Are you sure? Verifying the Solvency II numbers

It was clear from the start that Solvency II reporting would be a leap into the unknown.

It’s not just the scope that’s challenging, but also the tight timelines and how much of the information has never been made public before. And if this year’s quarterly disclosures are the qualifying rounds, the Olympic final of your first publicly available Solvency and Financial Condition Report (SFCR) is coming up in 2017. 

“Misstatement not only raises the risk of regulatory intervention, but also severe reputational damage.”

Audit requirements

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. This includes the balance sheet and own funds, along with the narrative disclosures in the SCFR relating to them . If your business uses the standard formula to calculate your minimum capital requirement (MCR) and solvency capital requirement (SCR), these will be subject to audit, though not if you’re using an internal model. The PRA’s only concession following last year’s consultations is to allow more time by applying the requirements to businesses with year ends after 15 November 2016.

Potential fault lines

At PwC, we’ve already had a strong taste of what’s required through our assurance work on the balance sheets of clients applying for internal model approval, which the PRA subsequently extended to large standard formula firms. As such, we’ve reviewed a significant proportion of the market. We’ve also carried out assurance on a number of SCR evaluations.

The results offer a good indication of the challenges your business is likely to face in verifying your numbers. The potential fault lines and priorities for securing assurance include:

  1. Liability estimates
    With so much discretion and judgement involved in areas ranging from the impact of risk mitigation to the level of surplus in with profit funds, it’s vital to establish a clear and justifiable rationale for how you arrive at these estimates.
  2. Risk margin
    The risk margin equates to the amount of capital a notional buyer would have to hold if they took on the risks you can’t hedge. A lot of the associated projections use simplifications, which while easier to evaluate are harder to validate. You also need to be clear about what’s hedgeable and what isn’t – what we’ve seen so far suggests that this is trickier than it sounds.
  3. Assets and liabilities
    The need to apply market-consistent measures raises clear questions in material areas ranging from the validity of projections to the allowance for pension scheme deficits.
  4. Transitional measures
    You can use pre-Solvency II measures to help ease the capital demands on some of your liabilities, but this requires two sets of evaluations (old and new) and two sets of records, all of which need to be auditable.
  5. Own funds
    The focus of scrutiny not only looks at the quality of the funds, but also their liquidity and how readily they can be moved around your business. Intra-group transfer is an especially critical issue as the PRA wants audits to cover reporting by entities in your group.

Rising bar

“As turnaround times continues 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.

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. And while the audit can spotlight issues and advise on remedies, the best route is of course to ensure that methodologies, governance and controls are right first time.

We will be presenting more on this at the IFoA Actuarial Life Conference on 2 – 4 November, come and have a coffee with us at the PwC Café, and let us know your thoughts on Solvency II reporting.

Contact us

Andrew James

Director, PwC United Kingdom

Tel: +44 (0)7725 706317

Michelle Lister

Associate Director, PwC United Kingdom

Tel: +44 (0)7714 567303

Follow us