Solvency II - In the brave new world - Grant Thornton UK LLP · 2016-10-10 · SOLVENCY II – IN...

Solvency II - In the brave new worldResults of a market surveyOCTOBER 2016

Contents

2 SOLVENCY II – IN THE BRAVE NEW WORLD

03 Welcome

04 Headline findings

05 Detailed results

24 Concluding remarks

25 Contacts

SOLVENCY II – IN THE BRAVE NEW WORLD 3

Welcome to the results of Grant Thornton’s 2016 Solvency II survey. Solvency II has taken up a huge amount of the insurance sector’s time and resources over the last few years but has it been worth the effort? Now that it is finally in force, we thought it was a good time to take the industry’s temperature and find out.

We took the opportunity to ask not only about attitudes to Solvency II but also about the progress insurers have made on the various elements of the new regime. The results make for fascinating reading.

We have undertaken a number of similar surveys in the past, the most recent one being in 2014, and it is instructive to compare our findings with those of earlier exercises.

The survey was undertaken during May and June of this year and it is worth mentioning that nearly all of the responses were received before the results of the EU referendum were known. As a result, any impact of the vote for Brexit on our findings will be immaterial.

We are enormously grateful to those people who took the time and trouble to complete the survey. It is only their efforts that have rendered this document meaningful.

However, whether or not you were one of those individuals, we hope that you find this report interesting, instructive and thought provoking. We certainly do!

Simon SheafHead of General Insurance Actuarial and RiskFor Grant Thornton UK LLPT (0)20 7728 3280M (0)7792 228065E [email protected]

Welcome


Headline findings

• Views of Solvency II appear to have become more negative since our 2014 survey.

• Only a quarter of participants believed that Solvency II is clearly the best way to run their business.

• About half of participants agreed with the statements that Solvency II is a necessary evil, more red tape from Brussels and a box ticking exercise.

• More than 90% of respondents believed that the principles of Solvency II are good but almost 70% think that those principles have been ruined by the implementation.

• Two thirds of respondents thought Solvency II is too complicated.

• Two thirds of participants believed that Solvency II is still using up resources that could be better deployed elsewhere.

• Almost 40% believed that Solvency II continues to distract senior management from running the business.

• Only 17% of participants felt that Solvency II has been worth the effort. This is just a third of the corresponding result from our 2014 survey.

• Nearly 80% of participants believed that Solvency II had improved the governance of their firm.

• Three quarters thought that the new regime had led to an improvement in their firm’s risk management.

• Only 9% of respondents felt that the costs of Solvency II were reasonable.

• Two thirds of respondents agreed that the costs of Solvency II were disproportionate to the size of the business.

• More than 70% of respondents thought that the value attained from Solvency II did not justify the cost.

• Only 30% of participants felt that the costs of the regime were high but acceptable with more than 60% disagreeing with this statement.

• Less than 20% of respondents had completed the transition of Solvency II into business as usual.

• Pillar 3 continues to pose a range of challenges for insurers. There is no sign of these challenges having reduced since our 2014 survey.

• The survey results indicate that insurers still have a long way to go until their boards are fully engaged with Pillar 3.


Detailed results

Composition of participantsType of company

For the survey we targeted a broad spread of the insurance market, and participants came from a wide range of entities. 38% were from general insurance companies while 27% were from Lloyd’s managing agencies (Fig 1). A further 18% of respondents were from life insurers, with 9% from composites and 6% from reinsurers.

Role of respondents

Respondents also held a variety of roles, although unsurprisingly actuaries and risk professionals dominated. Just over half (52%) were actuaries with a further 35% being CROs or other risk professionals (Fig 2). However, in addition to other Solvency II specialists, we also received responses from CEOs, CFOs, COOs and internal auditors.

Lloyd's managing agency 27%

Reinsurance company 6%

Life insurance company 18%

General insurance company 38%

Composite insurance company 9%

Insurance broker 1%

Fig 1: Type of company

CRO & Risk Professional 35%

Solvency II specialist 3%

Chief Actuary 31%

Actuary 21%

CFO / FD 6%

Internal Audit Specialist 1%

CEO & COO 3%

Fig 2: What is your role?


Size of companyFor the purpose of our analysis, we have grouped the companies who responded into three buckets based on their size. We did this on two bases.

We classified insurers with gross premium income below £250m as small, those with gross premium income greater than £1bn as large and the remainder as medium. This resulted in 28% of respondent companies being classified as small, 37% as medium and 35% as large (Fig 3a).

We also undertook an alternative split based on the level of technical provisions. We classified insurers with gross technical provisions below £250m as small, those with gross technical provisions greater than £1bn as large and the remainder as medium. This resulted in 24% of respondent companies being classified as small, 30% as medium and 46% as large (Fig 3b).

Small 28%

Medium 37%

Large 35%

Fig 3a: Size of Firm (Premium income)

Small 24%

Medium 30%

Large 46%

Fig 3b: Size of firm (Technical provisions)


Views of Solvency IIWhat is Solvency II?

We provided participants with four statements on Solvency II and asked about the extent to which they a greed with them. It can be seen (Fig 4a) that around 50% of participants either agreed or strongly agreed with the statements that Solvency II is a necessary evil, more red tape from Brussels and a box ticking exercise. However, significant minorities (between 33% and 44%) either disagreed or strongly disagreed with each of these statements.

When faced with the statement “Solvency II is clearly the most appropriate way to run our business”, it is notable that no-one strongly agreed and only 25% agreed. By contrast, 46% of participants either disagreed or strongly disagreed.

These results indicate that, even after Solvency II has come into effect, there remains a lot of negativity surrounding the regime.

We asked about the same statements in our earlier surveys and Fig 4b

compares the percentage either agreeing or strongly agreeing with the statements. It can be seen that respondents were more negative in responding to all four statements than was the case in either 2012 or 2014. This appears to indicate that the reality of Solvency II has fallen below the expectations of much of the market, even though those expectations were limited.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Clearly the most appropriate way to run our business

A box ticking exercise

More red tape from Brussels

A necessary evil3% 30% 15% 47% 5%

6% 29% 18% 38% 9%

6% 38% 5% 44% 8%

13% 33% 28% 25%

Strongly disagree

Disagree

Not sure

Agree

Strongly agree

Fig 4a: Solvency II is…

Fig 4b: Solvency II is…

2012 20162014

0%

10%

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30%

40%

50%

60%

70%

80%

90%

100%

Clearly the most appropriate way to run our business going forward

A necessary evilA box ticking exercise

More red tape from Brussels

45%

53%

29%

30%

47%

23%

21%

52%

28%

40%

52%

26% 31%

25%


More views of Solvency II

We next provided participants with a variety of other statements concerning Solvency II. Fig 5a shows their responses while Fig 5b compares some of those with the responses received to our previous surveys.

It is interesting to note that, although 91% of respondents either agreed or strongly agreed that the principles of Solvency II are good, 69% felt that those principles had been ruined by the implementation. This accords with the sense we get from the market that a lot of what was in the original directive made sense but that this sound basis has been undermined by the complexity

of the final regime and the numerous delays in its implementation. It also reflects the frustration that what was supposed to be a principles-based regime has been buried under an avalanche of rules, guidance and detail.

Linked to this is the finding that more than two thirds of respondents felt that Solvency II was too complicated.

Compared to our previous surveys, there has been a small reduction in the percentage who believe the principles to be good but there has also been a slight reduction in the percentage who think that the principles have been ruined by the implementation.

78% of those who completed our survey felt that the preparations for

Solvency II had used up resources that could have been better deployed elsewhere. What is more, even now when Solvency II should be business as usual, two thirds of participants still think that this is the case.

Almost two thirds of respondents believed that the preparations for Solvency II distracted senior management from running the business and, even more worryingly, 38% think that Solvency II is still distracting senior management. This is a concern as it implies that the people managing the business could be using their time better were it not for Solvency II.

Taken together, the responses to the last two questions give a sense that

Fig 5a: Views of Solvency II

Strongly Disagree Not Sure Agree Strongly AgreeDisagree

0%

10%

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Solv

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II h

as im

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The

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that

coul

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een

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Solv

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II is

too

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The

prin

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es o

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have

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the

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The

prin

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are

goo

d

1%1%6%

67%

24%

16%

15%

36%

33%

18%

12%

48%

21%

6%

16%

45%

33%

19%

13%

51%

16%

1%

19%

13%

52%

13%

3%

38%

21%

30%8%

7%

34%

40%

16%1%

1%10%

9%

70%

9%

10%

13%

69%7%

3%

28%

22%

46%


Fig 5b: Views of Solvency II

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20122016

The principles of Solvency II are good

The principles of Solvency II have been

ruined by the implementation

Solvency II is still distracting senior management from

running the business

Solvency II is still using up resources that could be better deployed in

other areas

Solvency II has been worth the effort

Strongly Disagree Not Sure Agree Strongly AgreeDisagree

20142012

20162014

20122016

20142012

20162014

20122016

2014

1%1%

56%

42%

1%4%

59%

35%

1%1%6%

67%

24%

18%

40%

42%

1%

24%

29%

46%

16%

15%

36%

33%

34%

36%

30%

1%

37%

48%

14%

3%

38%

21%

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8%

25%

29%

46%

23%

49%

28%

19%

13%

51%

16%

13%

26%

52%

9%

10%

38%

48%4%

7%

34%

40%

16%1%

insurers could be achieving more, being more efficient and being run better were it not for Solvency II. This appears to be almost the complete opposite of the original aims of the regime.

We also asked participants whether they agreed with the statement that, with the benefit of hindsight, Solvency II had been worth the effort. Only 17% of participants either agreed or strongly agreed with this while 41% either disagreed or strongly disagreed. This clearly does not indicate a particularly positive view of the new regime, although it is worth noting that 40% of participants appear to be reserving judgement on this.

Worryingly from EIOPA’s perspective, comparing the answers to this question with those in our

previous surveys, there has been a substantial reduction in the proportion of participants who think that Solvency II has been worth the effort compared to those who thought it would be – from 61% in 2012 and 52% in 2014 down to a measly 17% now. This paints a picture of Solvency II failing to live up to expectations and indicates that many insurers struggled through the preparations only to be disappointed by the outcome.

Governance and risk management

On a far more positive note, just under 80% of participants either agreed or strongly agreed that Solvency II had improved the governance of their firm (Fig 5a).


We also analysed the responses to this question by size of firm (based on premium income) and Fig 6a shows that significant majorities agree with this statement in all three groupings, although it is notable that medium-sized firms appear a little less effusive than both their smaller and larger counterparts.

We then asked an analogous question about the quality of risk management and an almost equally encouraging 76% of participants either agreed or strongly agreed that Solvency II had improved the risk management in their firm (Fig 5a). When analysed by size of firm (Fig 6b), it can be seen that all three groups are very positive about the impact of Solvency II on risk management, although larger firms are somewhat less so than small and medium-sized firms.

It seems that, whatever the misgivings about many aspects of Solvency II, participants were very positive about its impact on governance and risk management arrangements.

However, things do not look quite so rosy from a management information perspective since, although 46% of respondents felt that Solvency II had improved the quality of management information at their firms, almost a third disagreed with this (Fig 5a). Such a finding is not out of line with our experience since, despite considerable effort, many firms we speak to still have management information issues.

5% 30% 60% 5%

12% 8% 68% 12%

15% 5% 75% 5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Small

Medium

Large

Strongly Disagree Not Sure

Agree Strongly Agree

Disagree

Fig 6a: Solvency II has improved the governance at my firm

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Small

Medium

Large 5% 10% 75% 10%

12% 16% 60% 12%

5% 15% 75% 5%



Disagree

Fig 6b: Solvency II has improved the quality of risk management at my firm


Costs of Solvency II

We next asked participants about the extent to which they agreed with a number of statements about the costs of implementing the new regime. The responses to these questions paint a damning picture of the industry’s views on how much they have spent on Solvency II.

Only 9% felt that the costs of Solvency II were reasonable with 79% either disagreeing or strongly disagreeing with this statement (Fig 7a). It hardly seems worth mentioning that the 9% was actually a small improvement on the results of our 2014 survey (Fig 7b).

Meanwhile, 66% of respondents agreed that the costs of Solvency II were disproportionate to the size of the business. This is similar to the results of the 2014 survey.

72% of respondents agreed that the value attained from Solvency II does not justify the cost. Only 15% disagreed with this statement. This is a more negative result than in 2014. It is possible, of course, that this view will change over time. A number of industry sources have commented that the benefits of Solvency II will take time to emerge and we tend to endorse that view.

Only 30% of participants felt that the costs of the regime were high but acceptable with 61% either disagreeing or strongly disagreeing with this statement.

It is interesting to note that, although the responses to all of our questions on cost were overwhelming negative, the responses to the first question on the reasonableness of the costs were clearly more bleak than the others.

0%

20%

40%

60%

80%

100%

The value attained does not justify the

Solvency II compliance cost

The Solvency II compliance cost

is disproportionate to the size of the business

The Solvency II compliance cost is

high but acceptable

The Solvency II compliance cost

is reasonable

5%

5% 18%

61%

12%7%1%

7%

54%

9%

30%

3%

12%

13%

54%

18%



Disagree

1%

15%

18%

49%

16%

Fig 7a: Costs of Solvency II

0%

10%

20%

30%

40%

50%

60%

70%

80%

62%66%

2014 2016 2014 2016 2014 2016


disproportionate to the size of the business

The value attained does not justify the Solvency II

compliance cost


reasonable

53%

72%

5%9%

Fig 7b: Costs of Solvency II


Preparations for Solvency IIThe survey next turned its attention to aspects of the preparations for the new regime.

The three pillars

We first asked about how prepared firms had been for each of the three pillars at 31 December 2015 as Solvency II came into force. The results show that 94% of participants believed their firm to have completed 90% or more of the preparations for Pillar 1 at that date (Fig 8), while 83% believed their firm to have completed 90% or more of the preparations for Pillar 2. Only a handful of participants believed their firm to be less than 70% prepared for either of these pillars.

By contrast, when it came to Pillar 3, only 25% of participants believed their firm to have completed 90% or more of the preparations and 40% believed their firm to be less than 70% prepared.

These results do not come as a surprise given that many of the requirements of Pillar 1 and Pillar 2 needed to be in place on 1 January 2016 or shortly thereafter. On the other hand, many of the Pillar 3 reports will not need to be prepared in a live environment until 2017.

Assurance

We asked participants whether they had obtained any assurance, either internal or external, over certain aspects of their preparations and, for all of the elements we asked about, the significant majority had obtained assurance. At the top of the range were Technical Provisions with all participants saying that their firms had got assurance (Fig 9) but the only aspects to score below 90% were the reporting requirements.

This is unsurprising since firms have yet to deliver the annual Quantitative Reporting Templates (QRTs) or narrative reports in a live environment so that it is likely that some will be looking to obtain assurance over the next few months. Nevertheless, even for these aspects of the regime, three quarters of participants said their firms had already obtained assurance.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Pillar 3

Pillar 2

Pillar 1

0% to 29% 50% to 69%

70% to 89% 90% to 99% 100%

30% to 49%

54%40%5%2%

38%44%14%2% 2%

2%24%25% 35%10%5%

Fig 8: What percentage of the Pillars do you believe your firm complied with at 31 December 2015?


Business as usual

One of the key challenges for insurers this year is to move Solvency II from being a project to being part of business as usual. We asked participants how their firms were getting on with this.

Overall, just over a quarter said that they were making good progress but had some way to go, more than half (56%) said that they were nearly there and 18% said that they had already completed this process (Fig 10a). It is encouraging to note that none of our participants said that their firms had made either limited or no progress.

There were some interesting variations both by size and type of company. Fig 10b shows that, compared to their large and small peers, there are a smaller proportion of medium sized insurers who still have some way to go.

0%

20%

40%

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80%

100%100% 96%

Tech

nica

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ions

Solv

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Form

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Ts

Nar

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95% 95% 95%90%

77% 75%

Fig 9: Where has internal or external assurance been obtained?

Good progress but stillsome way to go 26%

Nearly there 56%

Done 18%

Fig 10a: How are you progressing with moving Solvency II from a project status to business as usual?

Good progress but still some way to go Nearly there Done

37%

42%

21%

29%

59%

12%13%

67%

21%

Fig 10b: Small Fig 10b: Medium Fig 10b: Large



16%

68%

16%

Fig 10c: Lloyd’s managing agency

When considering types of company, Fig 10c indicates that composite insurers are making better progress than other companies with 40% of our respondents indicating that they have completed the transition. Meanwhile, reinsurers appear to be lagging behind a little with half of them still having some way to go.


25%

63%

13%

Fig 10c: Life insurance company


35%

46%

19%

Fig 10c: General insurance company


50%50%

Fig 10c: Reinsurance company


60%

40%

Fig 10c: Composite insurance company


25%

63%

13%


25%

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13%


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Calculation of regulatory capital requirements

50% of respondents were from firms who are currently calculating their regulatory capital requirements using a full internal model (Fig 11) with a further 8% using a partial internal model. 29% are using the unadjusted standard formula with the remaining 13% using the standard formula supplemented by Undertaking Specific Parameters (USPs).

It is worth noting that the percentage of respondents’ firms using internal models is much greater than is the case in the population as a whole. This anomaly is at least partially explained by the relatively high percentage of Lloyd’s managing agents in our sample since all Lloyd’s syndicates are required to develop internal models.

Regulatory capital requirements and balance sheets

0%

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3 years from now3 years agoCurrent

5%

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8%

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Full internal model

Standard formula with undertaking specific parameters

Unadjusted standard formula

Partial internal model

Fig 11: How will you be calculating your regulatory capital requirements?

We also asked about what participants’ expectations were three years ago regarding the method for calculating their regulatory capital requirements, as well as what approach they expect to be adopting in a further three years’ time. It is perhaps unsurprising that three years ago a higher proportion (79%) were expecting to have a full or partial internal model since a significant number of insurers have abandoned plans to develop internal models over the last three years.

It is also not surprising that an increased percentage of firms (71%) expect to have an internal formula in three years’ time compared with today. It is nonetheless encouraging to see that some of the standard formula firms have ambitions to move to an internal model over the next few years.


Speed of calculation of regulatory capital requirements

The survey then asked how long it took participants’ firms to calculate their regulatory capital requirements. 25% could do it in less than a day (Fig 12) but none of the participants could complete these calculations in less than an hour. 29% could undertake them in between a day and a week while 25% take between a week and a month. Furthermore, it takes a fifth of participants’ firms more than a month to calculate their regulatory capital requirements.

These results show the huge variations between insurers. However, our expectation is that these times will reduce for all firms over the next few years as processing power increases and insurers streamline their approaches.

0%

5%

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25%

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15%

10%

Less thanhalf a day

Less thana day

Less than a week

Less thana month

More thana month

29%

25%

20%

Fig 12: How long does it take to calculate your regulatory requirements?

Solvency II balance sheet

The survey also asked how frequently firms anticipated preparing their Solvency II balance sheet. By far the most common answer was quarterly which was selected by 54% of respondents (Fig 13). By contrast, monthly was selected by 13% of respondents and biannually by 21% with the remaining 11% indicating that they would only recalculate the balance sheet on an annual basis.

The preference for quarterly calculations is in line with the requirements for quarterly QRTs.

0%

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20%

30%

40%

50%

60%

13%

Monthly Quarterly Biannually Annually

54%

21%

11%

Fig 13: How frequently do you intend to prepare the Solvency II balance sheet?


Progress

The most significant area where most insurers are still in implementation mode is Pillar 3. This is because the annual QRTs, the Solvency and Financial Condition Report (SFCR) and the Regular Supervisory Report (RSR) will not be required for the first time in a live environment until next year. For insurers with a 31 December year end, these will be required during the second quarter of 2017.

Given this, the survey asked about participants’ progress with Pillar 3, and more specifically about progress with each of the quarterly QRTs, annual QRTs, SFCR and RSR.

It is clear from the results (Fig 14a) that firms are most advanced with the quarterly QRTs. This is hardly surprisingly given that they had to deliver these for the first time in May 2016. However, even here, only 25% of respondents said that their firms’ preparations were 100% complete and 19% said that they were less than 70% complete. This apparent contradiction may be explained by the fact that some participants, although recognising that they had delivered the quarter 1 QRTs, may also have appreciated that they still had work to do in order to streamline the process and embed it into business as usual.

The next best developed set of reports were the annual QRTs with 13% of participants indicating that their firm was fully prepared and 69% claiming to be at least 70% complete. Again this is as would be expected since the completion of the quarterly QRTs lays the foundations for the annual QRTs.

Progress on the SFCR and RSR is very similar with 17% at least 90% complete, just over 50% at least 70% complete and nearly three quarters more than 50% complete. This analogous progress is also unsurprising as there is a significant overlap between the two reports meaning that it is efficient to develop them concurrently.

Pillar 3

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

How complete are your preparations for Regular

Supervisory Report?

How complete are your preparations for Solvency and

Financial Condition Report?

How complete are your preparations for Annual QRTs?

How complete are your preparations for Quarterly QRTs?

11% 17% 21% 34% 11% 6%

11% 15% 21% 36% 9% 8%

2%6% 23% 29% 27% 13%

13%2%4% 23% 34% 25%

0% to 29% 30% to 49% 50% to 69%

70% to 89% 90% to 99% 100%

Fig 14a: Pillar 3 Progress


Fig 14c: How complete are your preparations for Annual QRTs?

We analysed these results by type of company in order to see if there were any interesting differences. The results are shown in Figs 14b, 14c, 14d and 14e. It is difficult to ascertain many patterns from these graphs. However, they imply that composite insurers are more advanced in their preparations for Pillar 3 than other insurers.

Fig 14b: How complete are your preparations for Quarterly QRTs?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Lloyds managing agency

Reinsurance company

Life insurance compnay

General insurance compnay

Composite insurance company17% 33% 33% 17%

5% 14% 43% 19% 19%

13% 13% 25% 38% 13%

8% 46% 15% 31%

25% 25% 25% 25%

0% to 29% 30% to 49% 50% to 69%

70% to 89% 90% to 99% 100%

Lloyd's managing agency

Reinsurance company

Life insurance company

General insurance company

Composite insurance company

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

38%8%38%15%

50%50%

38%50%13%

27%23%41%5%5%

33%33%33%

0% to 29% 50% to 69%

70% to 89% 90% to 99% 100%

30% to 49%


Fig 14d: How complete are your preparations for SFCR?

Fig 14e: How complete are your preparations for RSR?


Reinsurance company




0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

14%29%29%21%7%

25%25%50%

13%25%25%38%

5%5%33%14%29%14%

17%83%

0% to 29% 50% to 69%

70% to 89% 90% to 99% 100%

30% to 49%


Reinsurance company




0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

67%

14%

25%

50%

7% 21% 36% 29% 7%

25% 25%

38% 13% 25%

24% 14% 38% 5% 5%

33%

0% to 29% 50% to 69%

70% to 89% 90% to 99% 100%

30% to 49%


Preparation of QRTs

The survey also enquired about the platform that firms were intending to use to prepare their QRTs. This showed that more than half (56%) were developing a solution in house (Fig 15). Of the remainder, the vast majority (40% of all firms) had purchased or planned to purchase a commercially available platform with only 4% engaging a consultancy to develop a bespoke solution.

Using a solutiondeveloped internally 56%

Using a bespoke solutiondeveloped by consultants 4%

Using a commerciallyavailable solution 40%

Fig 15: How do you intend to prepare your QRTs?

Preparation of SFCR

We asked about various stages in the development of the SFCR. Of the stages we asked about, none had been completed by more than a third of participants’ firms (Fig 16). This is to be expected since, as discussed above, firms do not have to deliver the SFCR “in anger” until the second quarter of next year. As a result, most firms have some way to go to complete their preparations.

Of the steps we enquired about, those that had been completed by the greatest proportion of participants’ firms (around 30%) were the development of a skeleton report, the assessment of a template report against the requirements, and the identification and allocation of ownership of data sources. At the other end of the spectrum, only 13% of respondents indicated that their firm had drafted a full report, designed and begun to implement a quality control process, or identified dependencies with other reports.


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Dependences with other submissionsidentified and subject to controls

Consistency with annualreport and accounts established

Quality controls designed andin process of implementation

Full report drafted

Several sections drafted

Data sources and ownershipidentified and formally assigned

Template assessed againstImplementation Technical Standards

Skeleton report prepared

18%

13%

13%

25%

32%

29%

32%

13%

82%

87%

87%

75%

68%

71%

87%

68%

Fig 16: Have you completed the following tasks in respect of the SFCR?


IFRS 4

The survey also asked participants about whether IFRS 4 Phase 2 had been considered in the development of the Pillar 3 reporting requirements. Only 37% of participants said that their firms had considered IFRS 4 with the remaining 63% not having done so (Fig 17).

We view this as concerning since both Pillar 3 and IFRS 4 have the potential to require significant changes to data and IT systems. The danger is that if an insurer does not consider IFRS 4 at the same time as Pillar 3, it could implement significant changes to its data and IT systems in order to

meet the requirements of Solvency II only to discover that it needed to make further substantial changes in order to satisfy the requirements of IFRS 4. It is obviously more efficient to go through a single process in order to meet the requirements of both regimes.

Yes 37%

No 63%

Fig 17: In your preparations for Solvency II, have you considered IFRS 4 Phase 2?

Review all submissionsat a detailed level

Review all submissions ata high level but delegate

the detailed review

Review and approvalcontrols embedded

Roles specified

Training sessions held

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

6% 94%

35% 65%

27% 73%

34% 66%

36% 64% Yes

Fig 18: Has your Board done the following with respect to Pillar 3?


Board engagement

The next question in the survey investigated the level of board engagement in Pillar 3. According to the results, around 35% of the boards of our respondents’ firms have specified roles, held training sessions and undertaken high level reviews of submissions (Fig 18). A smaller percentage (27%) have embedded controls for reviewing and approving submissions while only 6% have undertaken detailed reviews of all submissions.

It is worth noting that none of the tasks we asked about had been undertaken by more than 36% of participants’ boards. This indicates that insurers still have a long way to go until their boards are fully engaged with Pillar 3.

Challenges

The survey also asked about a number of possible challenges to the implementation of Pillar 3. We asked about an identical set of challenges to our 2014 survey and the comparison of the results is shown in Fig 19.

Of the seven potential challenges we asked about, all of them were regarded as either moderate or significant challenges in 2016 by at least 70% of participants. The most challenging elements were seen to be the granularity of the required information and the challenging timescales, with 89% of respondents recognising them as either moderate or significant challenges, but the volume of information required, and resource challenges also both scored above 80% on this basis.

For none of the seven features did more than 5% of participants say that they did not see them as a challenge.

Perhaps the most interesting point to note is that the responses to this question were broadly similar to those in our survey two years ago. It does not appear to be the case that, as might have been hoped, insurers have found ways to manage these challenges over the intervening period. Rather, it is clear that they are still struggling with Pillar 3.

The volume of information

required

The granularityof information

required

Extracting therequired

informationfrom systems

Obtaining requiredinformation from

third parties

Amendments to IT and reportingsystems

Resources Timescales

Significant challenge Minor challenge Does not present a problemModerate challenge

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

31%

52%

18%

22%

62%

13%4%

2014 2016

44%

47%

10%

40%

49%9%2%

2014 2016

31%

45%

19%5%

16%

55%

27%2%

2014 2016

26%

35%

37%2%

35%

38%

22%5%

2014 2016

33%

41%

25%2%

18%

53%

27%2%

2014 2016

37%

48%

15%

31%

51%

16%2%

2014 2016

35%

39%

26%

31%

58%7%4%

2014 2016

Fig 19: Pillar 3 Challenges


Despite this, insurers made good progress with their preparations prior to the implementation date. As would be expected, the main outstanding area is Pillar 3 and it is important that firms now overcome the various challenges to ensure that they are ready for the first round of annual reporting in 2017.

It is possible that the jaundiced view of Solvency II will reduce over time as the benefits become more apparent and the pain of the last few years begins to fade from the memory. However, there is no guarantee of this.

The recently announced Treasury Committee inquiry into Solvency II and insurance regulation post-Brexit raises the possibility that Solvency II

may not be around in the UK forever. Judging from the results of our survey, that may be viewed as good news by parts of the industry. However, we would caution against banking on this scenario. Our view is that there are strong arguments in favour of aiming for Solvency II equivalence following Brexit and the Committee may be persuaded by those.

What is more, even if it is decided that Solvency II is not the way forward, it will remain in place for a number of years until we have left the EU and new laws have been enacted. It follows that Solvency II is going nowhere in the near future.

Concluding remarks

It is apparent from our survey results that much negativity continues to surround Solvency II. What is more, this negativity appears to have increased since our last survey in 2014. There is certainly no sign at this early stage that, now the regime is in place, insurers are starting to recognise that the benefits justify all the grief of the last few years.


Contacts

Tim RoffT +44 (0)20 7865 2871E [email protected]

Simon Sheaf T +44 (0)20 7728 3280E [email protected]

Sonia StylesT +44 (0)20 7184 4343E [email protected]

Derek SmithT +44 (0)131 6598503E [email protected]

Jinit ShahT +44 (0)20 7865 2274E [email protected]

Bharat RajT +44 (0)20 78652697E [email protected]


Notes

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Solvency II - In the brave new world - Grant Thornton UK LLP · 2016-10-10 · SOLVENCY II – IN...

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