Pillar 3 reporting: past, present and future

Last week, we published our annual report on the Solvency II disclosures of 100 of the top non-life insurers across the UK and Ireland. Having undertaken this review each year since 2017, I wanted to reflect on how firms’ reporting has evolved and what we might expect in future.

Early reporting

As with many things Solvency II-related, firms were still finding their feet in the first couple of years of reporting. Generic “boilerplate” wording was commonplace, as were obvious errors in numbers and missing content that was required by the regulations. Based on my discussions at the time, firms felt very much “up against it” with the reporting timelines squeezing already scarce resources during Q1 and having little time to finesse reporting much beyond the first draft.

Also, stakeholders questioned the value of Solvency and Financial Condition Reports (SFCRs), noting that often there was little or no new content compared to annual reports and accounts.

Recent developments

More recently, EIOPA called for better consistency in the sensitivity testing that firms report in their SFCRs. And, whilst their guidance isn’t mandatory (and even less so for UK firms post-Brexit), we have seen small, but discernible, improvements in reporting. Sensitivity testing of capital coverage ratios to key assumptions is more widespread, giving readers a better understanding of the impact of certain scenarios on a firm’s capital strength. In addition, disclosures around emerging risks are continuing to improve, with issues such as cyber, conduct and climate (“the 3 C’s”) being discussed more prominently than ever before.

The global pandemic was considered a “major development” under Article 54 of the Solvency II Directive, creating extra reporting requirements for insurers. Specifically, firms were required to publish additional narrative on how COVID-19 was expected to affect the information being disclosed in the SFCRs, particularly as the pandemic hit shortly after most insurers’ year ends. These additional disclosures provided readers with helpful context as to the impact of the pandemic on the business, and the possible impacts on capital coverage (where this information was available).

What next?

Looking forward, issues such as diversity and inclusion are starting to feature more heavily in reports. And with the recent FCA / PRA / Bank of England joint discussion paper on how regulators could help improve D&I across the industry, including the possibility of regulations in this area, I predict this will be even more prominent in future.

I also expect firms to include more detail going forwards on managing climate risk - whilst 60% of firms did mention climate change in their SFCRs this year, I was surprised that only 6% referenced the TCFD requirements that are expected to become mandatory in the coming months.

This is against the backdrop of EIOPA’s proposals to include three additional climate change-related disclosures in Solvency II reporting going forwards: the proportion of investments identified as environmentally sustainable in the EU taxonomy; the proportion of investments exposed to transition risk; and the proportion of investments exposed to physical risk.?This additional level of disclosure would give stakeholders better insights into firms’ wider exposures to climate risks.

And whilst, post-Brexit, the PRA could materially change SFCR reporting requirements for UK firms, I expect that potential changes to the risk margin, volatility and matching adjustments are much higher up the PRA’s agenda, at least for the time being.