOPA. Not likely to be significant. Not likely to be significant. Need to review to ensure revised analysis can be provided. Not likely to be significant. Need to review to ensure that the revised analysis in the required format can be provided. EIOPA on Pillar 3 9
Area Key findings KPMG comment Impact on clients Group-specific (Continued) Internal reinsurance (IGT 3) previously IGT 5 (IGT 3 was previously internal cost sharing). Changes in headings under which disclosure is required and the number of headings is reduced. Internal cost sharing, other contingent liabilities and off balance sheet items and other types of IGT (IGT 4) Other IGT previously disclosed on IGT 6. Internal reinsurance (IGT 5) deleted and moved to IGT 3. Other IGT (IGT 6) deleted and moved to IGT 4. Risk concentration (RC) Only change was to include national identification code of counterparty. Only the most important exposure by counterparty should be listed. The thresholds could be fixed by the group supervisor after consulting the group itself and the College. Change is not significant. Further detail on materiality thresholds expected. Not likely to be significant. Narrative reporting SFCR Key new disclosure requirements include: Business and performance Requirement to identify the owners of the qualifying holdings and the share of ownership held by them. Name and contact details of the supervisory authority. Organisational structure information about the group including information on the internal structure. Detailed disclosure requirements relating to intra-group balances and transactions. Governance structure Explanation on how risk management, internal audit, compliance and actuarial functions are integrated in the organisational structure and decision making process. Risk profile Requirement to disclose whether the SPVs are authorised under Article 211 of the Solvency II Directive. Regulatory balance sheet Detailed guidance on valuation rules relating to different asset and liability categories, and technical provisions. Capital management Insurers should disclose their solvency ratio, calculated as eligible own funds as a percentage of the SCR. Requirement to explain the key elements of the reconciliation reserve. Disclosure of excess of assets over liabilities within ring-fenced funds including information on significant restrictions, deductions or encumbrances. Detailed disclosure requirements regarding the valuation of assets and liabilities have been provided. Intra-group balances and transaction disclosure requirements are consistent with disclosure requirements under IAS 24. Insurers are required to provide more disclosures in relation to own funds (e.g. solvency ratio, explanations on key elements of the reconciliation reserve, disclosure relating to ringfenced funds). Insurers can use the related party disclosures in their IFRS financial statements to meet the related party disclosure requirement in SFCR. More disclosures relating to own funds. 10 EIOPA on Pillar 3
Area Key findings KPMG comment Impact on clients Narrative reporting RSR More clarity has been provided on related party transactions. Requirement to provide detailed disclosures on intragroup operations and transactions including terms and conditions, commercial rationale, risks borne by, and rewards available to each party etc. Detailed disclosure requirements relating to technical provisions (more guidance). Detailed disclosure on related party transactions may be new to some UK insurers. Requires review to ensure that the required information can be provided. Narrative reporting Pre-defined events More example of pre-defined events (e.g. significant operational failures, very significant intra-group transactions etc.) together with detailed explanations. Detailed guidance is given in relation to different types of pre-defined events. Not likely to be significant. How we can help? KPMG has extensive experience of designing and implementing the Pillar 3 requirements working on delivering technically compliant, business focused and efficient solutions. Our experience ranges from the design of business requirements through to the design and implementation of large scale finance and risk reporting change. We can: Provide you with an up-to-date and scalable toolkit, including pro-formas and templates for the Pillar 3 outputs; Provide a finance and risk transformation methodology to assist you with upgrading the processes required to deliver the Pillar 3 requirements; Provide technical updates; and Benchmarking your progress against that of your peers. EIOPA on Pillar 3 11
Contact us Danny Clark Partner, Pillar 3 Lead T: + 44 (0) 207 311 5684 Jon Dowie Partner, Data & Systems Lead T: + 44 (0) 207 311 5295 Martina Neary Partner, Pillar 3 Process Design & Implementation T: + 44 (0) 207 694 2267 www.kpmg.co.uk/solvencyii The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member All rights reserved. Printed in the United Kingdom. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. RR Donnelley RRD265898 February 2012