Under the PRA’s Solvency II-implementing rules, (re)insurers are required1 to publish an annual Solvency & Financial Condition Report (SFCR), which describes:
- the (re)insurer’s business and performance;
- the (re)insurer’s system of governance, and an assessment of its adequacy;
- (on a risk-category by category basis), the risk exposure, concentration, mitigation and sensitivity;
- the bases and methods used to value the (re)insurer’s assets, technical provisions, and other liabilities, together with an explanation of any major differences in the bases and methods used for their valuation in the (re)insurer’s financial statements;
- the structure and amount of the (re)insurer’s own funds, and their quality;
- the (re)insurer’s MCR and SCR; and
- the nature and extent of any MCR or SCR non-compliance, the consequences of this non-compliance, and the remedial actions that have been undertaken to rectify these breaches.
There’s no need, at least on the face of the Solvency II Directive or Delegated Regulation, for the SFCR (or any part of it) to be externally audited. However, EIOPA regards the SFCR as “a unique opportunity” for (re)insurers to “address stakeholders’ perception on perceived opaqueness and inadequacy of [their] publicly disclosed information“. It has therefore sought to “encourage” (re)insurers “to actively engage in consistent, comparable and high quality communication with their stakeholders “, and described the external audit of regulatory public disclosures as “a powerful tool“, in that regard.
In November 2015, the PRA published a Consultation Paper “CP43/15 Solvency II: external audit of the public disclsoure requirement“, which proposed requiring the external audit of the quantitative and qualitative information included in the “Valuation for solvency purposes” and “Capital management” sections of the SFCR (broadly, sections 4, 6 and 7 described above); and the imposition of duties on the external auditor – with 2 exemptions (a) the SCR wouldn’t have to be externally audited if it was calculated using an approved internal model; and (b) if Solvency II required information to be produced using sectoral rules, that information wouldn’t have to be externally audited either. The PRA’s consultation period closed on 19 February 2016. If these rules had been made, they would have affected (re)insurers and their external SFCR auditors for accounting years ending on or after 30 June 2016.
The PRA is now proposing to make the same rules in materially the same form, save that:
- they will now affect (re)insurers for financial years ending on or after 15 November 2016 (instead of 30 June 2016);
- the external auditors will be required to:
- include an opinion in their reports, which is addressed to the (re)insurer’s governing body (instead of the governing body and the PRA); and
- prepare their reports with due skill, care and diligence (instead of in accordance with current auditing guidance published by the FRC).
The PRA argues that its latest consultation does not propose any substantive changes in its policy; or any changes to the substance of what an external auditor is required to do. The draft rules have “been amended to provide clarity“; and the PRA’s latest “consultation paper (CP) seeks views on this proposed clarification“. If that’s right, it’s not immediately clear why the PRA thinks a second consultation is required. Be that as it may, the consultation closes on 4 August 2016; and responses should be sent to CP23_16@bankofengland.co.uk.