Your Solvency II reporting may be better than you think
This may be the one thing you need to hear when trying not to drown in the to-do-list of the first quarter: The quality of Solvency II reporting has improved in recent years. And it is confirmed by EIOPA. All your hard work has finally paid off. From another perspective, it could be interpreted as the bar has been raised when it comes to reporting quality. It is no longer acceptable for insurers to have poor quality assurance in their reporting processes. We will explain why.
Regulatory reporting has been a prioritized focus area within institutions ever since the implementation of Solvency II in 2016. It’s evident that establishing a well-structured and robust reporting process is vital in fulfilling the demanding requirements. The reporting quality is monitored by both EIOPA and local supervisors and firms must ensure that reporting quality is maintained, even as the requirements change. At the same time, regulators have turned up the heat on insurance firm’s reporting. The FSA recently announced that they will review several Swedish insurance firms regulatory reporting processes and EIOPA is tracking the Solvency II data quality. According to EIOPA, “Poor reporting quality can be interpreted by supervisors as a sign of weak governance”. Failing this, can lead to reputational and monetary damage in terms of sanctions in the worst of cases.
Encouragingly, EIOPA has found that the quality of Solvency II reporting has improved since 2016. In 2022, EIOPA published a report on reporting data quality revealing that the automated data quality processing together with built-in validations in the XBRL taxonomy has contributed to a 12-percentage point improvement in the overall reporting quality, from 82% in 2016 to 94% in 2020. One obvious reason for higher reported data quality is the increased number of validations in the taxonomy releases, making it harder for firms to submit an incorrect report to EIOPA. Undertakings are also better at compiling comprehensive reports, which includes reporting all the necessary items, and submitting them before the deadline. The report shows that the share of entities that submitted a complete annual solo QRT report before the deadline rose from 76% to 97% between 2016 to 2020.
Several different key performance indicators are used by EIOPA for tracking whether the reported data is likely correct; Level of completeness and timeliness, correctness of asset data, LEI score, ISIN coverage, CIC and rating comparison check. A key area is the reporting of investments in the list of assets, template S.06.02. EIOPA asses the correctness of the reported data by comparing the reported assets with an ISIN code to the Centralised Securities Database (CSDB) from the ECB, receiving a CSDB score. 8 checks are run against the CSDB data base covering ISIN, Issuer LEI, Issuer country, asset currency, bond duration, maturity date, accrued interest and price, all adding up to a total CSDB score. The advantage with having a large database of reported data is that EIOPA can easily discover patterns in the reported data and automatically recognise outliers. In addition to the CSDB comparisons, EIOPA compares for each ISIN reported by multiple different undertakings, if the CIC classification is aligned or if there are outliers. The same is done with the assigned credit quality step, EIOPA can automatically identify outliers when combining the rating and rating agency.
All indicators demonstrate increased reporting quality among Solvency II reporters. Since the report from EIOPA only analyse completed and reported data, we cannot say anything about whether the data quality of the insurance companies has increased in recent years. However, the positive trend indicates that companies’ reporting processes have probably developed to meet new regulatory requirements and taxonomy validations. The overall increase in reporting quality is signalling that the bar has been raised when it comes to reporting quality. Another way to phrase it is that it is no longer acceptable with poor reporting quality. If you haven’t improved your regulatory reporting process and reporting quality since 2016 the risk of being deemed as an outlier, and consequently as a company with weak governance, has significantly increased over the past six years.
Ensuring high quality reporting is a major task for EIOPA, however the main responsibility lies on the supervised entities. EIOPA’s analysis of reporting quality identifies which areas supervisors should follow up on, e.g., the investment reporting, and these should therefore be prioritized by firms and their asset managers. Accurate and reliable data is not only a requirement from regulators but also favourable for the company. Reported data can give valuable insights for decision making processes affecting the business. Utilizing reporting data in the right way can lead to a more efficient capital allocation and hence lower risk and cost of capital. In this case, regulatory reporting doesn’t have to be “a necessary evil”.
The current template-based regulatory reporting requires a lot of maintenance and development for insurers. At the same time, expectations on regulatory reporting are undoubtedly increasing. To ensure correct regulatory reporting several key components should be in place. Insurers need to have a well-documented process covering at least the following:
- Governance structure including internal controls, which preferably are integrated with the financial reporting
- Implementation of new regulatory requirements and taxonomies
- Enough resources to avoid key staff dependencies
- Proactive monitoring and assessment of regulatory changes
- A robust review and sign-off process
- Effective communication
- The right technical solution
There are solutions that can help with the technical aspects, such as the conversion to XBRL and the calculation of SCR. However, interpreting new regulations and implementing the necessary requirements to meet long-term expectations remains a challenging task. With rising expectations from supervisors and the regulatory landscape becoming more and more complex, firms need to ensure that they have a flexible approach which can smoothly adjust to upcoming changes.
Many smaller insurers outsource (or co-source) the regulatory reporting. For smaller insurers it may not be feasible or efficient to staff the monitoring, implementation, and maintenance of regulatory reporting with internal resources. The regulatory reporting may be a part time job. Also, doing the regulatory monitoring can in part be reinventing the wheel, since all insurers need to do similar monitoring. Some benefits of outsourcing the regulatory reporting are that the work can be scaled to the needed hours, that the monitoring is done more efficiently and that the work can be done with a single point of contact that is supported by other experts when needed.
How FCG can help? FCG currently supports several insurance firms through the complete reporting process and has extensive knowledge within the regulatory reporting frameworks as well as the regulatory requirements of Solvency II. Our dedicated team can assist your company in ascertaining that your regulatory reports are correct, support you in the improvement of the regulatory reporting process and navigate the complex maze of regulatory requirement.
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