Real comfort: Balance sheet assurance

Solvency II has ratcheted up the volume, complexity and potential for misstatement within regulatory reporting. And if you don’t trust the numbers, why should anyone else? So how can you gain real comfort?


It’s not just the scope of Solvency II reporting that’s challenging, but also the tight timelines and level of judgement involved.

While the 2016 quarterly reporting has provided an initial taste of the challenge ahead, the real test will come when your business has to disclose its first publicly available Solvency and Financial Condition Report (SFCR) in 2017. The SFCR should include a statement from the governing body acknowledging their responsibility for its preparation. A lot of the information in the SFCR is also being made public for the first time, having been largely confined to internal actuarial evaluations before.

Comfort is therefore vital. Boards want assurance that the business is solvent and compliant, and that they’re basing decisions on reliable numbers. Any misstatement not only raises the risk of regulatory intervention, but also severe reputational damage.

Priorities for action

Given the scale of the demands and the risks surrounding them, it’s no surprise that the Prudential Regulation Authority (PRA) wants so much of the disclosures to be audited[1]. The audit can spotlight issues and advise on remedies. But the best route is of course to ensure that the calculations, estimations and governance and controls that surround them are right first time.

Audit scope for Solvency II reporting points
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Our wide-ranging assurance work on the balance sheets of clients applying for internal model approval and large standard formula firms[2] has given us a good indication of the challenges your business is likely to face in verifying your numbers, the potential fault lines and how you can work with your auditors to gain real comfort.  Our top tips are as follows:

  1. Clear and justified
    Clear and justifiable rationale for methodologies you use in your best estimate judgements and approximations
  2. Supporting evidence
    Standalone Solvency II documentation with evidence of sign-off. Highlight Solvency II specific requirements and update regularly the basis of preparation
  3. Governance and control
    Use existing framework to help develop a holistic view of the Solvency II balance sheet. Develop Solvency II-specific controls including identification and remediation of material risks
  4. Board buy-in
    Ensure your board has sufficient understanding to provide full review, sign-off and challenge. This is likely to require training, especially in key areas of judgement and discretion
  5. Allow enough time
    If you’ve yet to gain assurance, it would pay to do this sooner rather than later as experience shows that it can take a lot of time to put things right

Rising bar

As turnaround times continue to shrink, the pressure on reporting processes and controls will intensify. You’ll also have to factor in further strains on your balance sheet and the analyst scrutiny that comes with this, including the possibility of further falls in interest rates and resulting impact on guarantees. At the same time, Solvency II is an opportunity to demonstrate the strength and potential of your business and enhance confidence among analysts, investors, policyholders and regulators.

If you would like to find out more, we’ll be discussing what we’ve learned from our practical experience of Solvency II balance sheet assurance at the IFoA Life Conference in November – we hope to see you then. Otherwise please feel free to get in touch.



[1]
Solvency II: external audit of the public disclosure requirement – CP23/16, 4 July 2016

[2] We carried out balance sheet assurance for the majority of our 40 UK life insurance and mutual audit clients. We also performed SCR assurance for five UK life insurers.