COMMENTThe Central Bank of Ireland and the wider Irish insurance industry are actively finalising preparations for the first cycle of Solvency II annual reporting. Dr Allan Kearns, head of insurance analytics at the Central Bank of Ireland, reflects on the quality of the quarterly reporting to date, arguing that firms should not be using their supervisory authority as a reviewer, and should be looking to present a fully correct view of their business. Insurers across Europe began submission of the new Solvency II regulatory templates in May 2016. There was obvious satisfaction on achieving this significant milestone with almost all submissions by firms in Ireland received by the statutory deadlines. Our vision at the Central Bank is to embed Solvency II reporting as fully and as quickly as possible in our supervisory decision making, as well as to share certain aggregate information with the insurance industry. The achievement of this vision is entirely dependent on the quality of the information reported to us. In that context, May 2016 marked the beginning of a significant investment in quality assurance on the new Solvency II data.
How will the Central Bank assess data quality?Our approach to the quality assurance process starts with the understanding that the accuracy of the reporting has been attested to at a senior level within each firm. The process itself encompasses three layers: taxonomy validation, data quality and plausibility checks, and supervisory review.
Taxonomy validationsData files are accepted as valid only when they meet the various taxonomy validations. These validations are a check on the internal consistency of the data across the various templates. Importantly, it is possible for a file to meet the taxonomy validations but still contain a host of other data quality issues.
Automated checks of data quality and plausibilityOur analytics team has put in place automated checks, which in part expand on the suite of taxonomy validations, but also links Solvency II data to other data sources to cross-check submissions. Importantly, this layer offers a flexible and efficient approach to assessing quality of data that is reported, but is constrained by an inability to identify every check that might be required at this early stage in the Solvency II reporting process.
Supervisory reviewOur front-line supervisors review Solvency II submissions in order to sense check the overall returns. Essentially, the question asked of supervisors is whether they recognise the business model and financial position of a regulated entity as described by the Solvency II data. We expect collaboration with EIOPA over time to provide a fourth layer, for instance, with the benefit of cross-country comparisons.
A varied quality in submissions to dateQuality assurance professionals benchmark against two basic principles: fit for purpose and right first time. In both these respects, there have been strengths and weaknesses in the first sets of submissions; we have seen instances across the entire quality spectrum, from the near perfect to other cases where significant revision has been requested. Examples of poor quality reporting have been found across all of the different categories of data. While it had been expected that the more granular asset templates would prove to be more challenging, we have seen issues across the returns including reporting on solvency coverage and own funds, balance sheet, premiums, and claims and expenses. There are a number of examples that we have shared with the industry by way of illustration. These include:
- significant sums of notes and coins reported being held, which on investigation has proven to be a misclassification of deposits;
- a number of firms reporting incorrectly their use of approved features of Solvency II for which they had not received regulatory approval, which on investigation can be attributed to mis-reporting, and
- a mismatch between granular information on assets which do not match the aggregate figures on the balance sheet – which has been attributed to incorrect or incomplete reporting.