Solvency II Wire has obtained four SFCR reports and conducted analysis of their content to begin to shed light on the kind of information and depth of disclosure.
The SFCR is particularly problematic because it leaves most of the disclosure choices with the firm. The structure and headings of the report are stipulated in the regulation (Commission Delegated Regulation (EU) 2015/35), but it is up to the individual firm to decide how to populate each section.
In addition, firms must consider the wide range of audiences for the report. Not only must the text be accessible to both sophisticated market participants and policyholders, but for many insurers, it will be the first time that competitors will get such an up close and personal look into their affairs.
About the analysis
In additional to a general reflection on the entire report, illustrative examples are used from the following parts: Introduction/executive summary; B.1 General information on the system of governance; D1. Assets; and the ‘Any other information’ section in the five parts of the report. The purpose of this selective analysis is to begin to shed light on what, how and how much information firms are disclosing publicly. It is not meant as a commentary on the performance of individual firms.The firms
Evolution Insurance Company Limited, a Gibraltar regulated insurance company, which underwrites surety bonds, building warranty, title insurance, motor insurance, motor insurance ancillary products, and also fronts insurance into other EEA jurisdictions. The firm is the solo entity of Evolution Holdings (Guernsey) Limited (‘EHGL’). – Assets £108,196 Liabilities £89,596* *(All figures are based on Solvency II valuation, figures are 000’s) Hansard Europe DAC, an Ireland regulated unit-linked life assurance private company limited by shares. The company is in run-off. – Assets £199,263 Liabilities £186,989 Vitality Life Limited, a UK regulated life insurance entity authorised to carry out long term insurance business. Its ultimate parent is Discovery Limited based in South Africa. – Assets £47,868 Liabilities £53,258 The Wren Insurance Association Ltd, a UK regulated mutual insurance association providing professional indemnity (PI) cover for architects. – Assets £77,757 Liabilities £32,291Statistics and readability
Much like the ORSA reports, firms have been trying to work out how long the SFCR report should be. The four reports analysed have an average length of 37 pages (excluding the QRT annexes) ranging from 24 pages (Wren) to 51 pages (Vitality life). To gauge the accessibility of the report a SMOG Readability Formula test, which estimates the number of years of education needed to understand the text was applied to the full narrative text of each report. The scores are as follows: Vitality Life 12.4, Wren 12.6, Evolution 13.5 and Hansard 14.6. By way of reference the SMOG index for this article is 14.5.Introduction / Executive summary
Each report must contain a “clear and concise” summary or introduction, which according to Article 292 of the Regulation, “shall be understandable to policy holders and beneficiaries”. The summary should also highlight any material changes relating to the five parts of the report.
General information on the system of governance
The entire second part of the SFCR ‘General Information on the system of governance’ is, in most cases, the longest, ranging from 5 pages in the Wren report to 15 pages in the Vitality Life report. Article 294 of the Regulation lays out in detail what information should be included in this part, including the governance structure and lines of accountability, remuneration policy and information about material transactions during the reporting period. The EIOPA guidelines on Reporting and public disclosure (BoS-15/109) further clarify that the report: “should explain how the key functions have the necessary authority, resources and operational independence to carry out their tasks and how they report to and advise the administrative, management or supervisory body of the insurance or reinsurance undertaking.” Some of the reports provide extensive information about the functioning of each committee and its lines of responsibility as well as the duties of specific posts, while others only provide a brief outline.
Remuneration
The differences in the level of detail are further highlighted in the way each report complies with the requirements to provide information about remuneration policy. The Vitality Life report contains a dedicated sub-section called the “Remuneration policy for the administrative, management or supervisory body and employees”, which details policy over two and a half pages. Part of this is due to the company’s complex remuneration policy that includes both fixed and variable (long and short) remuneration plans. The Hansard report lists a range of employee benefits, while the Wren report only discusses the role of the Remuneration Committee, giving no further details. Only the Evolution report details actual salary figures.Material transactions
The general information part of the report must also note any “material transactions” during the reporting period. Of the four reports, only Vitality Life had such transactions (the others state that none took place). Vitality Life defines material transactions as, “anything over the value of £5,000k”, and lists a number of capital injections from its parent company.Charts
Three of the reports (except Hansard) also include charts of the structures of the Board and committees. The Wren report includes a Governance Map at the end of the document, with details of the directors and committee members (page 23).Assets
The section on “Assets” is included in the fourth part of the SFCR, “Valuation for Solvency Purposes”, where firms explain the valuation of the Solvency II balance sheet as outlined in Article 296 of the Regulation. Three of the reports (except Vitality Life) include a chart or a table showing the breakdown of assets, in various degrees of granularity. The Evolution and Hansard reports also include comparisons between the Solvency II valuation and local GAAP rules. The Vitality Health report relies more heavily on the QRTs for details of its assets compared to the other reports.
Any other information
The SFCR structure allows for the inclusion of “Any other information” in each one of the five parts of the report. Reviewing these can provide useful insights into the thinking and concerns of the market.
Economic and political conditions
Evolution, which is a Gibraltar regulated firm, expressed concern in terms of the relationship between Gibraltar and the UK and the fear of losing passporting rights into the EU. The report states (page 29): “The Board continues to monitor the situation and consider whether contingency arrangements should be investigated to mitigate the risk, thus enabling the Company to continue writing business in the EU after the UK exits.” The Hansard report also expresses concerns about the impact and uncertainty of Brexit and states that the company is monitoring developments, listing the following potential impacts depending on the outcome of the process (page 27):- VAT Grouping arrangements and resultant cost impacts
- Tax treaty arrangements and employment mobility
- Future tax policy
- Tax competition/ Business mobility
- Currency volatility
- Other Countries leaving the EU
- Freedom of Services’ Business framework
- Import/export tariffs.
Company specific information
Company specific information relates to the company’s specific line of business or business model or specific experience of the company. For example, Vitality Life addresses what it calls the Vitality status distribution risk about its rewards and incentives scheme (page 41): “the risk that more policyholders than expected are on the higher statuses without a commensurate improvement in claims experience.”A wealth of insights
Additional information found in other parts of the SFCR include information that the company is subject to a number of legal actions relating to asset performance (Hansard); dealing with a breach in the SCR ratio (Evolution); or a change in incorporation status (Vitality Life). Over time it is likely that the information contained in these sections will provide a rich tapestry of insights into market trends and general market sentiments in specific countries as well as globally. For example, it is reasonable to expect the impact of the US elections to feature in some of the future reports.How do you SFCR?
Even a partial review of the SFCRs of only four relatively small insurance firms is already revealing the awesome power contained within the Solvency II public disclosures. The variety as well as range of information show that the EIOPA and NCA guidelines about the content of the SFCR leave a wide margin of discretion to the reporting entities. The Solvency II framework has often been considered to be at risk of becoming a “tick-box exercise” in the context of reporting. However, the SFCRs gathered and analysed by Solvency II Wire show that companies are adapting the structure of the report to their actual disclosure needs, by highlighting the particular features of the firms’ businesses and composition. Such an exercise contributes to enhancing the transparency and, ultimately, the competitiveness of the European insurance market. At a time, when the memory of the financial crisis is fading and the winds of deregulation are starting to howl through the still creaking global financial architecture, the crisp and powerful clarity of the Solvency II public disclosures could provide the shock that will jolt policy makers and industry to realise the value of comprehensive and consistent regulatory public disclosure framework. If the question is “How do you SFCR?”, the answer must be: “very, very well”.*Additional reporting Giulia Gentile — Solvency II Wire Data is a simple and powerful tool for analysis of all available Solvency II public disclosures across Europe from Solvency II Wire. To learn more click here.
