PwC Pillar 3 Whitepaper · PwC Getting to grips with Pillar 3 1 The implementation section,...

Getting to grips with Pillar 3

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Contents 01 Foreword

02 Overview

04 Section oneHow are you going to be judged?

05 Moving to a new regime:Judging the business through the lens of Pillar 3

10 Vision for the future

12 Gauging the need for external evaluation

14 Section twoBringing reporting up to scratch

15 Starting with the end in mind:An insurer’s perspective on implementing Pillar 3

17 Setting the scope

20 Applying proportionality to your reporting demands

23 Getting down to the right level of detail

28 Developing an effective partnership with your asset managers

32 Delivering on time, every time

36 Contacts

Foreword

PwC Getting to grips with Pillar 3 1

The implementation section, ‘Bringingreporting up to scratch’, examines thepractical considerations for complyingwith the demands of Pillar 3. Pillar 3 willrequire your business to report moreinformation (in a structured, electronicformat) more quickly and with muchgreater scrutiny than ever before.But there will also be opportunities touse the required investment to improvethe quality, reliability and timelinessof management information. Manybusinesses will be looking to realise thesebenefits ahead of the compliancedeadline.

To help illustrate the scale and natureof the task, the section opens with aprogramme director’s view from thecoalface of implementation. We then lookat the different elements that will need tobe put in place, including getting down tothe right level of detail; bringing assetmanagers on board and what isappropriate for different types and sizesof company; along with how to developthe systems infrastructure needed to keepit all running.

There is no single right answer for anyof these issues. What works best is goingto depend on a range of coalescing factorsincluding what kind of business youwrite, where and the structure of yourcompany. What this paper does seek to dois to outline the issues you will need toconsider and the next steps towardsimplementation.

I hope that you find this paperinformative and useful. If you have anyqueries or would like to discuss any of theissues in more detail, please speak to yourusual PwC contact or one of the authorslisted on page 36.

Paul ClarkePartner PwC Global Insurance Regulatory Leader+44 20 7804 [email protected]

Welcome to ‘Getting to grips withPillar 3’. Drawing on our wide-rangingwork with clients and discussionswith supervisors and other relevantbodies, the paper looks at how totackle the key strategic andimplementation issues emanatingfrom the Solvency II reporting anddisclosure requirements.

With so much attention devoted to thePillar 1 capital evaluation and Pillar 2 riskmanagement requirements, Pillar 3 cansometimes become the forgotten pillarwithin many organisations. Yet thequantitative and qualitative disclosurescould have a significant impact on howyour business is judged by policyholders,analysts, investors and supervisors. Thetight turnaround times and level of dataand analysis that will need to be reportedand disclosed also present a significantoperational hurdle over and above what isrequired for the other two pillars.

The implementation date for Solvency IIlooks set to be postponed to allow moretime for assessment and agreement on anumber of key issues. But the reportingand disclosure are unlikely to see materialchanges and it will be important not tolose momentum on the preparations forPillar 3, especially as some localsupervisors are set to require ademonstration of reporting capabilitiesand significant interim disclosures aheadof the EU-wide launch (as an example,the ACP in France are potentiallyintroducing QRT reporting in XBRLformat for 2014.) Furthermore, EIOPA arecurrently looking to see what aspects ofSolvency II (particularly Pillars 2 and 3)they can introduce in the interim phasewithin the supervisory process.

The extra time also offers a valuableopportunity to use resources in the mostcost-effective way. This includesdeveloping sustainable reportingcapabilities and building them intobusiness as usual. This would help avoidthe quick fix spreadsheet options that

many were envisaging to get over the linein time for the earlier deadline. Somenational supervisors may allow you to useadvanced Solvency II templates in placeof current regulatory standards, and thiscould include reporting and disclosure.

A further consideration is that thepostponement would open up thepotential to bring the timetables forPillar 3 and the planned new IFRSinsurance contracts standard (IFRSPhase II) closer into line if your companychooses the possible option for earlyadoption of IFRS Phase II. This wouldhelp to avoid digging up the road morethan once. (See our publication ‘Layingthe foundations for the future ofinsurance reporting’.) The added benefitwould be to bring a relatively early end toa period of substantial financial reportingchange and allow you to fully focus onbusiness priorities.

As you think about how to prepare in themost effective way, the strategic sectionof this publication, ‘How are you going tobe judged?’, looks at what areas of thebusiness are going to come under thespotlight, how the numbers mightinfluence decisions and how they aregoing to be viewed by the financialmarkets. The consistent market valueapproach could provide greatercomparability of risk and capitaldisclosures across the EU. But it couldalso introduce greater balance sheetvolatility and there will still beinconsistencies with business writtenoutside the EU. The market focus on thenumbers is going to be heightened by thefact that the solvency evaluations willhave a crucial impact on how muchmoney you can pay in dividends.You will also need to decide how muchindependent review will be required toensure market confidence in thedisclosures.

2 PwC Getting to grips with Pillar 3

Overview

Given the lack of focus on Pillar 3 incomparison to Pillars 1 and 2 withinmany insurance companies, it iseasy to misjudge or under-estimatesome of the key strategic andimplementation challenges. Some ofthe main misconceptions and theirimplications are set out here.

Possible misconception one“Pillar 3 reporting and disclosure doesnot matter as we primarily focus on adifferent basis of disclosure.”

In fact, your business will need to take fullaccount of Pillar 3 reporting anddisclosure in line with the requirement tobuild the risk and solvency evaluationsinto decision making. The binding capitalconstraints imposed by Solvency II willalso have a decisive impact on how muchmoney is available for dividends andinvestment, which are a key focus foranalysts and investors.

See ‘Moving to a new regime: Judging thebusiness through the lens of Pillar 3’

More broadly, Pillar 3 could provide auseful catalyst for a review and rethink ofreporting and disclosure aimed atcommunicating the strength andpotential of the business in a moreunderstandable, accessible and,ultimately, value-enhancing way.

See ‘Vision for the future’

Possible misconception two“Pillar 3 disclosure will provide a moreuseful and comparable market-consistent approach to insurancedisclosure.”

Pillar 3 introduces a prescribed and henceconsistent EU-wide basis for evaluatingand communicating a market valuebalance sheet. But while some firms maythus want to use Pillar 3 as a key basisfor judging and communicatingperformance, translating regulatorymeasures into performance reporting canbe difficult in practice. For one, Pillar 3could introduce short-term fluctuations inthe evaluation of assets and liabilities,which may not reflect how they areviewed, managed and matched within thebusiness. The regulatory capitalcalculations for many non-EU operationswould also be based on the existing localrules, not on the prescribed Solvency IIformat.

See ‘Moving to a new regime: Judging thebusiness through the lens of Pillar 3’

Possible misconception three“Reconciling Pillar 3 disclosures withfinancial reporting should be relativelystraightforward.”

There are conceptual similarities betweenIFRS and Solvency II and it will beimportant to make the most of thesesynergies when designing and developingmodels. But there are also a number ofkey differences in areas ranging fromcontract boundaries to the basis fordiscounting. So it will be important toidentify any divergence and be able toexplain the reasons for it. If you don’t,you could face awkward questions fromanalysts and investors.


Possible misconception four“A single group SFCR would be easierand cheaper than preparing separatereports for what may be many differentlegal entities.”

A single group report would allow boththe group and the reader to view thebusiness as a single entity. But it may notnecessarily be more straightforward andunderstandable than separate solo entityreports once factors such as language,stakeholder expectations and differencesbetween business lines are taken intoconsideration.

See ‘Setting the scope’

Possible misconception five“The simplifications used in Pillar 1capital evaluation will also makePillar 3 more straightforward.”

In fact, simplifications in Pillar 1 couldactually add to the Pillar 3 demands byrequiring the inclusion of a fullexplanation to justify the use of thesesimplifications.

See ‘Applying proportionality to yourreporting demands’

Possible misconception six “Fund administrators will easily beable to take care of all the third partyinformation demands.”

In fact, your business will be responsiblefor making sure the required informationon assets is delivered on time and that it issubjected to appropriate governance andverification. Particular challenges includethe ‘look-through’ approach, under whichyour fund administrator would have toprovide details on each of the assetswithin a fund or fund-of-funds.

See ‘Developing an effective partnershipwith your asset managers’

Possible misconception seven“The detail and timelines will be tough,but existing solvency evaluation andfinancial reporting systems can beadapted to cope.”

In fact, the level of detail required and theturnaround times are unprecedented.People, processes and technology are allgoing to have to be reviewed andrethought as part of the ‘industrial’approach needed to build Pillar 3reporting into business as usual. Withoutit, the process is going to be unsustainablylabour intensive.

See ‘Getting down to the right level of detail’and ‘Delivering on time, every time’

Moreover, Pillar 3 will require actuarialevaluations that are at present only usedinternally to be brought up to thestandards of verification and reviewneeded for external reporting.

See ‘Gauging the need for externalevaluation’

Possible misconception eight“The postponement of theimplementation date for Solvency II isa chance to put Pillar 3 preparations toone side.”

In fact, some local supervisors are set torequire a demonstration of reportingcapabilities and significant interimdisclosures ahead of the EU-wide launch.EIOPA chairman Gabriel Bernardino saidin his speech of 21 November 2012 thatan interim phase could introduceelements of Pillars 2 and 3 before theimplementation date. Sustaining themomentum of implementation wouldalso help to build Pillar 3 into business asusual and avoid the potentially costly anderror-prone quick fixes that many mighthave felt necessary to comply with theprevious deadline.

Simplifications inPillar 1 could actuallyadd to the Pillar 3demands by requiringthe inclusion of a fullexplanation to justifythe use of thesesimplifications.


Section oneHow are you goingto be judged?

Solvency II will change howcompanies within the insurancesector think about their businesses.This might include how performance,risk and capital are evaluated andcommunicated. But using regulatory-driven data for performance analysisbrings with it many challenges. Quitea few companies, particularly in thelife sector, may also not viewSolvency II data as the ideal basis forallocating capital or judging theperformance of the business.

These companies may look to augmentSolvency II data with additional metrics,both internally and externally, but thisintroduces a new set of issues. Andwhether management thinks Solvency IIis a good approach or not, the Directivecould introduce greater volatility intocapital metrics and new complicationsinto determining the amount of cashavailable to pay dividends, which are keyareas of analyst and investor focus. Sowith no ‘one size fits all’ view, how yourbusiness addresses these challenges willvary considerably.

Greater consistencyThe introduction of greaterharmonisation and better alignment ofcapital requirements and risk is awelcome step for the European insurancesector. Solvency II may help iron out someof the inconsistencies in current solvencyreporting, and the outputs should bemore useful as a tool to help evaluate thebusiness than is the case with existingrequirements.

Moving to a new regime:Judging the business through thelens of Pillar 3

Pillar 3 is also going to put new andpotentially more detailed informationabout your risk profile and the way it ismanaged into the public domain. Evencountries such as the UK, whereregulatory returns are already madepublic, will see new disclosures that themarkets will be keen to scrutinise.

In an industry that currently lacks aconsistent approach to calculating an‘economic’ view of the business, someinsurers believe that Solvency II couldhelp to fill the void and allow them to linkperformance, capital and risk metrics.They may see Pillar 3 reporting as anopportunity to bring market disclosurecloser into line with the measures theyuse to run their businesses and possiblyprovide a new basis for how they judgeperformance. This is more likely to be thecase for non-life companies, as the waysrisk and capital are evaluated underSolvency II are conceptually not far awayfrom how most internal models work.Many will thus want to focus analyst andinvestor attention on the Pillar 3 numbersand use them as one of the bases forsteering the business.

Using Pillar 3 as one of the bases forperformance management may bedifficult to achieve in practice, however.A particular challenge will be how to use aframework designed for regulatoryreporting to provide information that isuseful to management (let aloneinvestors).


The focus to date has been on ensuringthat insurers can explain the movementsin solvency capital in a Solvency II worldin the form of ‘variation analysis’ and ‘P&Lattribution analysis’. However, this maynot generate the type of information thatis actually needed to run the business orcommunicate with investors – essentially,a clear view of operating and non-operating elements, and an ability todetermine what is really drivingmovements in capital available at agroup level.

In particular, ‘variation analysis’ maynot prove particularly useful as amanagement tool. It will be prepared on asolo basis only. It will not be mandatoryuntil the second year following SolvencyII implementation, and the degree ofdetail around life results (with separationonly between ‘life’ and ‘health’) may notprovide the granular level insight that willbe needed to understand what ishappening in the business.

And while the industry has looked formore user-friendly information fromP&L attribution analysis, the main aim ofthis information is to act as a cross checkagainst whether internal models arefocusing on the key risks, not onproviding insight into profit drivers tomanagement or investors. With a lackof clarity as to how this informationshould be presented combined, withconsiderable flexibility as to the approachadopted, there is a great deal ofuncertainty as to whether this will be astep forward.

Those insurers that are looking to useSolvency II to help bridge the informationvoid both internally and with investorswill need to be able to build from sololevel to group-level analysis and to helpprovide clarity on the different sources ofearnings that drive results on a Solvency IIbasis, as well as how group capitalstructures work in practice.

A further consideration is to reflect theviews of investors. Fund managers arekeen to ‘join the dots’ with measures thatare comparable to other industries. Given

the ‘economic’ starting point forSolvency II reporting, this will create newchallenges. In particular, simply providinganalysts with a new raft of data on a basisthat is unique to insurers is unlikely to bea successful strategy.

What this means for your business is thatit will need to be able to reconcile Pillar 3disclosures with other aspects of financialreporting and to be able to explain themain differences, whether they relate tocontract boundaries, the basis fordiscounting or the myriad of othervariables. From a practical perspective itwill be important to prepare the Solvencyand Financial Condition Report (SFCR) inparallel with annual reports to allow yourbusiness to identify any divergence and beable to explain the reasons to analysts.Failure to do this risks sending out mixedmessages and incompatible numbers.

When Solvency II may not bethe right answerFor large and complex insurance groupswith significant operations outside theEU, particularly life insurance operations,Solvency II may not be fully consistentwith what management view as the maindrivers of value and risk.

First, under the proposed equivalencerules, regulatory capital calculations formany non-EU operations could be basedon the existing local rules, not on theprescribed Solvency II format. This maybe particularly significant if your businesshas large US operations, given theconceptual differences between the USstatutory and EU Solvency II frameworks(discussions between EU and USsupervisors on equivalence are ongoing).While not relevant to solo level reporting,the consolidated data that emerges fromthe Solvency II reports would include twodifferent bases of evaluation, rendering itfar less useful either internally orexternally as a way to judge performanceor to allocate capital. In such cases, it ishard to see how Solvency II informationfor insurers operating outside the EUcould be viewed as a substitute forembedded value data, for example.


From a practicalperspective it will beimportant to preparethe SFCR in parallelwith annual reports toallow your business toidentify any divergenceand be able to explainthe reasons to analysts.


Secondly, Solvency II is built on a market-consistent approach that does not haveuniversal appeal. Many insurers view amarket-consistent approach as the mostappropriate benchmark of economicvalue in their businesses. However, thereare some who believe that it can portrayan overly generous view of somebusinesses (for example, mortality andother risks within protection business, aswell as unit-linked business), while takinga highly punitive view of the risks withincertain guaranteed savings business.A market-consistent approach alsointroduces much greater volatility intoboth capital available and capitalrequirements, which even with‘dampeners’ in place may exacerbatepro-cyclical pressures.

Tackling these challenges will requirecareful thought. On the one hand,management teams will need todemonstrate that Solvency II-styleinformation is at the heart of decisionmaking. On the other, management maynot want to adopt bases for internal orexternal reporting that do not reflect itsown view of risk and value. You couldlook to adopt a consistent group-wide‘Solvency II’ view, but this may not be easyto do, and would be resisted by those whobelieve that a market-consistent approachis inappropriate. An option is to focusgroup-wide capital allocation decisionsand external markets on the outputs frominternal economic capital models, and touse Solvency II data at a local solo level,as well as a means of testing compliancewith binding regulatory constraints.

The advantage of this approach is thatit can be applied on a consistent basisacross the business and may better reflectmanagement’s own perspectives andobjectives, as well as what is viewed asmost important in creating value in thebusiness. However, this approach alsobrings numerous challenges. A key oneis ensuring that it does not jeopardiseinternal model approval. In addition,experience shows that embedding anapproach for group-wide decision makingthat is not fully aligned with local

regulatory approaches, or with howlocal competitors set capital requirementsor price products, is far fromstraightforward. It is also debatable howuseful this approach is to analysts andinvestors, since local regulatory demandsare the ones that may determinedividends and other questions aroundcapital deployment.

In respect of the needs of analysts andinvestors it is not possible simply todismiss Solvency II information. Yourbusiness would still need to find ways totie these binding regulatory constraints togroup level economic capital evaluations,along with those used in IFRS and ratingagency capital models. We set out inFigure 1 some of the considerations thatcompanies will need to address.

Figure 1: Two polar positions – or a hybrid view?

You use local regulatory approachesto assessing capital and risk

You develop an alternative capitaland risk framework

What metrics will you use to judgecapital and performance?

How do you ensure the group issteered in a consistent way?

How do you link to measures of valueand risk management view asappropriate?

What do you use the internal model for?What happens to embedded value?

How do you rationalise this to theoutside world?

What metrics will you use to judgecapital and performance?

What will be the challenges in fullyembedding this within the business?

Will you just use Solvency II data as a‘binding constraint’, alongside otherregulatory/rating views?

How will you reconcile the internal viewwith these binding constraints?

How do you persuade the outsideworld that this is a ‘real’ measure?

Source: PwC

Break on capital flexibilityWhether or not Solvency II or alternativeversions such as internal economic capitalmodels are viewed as the best proxy foreconomic value in the business, it will belocal solvency rules and ratingrequirements that are likely to be thedecisive factor in calculating how muchcash is available to be reinvested in thebusiness, or is legally available to paydividends or fund possible share buy-backs.

Market movements come into play here,as there will be more volatility in availablecapital than under the relatively staticexisting regimes. Today’s point estimatesare therefore likely to be redundant andwill need to give way to dynamic analysisunder a comprehensive range ofscenarios.

A further consideration is the impact thatSolvency II will have on capital flexibility,particularly for life companies. At present,Solvency I rules and the legalrequirements for what counts asdistributable earnings tend to operate in abroadly consistent way (and in somejurisdictions are in fact the same). ButSolvency II could create a high degree ofdivergence between what may be ‘freecapital’ from a regulatory view, and whatmay in fact be legally distributable. This isbecause Solvency II takes an ‘economic’view, as opposed to the traditional cost-based view, which tends to drive legalconsiderations around dividenddistributions. A further complication isthat the difference between an economicand ‘distributable’ perspective may varygreatly by product. This will haveconsequences for different legal entitieswithin a business as to whether the realbinding constraint will be regulatorycapital (guaranteed savings products) orwhat is legally distributable (protection).

What this means is that even if Solvency IImay be viewed as broadly neutral to aninsurer at a group level, there may beconsequences in the ability to movecapital internally from what is the currentpractice. A key question for CFOs iswhether today’s cash cow becomestomorrow’s dividend block?

Identifying the implications of theseconsiderations for your own operationswill be hard enough, but clearly analystsand investors will be looking for ‘winnersand losers’. In other words, they will wantto know what Solvency II data means interms of sufficiency of capital and abilityto withstand shocks, the quality of capital,and the impact that this will have on thefinancial flexibility of the business. To beprepared, it will be important to havethought through your positioning relativeto key competitors and the consequencesthis may have for the business – and to doso early enough to be able to take anynecessary actions well in advance ofSolvency II coming into effect. Here,delays to implementation may actuallywork to the industry’s advantage, butthere is no room for complacency.

Strategic responseWhile the latest delay to Solvency II maybe viewed as an opportunity to focus onremaining technical challenges, it’simportant to bear in mind thatshareholders reward good performanceand potential rather than good models.Assessing the investor relationsimplications of these reporting changesand how to address them is thereforevital. Getting this right is going to taketime and a considerable amount of highlevel input. The postponement will allowmore time to address these challenges ina well-planned strategic way.



The first key step is to determine whether the Solvency II numbers are going tobe an important performance driver in allocating capital across the group orwill be viewed more from a compliance perspective. If Solvency II numbers willbe the core basis for decision making and performance management, thenyour Pillar 3 disclosures are clearly going to be a vital part of how managementand investors will assess your strategy and track progress against objectives.But you will need to think through how to make information intended to beused for regulatory reporting genuinely insightful for you in performancereporting, and how to tie this together with other perspectives of your business(bearing in mind that there is resolutely no ‘one view’ that can tell youeverything you need to know). While not a direct factor in Pillar 3, it will beimportant to look at how to make P&L attribution analysis useful within yourfinancial reporting function.

Companies with less appetite for using Solvency II as a basis for valuation,capital allocation and performance management at a group level will need todetermine how to build and embed a more coherent approach without thisleading to regulators questioning whether the Solvency II evaluations have

enough influence on decision making. Alternatively, these insurers maydecide to manage the group to local bases.

Whichever approach is adopted, there will be a raft of additionalchallenges. For example, if you are looking to design an alternative toSolvency II, there is the challenge of how to embed a metric in your

business that may not actually be a binding constraint – as well as to haveclear links to what will actually drive your ‘real-world’ capital flexibility.

Clarity on the final direction of Solvency II will be helpful but not essentialbefore you can fully engage with this issue. There are steps that are relevantnow. For example, it is important to think through the possible consequencesof Solvency II for your business, and to start to plan ahead for future reporting– for example, where will embedded value data fit in?

You will need to ask how financially stable the business will look under theSFCR. How will the new regime affect distributable earnings? How does thiscompare to your competitors? How does it square with the measures used byanalysts and investors to rate performance?

It is also important to look at how the changes to reporting support your‘equity story’. This includes explaining to analysts and investors the extentto which Solvency II is likely to change the key performance indicators usedto run the business and how strategic objectives accord with your regulatoryrequirements.

Next stepsWhile the latest delayto Solvency II may beviewed as anopportunity to focuson remaining technicalchallenges, it’simportant to bear inmind that shareholdersreward goodperformance andpotential rather thangood models.


The previous section, ‘Moving to anew regime: Judging the businessthrough the lens of Pillar 3’ exploressome of the immediate investorrelations challenges created by themove to Solvency II. We think it isalso useful to examine how theDirective might influence longer termchanges in insurance reporting andhow we believe these will take shape.

In particular, given investors’ continuedfrustrations about how insurerscommunicate on value, performance andrisk, the combination of Pillar 3 reportingand the planned new IFRS for insurancecontracts (IFRS Phase II) presents theopportunity for a broader rethink ofinsurance reporting and disclosure.The results of this rethink would aim tocommunicate the strength and potentialof the business in a more understandable,accessible and, ultimately, value-enhancing way. Further opportunities tocut through the complexity of reportingare going to come from the market pushfor more straightforward andcomprehensible products.

Closing the information gapThe gap between what analysts andinvestors want from reporting and whatthey actually receive from many insurershas long been a cause for concern.

The markets want a clear indication bothof how insurers make money now andhow they intend to in the future(underwriting, fees or investmentreturns) as well as how these funds wouldtranslate into ‘real’ distributable cash.To be credible and informative, thesemetrics need to be consistently prepared(across years and between companies)and actually be used within the enterpriseitself.

Vision for the future

In most analysts’ view, what theycurrently get, particularly with respect tothe life industry, is far less useful. Thereare essentially two main issues toovercome, comprehensibility andcomparability. Our research hasconsistently highlighted market concernsover what analysts and investors believeare disjointed and opaque insurancefinancial statements, creating a jumble ofnumbers that are difficult to comprehendand compare against other sectors andwhich often fail to tell them what isactually happening within the company.Comparability is compromised bymaterial inconsistencies in approach inrelation to almost all aspects of reporting.The numbers are produced on a differentbasis from insurer to insurer and mightnot even correspond with the measuresthat are being used to run the business.

At a time when competition for capitalhas rarely been more intense, thedifficulties in understanding the strategicdirection and value potential withininsurance businesses mean that they maylose investment to industries that offerseemingly more transparent and easilydiscernible opportunities.

Equally, policyholders want products thatare easy to understand and compare.We’ve already seen the rapid rise of pricecomparison sites for many forms ofinsurance. The drive towards greaterproduct simplicity, transparency andcomparability is also gaining ground onthe life side through the emergence ofonline access life policies and easy tomanage pension products such as targetdate funds.


As a lot of the complexity is stripped outof product design, it should be possible tocut out some of the correspondingcomplexity in reporting to create financialstatements that all stakeholders canunderstand. For example, simplerproducts are likely to require lesssophisticated investments, which willmake risk evaluation morestraightforward and the resulting reportsand disclosures more concise andcomprehensible.

A new frameworkAs the previous section highlighted, theway insurers approach Solvency II isgoing to vary. Some will be looking at it asa binding capital constraint, while otherswill want to place greater emphasis on theevaluations within managementinformation and external reporting.Equivalence could act as a furtherconstraint on comparability, as quite a lotof the non-EU operations of Europeangroups could be measured on a differentbasis. Given these factors, the view thatSolvency II could represent a fresh startfor the industry from a reportingperspective may be rather naive.

However, when put in the context of thefar-reaching changes to financialreporting likely to come in as part of IFRSPhase II, the insurance industry is goingto have to rethink how it judges all aspectsof performance over the next decade. Itwould clearly be a wasted opportunity ifthis was not used to address some of theproblems highlighted earlier.

From this perspective, as well as focusingon the technical challenges of thesenew standards, companies need to thinkabout how they use Solvency II and IFRSPhase II data to answer the key questionsthat are relevant to management ofthe business and to what investors needto know.

In our investor survey earlier this year,fund managers told us that insurancereporting consistently failed to answersome of the following points:

• How do life insurers make money?Here, existing reporting often providesonly the most tangential clues as towhat drives profits, whether on an IFRSor embedded value basis.

• How do we know that the reinvestmentin the business is of good quality?Investors are increasingly sceptical as towhether new business profits are reallyachieved, and whether publishedinternal rate of returns (IRRs) orpayback periods really match reality.

• How do insurance earnings turn intodistributable cash? While there havebeen attempts by several insurers to tryand answer this question, the outputsare often not robust or linked to the‘real world’.

• Does the company have sufficientcapital? This may seem like astraightforward question, but themyriad of different capital lenses andfrequent company confusion mean thata clear answer can often be lacking.

We’re not suggesting that these are theonly issues, and clearly there arenumerous other considerations that are ofequal importance to management andinvestors. However, it is not a stretch tounderstand how Solvency II and IFRScould be used to try and address thesequestions, and to deliver a far morecoherent approach to internal andexternal analysis than the patchwork ofdisjointed metrics that tend to representthe reporting dashboard of many insurersin today’s environment.

For example, using scenario analysis builtaround Pillar 3 data would go a long waytowards giving analysts the prospectiveinformation on cash generation they arelooking for and help them to track themost important risk and value drivers thatinfluence this. As a result, financialstatements would provide a morebalanced evaluation of risk and reward

and the strategies that underpin this.The information would ideally beavailable in an accessible and conciseformat.

Industry investment in new technologywill support these developments byspeeding up the supply of keyinformation. To manage their businesses,management will have online access tovalue creation and risk informationthrough dashboards. Once the linkbetween Solvency II and statutoryaccounting is bedded down, we may alsosee the emergence of a core suite ofmetrics to manage and communicate theperformance of the business on aconsistent basis.

Of course, there remain unansweredquestions as to how far the US and othernon-EU markets will go along withapproaches often built from a market-consistent approach; in this respect,multinational insurers are likely to have tocontinue to grapple with multiplereporting approaches for many years tocome. A further consideration is thecomplexity of the Solvency II and IFRSPhase II reporting, which could just aseasily make current confusion even worseif not handled properly. However, there isa clear prize here for the insurers that getthis right – and focus beyond technicalconsiderations to make the outputs of thesignificant investment in reporting usefuland insightful.

Presenting a clearer, more concise andmore compelling approach to reportingwould remove much of the ‘mystery’ frominsurance disclosure and help companiesto compete for investment on a morefavourable basis with other sectors, whilebeing more transparent to shareholders,policyholders and other externalstakeholders.

Presenting a clearer, more concise and morecompelling approach to reporting would removemuch of the ‘mystery’ from insurance disclosureand help companies to compete for investmenton a more favourable basis with other sectors,while being more transparent to shareholders,policyholders and other external stakeholders.

Pillar 3 disclosure could have asignificant influence on investors’decisions. How much independentreview will be required to ensuremarket confidence in thedisclosures?

We would expect that key elements of thequantitative reporting such as thetechnical provisions and own funds arelikely to require mandatory externalreview under Solvency II. Preliminaryconsultations are underway.

As market pressure to disclose aspects ofSolvency II increases, your business mayeventually want to consider whetherexternal review may need to go furtherthan the mandatory areas. Possible areasinclude parts of the own risk and solvencyassessment (ORSA), such as theassessment of the future solvencyposition. External review would enhance

Gauging the need forexternal evaluation

the credibility of the reporting within themarkets. This will in turn require a moreforward-looking approach than is typicalwithin today’s audit-type evaluations.

However, it is important to note thatexternal review is intended to be acomplement to internal governancerather than a replacement for it.Reviewers are expected to placeconsiderable reliance on your company’sown framework of oversight and controls.

So what role may external reviews playin Solvency II reporting and how wouldthis work?

Broad scope of reviewInvestors and other stakeholders maycome to expect both a retrospective andprospective focus for external reviewunder Solvency II. On a retrospectivebasis, reviewers will be called upon toprovide stakeholders with reasonableassurance that key elements of Pillar 3disclosure are materially correct. On aprospective basis, it is our view that someanalysts and investors might want to see areview of the assumptions made to assessthe future continuity of the business.These perspectives would draw onreviews of the risk assessment and controlframework to judge whether the businessis properly controlled.

Therefore, we envisage that the externalreview will focus not only on a selectionof the publicly available elements ofPillar 3, but also on a limited number ofadditional disclosures as a result ofmarket pressure (Figure 2 sets out thepossible scope of external review).

• A selection of the publicly disclosed Quantitive reporting templates (e.g.Solvency II balance sheet)

• Tiering and eligibility of the own funds• Solvency capital requirement (SCR) and minimum capital requirement (MCR)calculation and thus the solvency position

• Management’s assessment of the prospective risk and solvency position basedon the ORSA and a statement on the quality of the internal control frameworkto the extent that the information can be objectively measured and madesubject to a clear framework for review

Figure 2: PwC’s view on the potential scope of external review

Source: PwC



Changing role for auditorsSome countries already require auditingof certain elements of regulatory returns.But Solvency II may take such evaluationsinto uncharted waters. In particular, ifstakeholders would require a statementon management’s prospective riskassessment, this would lead to a moreforward-looking focus for auditors thanat present.

The review body would be required toprovide a letter detailing any mattersarising from the evaluation, such asinternal control issues. This would beshared with the supervisor, but notpublicly available.

Reviewers might be allowed to place acertain amount of reliance on yourinternal control framework and theindependent validation of the cash flowand (in the case of internal models) therisk models in judging the accuracy of thenumbers and rigour of the surroundinggovernance and oversight. Their mainrole will be to test controls and ‘review’the procedures in place rather thanprimary verification, though how muchtesting of their own they are likely tocarry out remains to be seen.

Emerging requirementsIn addition to the mandatory areas forreview, there may eventually be peerand market pressure to disclose someadditional elements of Solvency IIevaluation and management. This couldinclude scenario analysis within theORSA. The credibility of this informationwould benefit from external review andverification.

Strengthening assuranceThe details of the (mandatory) externalreview requirements are still to befinalised. What is certain is that suchreviews would play a significant role inassuring stakeholders over the accuracyof disclosure and the quality of thecontrols that underpins it. We expect thatthe market may also be looking foran additional voluntary review ofmanagements’ forward-lookingstatements not covered by the mandatoryreview. This will be a new departure forcompanies used to a traditional auditof financial reports, and therefore theinformation and evidence they will seekto assure themselves will be extensive.

EIOPA has embarked on a programme of consultations which will look atwhat should be covered by an external review, how it will work (includinghow much reviewers can rely on internal controls) and the cost/benefitof the proposed approach. Subject to this cost/benefit analysis, furtherareas that could fall into the scope of the review include the SCR andMCR. Further questions are likely to centre on clarification of how much

reliance can be placed on internal controls.

Next steps

External review isintended to be acomplement ratherthan a replacementfor internalgovernance.


Section twoBringing reportingup to scratch

The challenges of getting ready forPillar 3 disclosure should not beunderestimated. However, thesystems and operational upgradesthat will be required open upopportunities to create a moreefficient, organisationally integratedand ultimately useful framework forcompany-wide reporting. We askedthe programme director from aleading international insurer to sharehis company’s expectations, practicalexperiences and perspectives on thehurdles ahead.

‘We knew from the outset that meetingthe Pillar 3 requirements would bechallenging, requiring us to disclose moreinformation, more frequently than everbefore and with much less time availableto do so. But the challenge is notcompliance in itself – we would alwaysfind a way to get over the line, even if thatmeant bringing in more people fromother areas of the business. The real issueis how to meet the demands of Pillar 3 ina sustainable way that minimises theimplementation costs and ongoingcompliance burden in the future.

Having carried out some initial work in2008 and 2009, mainly focusing on thePillar 1 quantitative requirements, theprogramme began in earnest in 2010.The first step was to bring together keystakeholders from across the organisation(actuarial, finance, risk, internal auditetc.) to evaluate what would be requiredfor all three pillars, carry out a high level

Starting with the end in mind:An insurer’s perspective onimplementing Pillar 3

gap analysis and set up work streams toaddress the gaps. This was accomplishedduring a project initiation workshopwhere the programme structure, visionand training requirements weredetermined.

It is very important to develop a goodorganisation-wide understanding of whatis required for Pillar 3 at an early stage tohelp to mobilise the business. As peoplebecome aware of the implications, theycan begin to lobby their supervisors for aworkable approach. Many localcompanies had been primarily focusingon Pillar 1 at the beginning and thereforethere was less awareness of how long thePillar 3 implementation will take and howmuch it is likely to cost.

We were among the first feworganisations to be lobbying oursupervisor for better recognition of thechallenges and this has resulted in greaterawareness across the industry.

Setting your ambitionsDrawing on our high-level evaluation,a core team developed the programmevision for the new solvency regime andfor Pillar 3 specifically, before we soughtviews from key stakeholders at all levelsof the business.

This vision is going to vary fromorganisation to organisation dependingon their ambition and what other issuesthey want to address as part of theprogramme. But an agreed vision is thekey to getting everyone mobilised andworking towards common goals.


Our overall vision not only focuses on thepractical compliance demands (forexample, how to clear the compliancehurdle at the lowest possible costs), butalso how to use the necessary changes asan opportunity to develop a more risk-aware culture and optimise risk-adjustedvalue. Our Pillar 3 vision reflects theseoverall objectives by looking at how wecan use the new managementinformation and reporting requirementsas a foundation to add value forcustomers, investors and other keystakeholders. It also recognises that theright processes, controls, technology, dataand governance have to be in place.

Pillar 3 is a journey and some elementsof what we want to achieve will not bein place before the implementationdeadline. But as long as you have a clearand agreed vision, the direction andmomentum can be maintained to ensureyou will get there eventually. Similarly,you are bound to need some workaroundsto get over the line during the transition.But you can’t afford to institutionalisethese fixes, as this will only prolong thecosts and disruption.

From a practical perspective, we havecome to realise that integration withfinancial reporting is vital, especially asmany of the same people are going to beclosely involved in both. The worst thingto do would be to create a whole new setof reports on top of what is alreadyproduced.

In turn, efficient implementationdemands close integration betweenrisk, finance, actuarial and assurance(internal audit) teams. These teams tendto work quite independently, so gettingthem to work together posed a possiblechallenge. However, the earlier youcan get these teams to engage andcollaborate, the better.

Steps along the journeyAll this preliminary work paved the wayfor the development of a target operatingmodel. We carried out a more detailedgap analysis that looked at the potentialdata gaps and hold-ups and whatorganisational changes and systemsinvestment would be needed to tacklethese (The ‘Delivering on time, everytime’ section on pages 32–35 exploressome of the key considerations). A veryimportant part of this was to look at thereporting calendar and then determinewho needs to do what and when and howall the reporting activities are going tocome together. Among the potentialbottlenecks we identified were systemsand process inefficiencies, technology notdeployed as efficiently as it could be andactuarial, risk and finance teams workingin silos. Other key bottleneck areasincluded reliance on asset managers andother third party data providers for morefrequent and detailed data feeds (the‘Developing an effective partnership withyour asset managers’ section on pages20–31 looks at the additional requirementsand how to overcome them).

We’re upgrading our systems to makesure that we can meet the new reportingdeadlines. While we currently haveseveral months to submit our returns,in future these will need to be ready in amatter of weeks. Our investment includesa combination of off-the-shelf Pillar 3reporting systems and the development ofa new data warehouse. It’s important tostress that you can’t just buy a solution,as the really hard part is making sure theright data is fed into the system at theright time, which requires a substantialamount of data sourcing and data flowwork across the organisation.

Looking at where we are now, I think weare probably slightly ahead of the curve,but there is still some way to go. The keychallenge ahead is embedding thechanges, though I believe that if youdevelop capabilities that the business willuse and see the benefit of, embedding willjust be the by-product of this rather thanan exercise in itself. Starting ‘with the endin mind’, i.e. what you are going to reporton, brings significant clarity on what thebusiness needs to do after the programme.

Key lessonsWhen asked what we’ve learned, I thinkthe first key point is that all the peoplewho are going to have the most importantroles in making this work – including theIT, risk, finance, actuarial and internalaudit teams – need to be pulling togetherfrom the outset. In turn, you need seniorbuy-in or progress will be significantlydelayed. Given the amount ofdependencies and oversight involved inPillar 3 reporting, allowing time for a dryrun and any subsequent fixing is alsoessential. The final message is theimportance of being pragmatic andrealistic and developing an iterativesolution approach. An overly complicatedprogramme and approach can all tooeasily come unstuck, destroying valuerather than creating it.

We would like to thank the contributorfor his time and thoughtful insight.


One of the key implementationconsiderations is how to present thesolvency and financial conditionreport (SFCR) in a way that worksbest for your company and the usersof your reports.

At first glance, bringing all your variousentities into a single (group-wide) SFCRwould appear to be easier and cheaperthan preparing separate reports for whatmay be many different legal entities.It would also allow both the group andthe reader to view the business as a singleeconomic entity. But a single groupreport may not necessarily be morestraightforward and understandable thanseparate solo entity reports once factorssuch as language, stakeholderexpectations and differences betweenbusiness lines are taken intoconsideration.

Setting the scope

So what are the key factors that wouldhelp your business to judge whether toopt for a single group-wide SFCR for alloperations or separate group and soloentity reports?

Meeting stakeholder demandsPillar 3 reporting and disclosurerequirements under Solvency II includeboth private reporting to supervisors inthe form of the Regular SupervisoryReport (RSR) and annual publicdisclosure in the SFCR.

Overall, the SFCR and RSR provideintegrated quantitative and qualitativeanalysis, bringing together a view of howbusiness activities affect your risk profileand related capital adequacy.

The QRTs capture information on thebalance sheet, assets, SCR, MCR,technical provisions, variation analysisand reinsurance. Your business can usethe QRTs to support the preparation ofthe RSR and the SFCR.

It is worth noting that EIOPA leaves scopefor EU member states to define nationalspecific templates, covering products andconditions with particular relevance tolocal markets and national legalrequirements. National specific templateswould not replace the QRTs, but wouldhave to be submitted in addition.

A single SFCR should include an overviewof the position at group level with thespecific details of individual entities beingeasily identifiable. Figure 3 outlines thecontents of an SFCR.

There is no proportion of group turnoveror other quantitative threshold todetermine what operations are deemed‘material’ and therefore need to beincluded in the disclosures. The generalrule of thumb is that the operation is


The publicly available SFCR is designed to bring out the internal operationalstructures/procedures underlying capital management (Pillar 1) and the systemof governance (Pillar 2) so that it can be scrutinised by external stakeholders.Although it has close parallels with the RSR presented to supervisors, the SFCRwill be more descriptive in detail and will not contain commercially sensitiveinformation. Key elements include:

• Nature of the business and external environment, objectives, strategies,underwriting and investment performance

• Governance structures, responsibilities of the board/administrative bodies,senior management and key committees, reflecting elements of the ORSA

• Risk profile and risk management approach for each category of risk• Valuation bases for assets and liabilities including technical provisions, withexplanation of any major differences to the bases used in the financialstatements

• Capital management including SCR, MCR, Own Funds (tiers and classification)and quality/structure of solvency reserves

Figure 3: Content of SFCR

material if a user might make a differentdecision if it was left out. In keeping withthe overall aims of Solvency II,supervisors are also going to be looking atwhether the operation’s collapse mighthave a significant impact on yourcompany’s ability to meet its obligationsto policyholders. Given the possibility ofreputational damage and withdrawal ofinvestment if any part of the group runsinto trouble, the operation would have tobe fairly small to be immaterial.

The optionsSubject to approval from your groupsupervisor, you then have three possibleoptions for how to submit your groupSFCR:

Option one: Single (group-wide) SFCRYou can submit a single SFCR, which notonly includes the aggregate groupposition, but also the information for eachapplicable solo entity. It should be easy toidentify which undertaking the solo entityinformation relates to.

Option two: Separate SFCRsYou can submit an SFCR covering thegroup on its own. Each solo entity wouldthen generally submit a separate SFCR inlocal language to the solo supervisor,along with others as determined by thecollege of supervisors according to thelevel of interdependency and whethersub-group supervision is applied.

Option three: CombinationYou can submit separate SFCRs forselected entities (e.g. a nationalsubsidiary or operation with a significantlocal market share). The group SFCRwould include the aggregate groupposition and information for smallerentities not producing their own SFCRs.

Weighing up the optionsA single (group-wide) SFCR wouldappear to cut out a lot of work, especiallyas there would only (in theory) be onesupervisor to engage with. It could alsomake the monitoring of consistency ofapplication and evaluation around thegroup slightly easier. But the same level ofdetail that would go in a solo SFCR would

need to be included in the group report ifthere is no solo version. The result wouldsimply be a longer group report, whichmay end up being very difficult to puttogether and comprehend in a groupwhere there are multiple business lines inmany different territories.

If your company has significant marketshare in a particular country, the localsupervisor may well press for a translationinto their local language of subsets of theSFCR, even if the operation is notmaterially significant within the groupoverall. Stakeholders of a local subsidiaryare also likely to expect an entity-specificreport in their own language rather thantrying to extract the information theyneed from a group report. This underlinesthe importance of liaising withstakeholders about their expectations.

Either way, the level of work will in mostcases be the same as the data gathering,risk analysis and other key elements of anentity report, and would in any eventneed to be produced for the RSRwhatever the chosen option for the SFCR.

Nonetheless, a single SFCR would bemore straightforward and acceptable tostakeholders if your group isoperationally centralised and has alimited number of business lines. If youplan to ask your supervisor for permissionto submit a single (group-wide) SFCR,your request should explain how thesingle group SFCR will meet therequirements set out in the Level 2delegated acts (‘implementationmeasures’).

The explanation should cover both thegroup and the individual subsidiariesincluded within the single group SFCR.Your request letter and subsequent singleSFCR would need to set out whichsubsidiaries you intend to include withinthe single SFCR, which you do not(because they are not material) and howthe requirements will be met for thoseyou don’t propose to include (e.g. byseparate solo SFCRs). It is important tobear in mind that one of the mainpurposes of the group SFCR (whether


If your company hassignificant marketshare in a particularcountry, the localsupervisor may wellpress for a translationinto their locallanguage of subsets ofthe SFCR, even if theoperation is notmaterially significantwithin the groupoverall.


solo entities are included or separate)is to present a view of the group andinterconnectedness throughout.

For subsidiaries outside the EU, it won’tmatter whether they are in an ‘equivalent’jurisdiction or not, as they could berequired to contribute quantitative andqualitative data to the group report.Whether they need to be includedas a distinct section depends onhow material they are to the groupoverall.

It’s important not to underestimate the work involved and the time it will taketo prepare your SFCR(s) – single reports could be very lengthy and it will be achallenge to present this in a way that is representative of the group overall.

The first step is to work out what is the best choice for your company and itsstakeholders. At the same time, it’s important to open a dialogue with yourgroup and solo entity supervisors to understand and manage theirexpectations about your disclosure.

You should ideally allow enough time for a dry run ahead of initialdisclosures. Working back from that timetable you should think about

choosing your preferred option and ideally seeking affirmation from yoursupervisors in advance. That will allow you enough time to carry out anassessment of the status of your Pillar 3 programme and then begin to developand implement your reporting procedures and calendars, technology changesand Pillar 3 governance.

Next steps

A single SFCR would bemore straightforwardand acceptable tostakeholders if yourgroup is operationallycentralised and has alimited number ofbusiness lines.


If your business is relatively small ornot especially complex, yourreporting and disclosure demandswill in some respects be lessextensive than a larger or morecomplex counterpart. This‘proportionality’ will mostly be evidentwhen reporting on your Pillar 2systems and processes. Some of theQRTs also include materiality aspects(e.g. on lines of business reporting).

Proportionality is one of the core tenets ofSolvency II. It seeks to ensure that theregulatory demands on your businessreflect its nature, scale and complexity.

In principle, your business won’t beexpected to report or disclose informationthat is not material or relevant. Asoutlined in the previous section, ‘Settingthe scope’, the general rule of thumb isthat reporting or disclosure is material if auser might come to a different decision ifit was left out. In practice, you will needto be prepared to report all the QRTswhere you have relevant data regardlessof the size of your business.

Based on the nature of the business andits investment strategies (e.g. smallerinsurers may not have structuredproducts on their balance sheet), someQRTs might not be applicable. If you onlywrite a few business lines or there is littlecomplexity in your investment strategy,the required level of detail in your assetand liability QRTs might be relativelystraightforward.

Applyingproportionality toyour reportingdemands

To take account of proportionality, someinsurers will be exempted from thequarterly reporting requirement on assetslook-through. According to the availabledraft delegated acts, such an exemptionwould apply when the ratio of investmentfunds to total investments is less than30%. These exemptions can be made bysupervisors, based on the scale, natureand complexity of the risk profile ofundertakings and their investment funds.Nonetheless, this information may still berequired for Pillar 1 evaluations.

In March 2012 the ECON Committee inthe European Parliament voted on andapproved a series of compromises whichincluded some areas of proportionality inPillar 3. In particular, a concept was putforward whereby if an insurance entityrepresented less than 20% of the marketshare of the country it operated in, thenational supervisor has the ability torelease that company from certainreporting obligations during the year, solong as the supervisor believes it can carryon its duty without the information andthe company reports the data at leastannually.

These concepts could clearly result insome inconsistency across Europe and sothere remains some uncertainty aroundwhether they will ultimately be part ofthe Directive. Furthermore, they still needto be voted on and approved by theEuropean Parliament

If you have approval to use an internalmodel or partial internal model, you willhave to complete a slightly different set ofQRTs from those that use the standardformula. Technically, reporting thetemplates for internal model users onlyapply if your model is approved. However,your supervisor may require that youcomplete both sets of QRTs depending onyour status within the internalapplication/pre-application process.Ring-fenced funds may also have to reportcertain templates themselves, includingthe balance sheet, own funds, SCR andoverview of technical provisions. If youare a large and complex insurer withmany ring-fenced funds, this will be anadditional burden.

SimplificationThe simplifications used in Pillar 1 capitalrequirement calculations should bereflected in the Pillar 3 QRTs. But asFigure 4 highlights, these simplificationsmay create their own additional reportingrequirements, including the need toexplain why they have been applied.

For example, simplifications in thestandard formula might allow you toevaluate fewer scenarios for lapse risk ora simplification of the spread risk forstructured products. But you may have toinclude a detailed explanation in Pillar 3to justify the use of these simplificationsand validate that they are proportionate.

As regards Pillar 2, the governance andrisk management framework is basedon the risk profile and complexity ofan undertaking, and thereforeproportionality within Pillar 2 will havea direct and high impact on yourreporting (see Figure 5 overleaf).

As the ORSA includes elements of bothPillars 1 and 2, the simplifications usedwill also have a high impact on thereporting demands (quantitative andqualitative), especially if using all possiblesynergies between the ORSA report andthe RSR. Thinking about the synergiesbetween the ORSA report and the RSRand setting up the ORSA to takeadvantage of these is therefore crucial inreducing reporting demands. As before,however, you will need to justify why youare operating with a relatively simplegovernance and risk managementframework.

Simplifiedcalculation ofSCR

109SIID

Simplified calculation for a specificsub-module or risk module and whereit would be disproportionate to requirethe standardised calculation.

G20CP09/11

Information on the justifications thatsimplifications used for calculation ofthe solvency capital requirement areproportionate.

Simplifiedcalculation oftechnicalprovisions

47TPS1DraftL2

Methods to calculate technical provisionsshall be proportionate to the nature,scale and complexity of the risks. Indetermining whether a method isproportionate, undertakings shall carryout an assessment.

G37CP09/11

Details of any simplification used inthe calculation of the technicalprovision and including a justificationthat the method chosen isproportionate.

Figure 4: Extra reporting requirements generated by simplification

Simplification Ref RefDescription of proportionaltreatment

Description of reporting requirementdepending on simplification

Source: PwC analysis


To take account ofproportionality, someinsurers will beexempted from thequarterly reportingrequirement on assetslook-through.


It’s important to look at proportionality in the round across Pillars 1, 2 and 3.Key considerations include assessing what aspects of Pillar 1 and Pillar 2proportionality could be applied to Pillar 3 and to think about the

consequences for Pillar 3. The extra reporting needed to justifysimplifications is one of the areas that will need to be weighed up. This isone of the areas where it will be important to liaise with your supervisorto find out what they are likely to expect from your company.

It is quite likely that over the coming years harmonised standards for thelevel and focus of reporting across the EU will emerge. The benchmarks arelikely to be set by analysts and investors as much as supervisors and many maywell go beyond the statutory minimum.

Next steps

Proportionality in Pillar 2 will have a high influence on your reporting and will directly decrease the amount of justifications aswell as the level of detail you have to give in your RSR and SFCR. If your risk profile, the complexity of your business modeland your organisation are straightforward, it will be much easier to report on your Pillar 2 requirements (e.g. risk managementsystem or internal control system) than it will be for a more complex undertaking.

Organisational structure, risk and capital management:• The extent to which staff may perform multiple roles while appropriately managing conflicts of interest• The scope and frequency of internal reporting • How the risk management function is organised – this may include fewer procedures, less sophisticated risk managementtechniques, capital monitoring less frequently

• The sophistication of the techniques used in asset-liability management and reflected in its reporting should beproportionate to the product, nature of the claims and any discretionary elements (e.g. embedded options and guarantees,short-tail liabilities backed by high quality corporate bonds)

Functions or personnel holding key roles:• There is a degree of flexibility in allocating internal control responsibilities• Operational units and internal audit must be segregated and can therefore be outsourced to a qualified third party• A lower level of professional qualification, knowledge and experience of those holding key roles may be acceptable • The actuarial function is mandatory, but an individual with an actuarial background can be employed part time

Proportionality cannot be used if it:• Materially impairs the quality of the system of governance• Increases operational risk• Impairs the ability of the supervisor to monitor compliance or undermines satisfactory services to policyholders

Figure 5: Proportionality in Pillar 2 influencing narrative reporting in Pillar 3

Source: PwC analysis

Thinking about the synergies between the ORSAreport and the RSR and setting up the ORSA totake advantage of these is therefore crucial inreducing reporting demands.

The required level of detail in the dataneeded to prepare the Pillar 3reporting and disclosurerequirements is going to be asignificant challenge for companies.How far down will you need to go?

While some of the information mayalready be collated for other reportingdemands, much of the Solvency IIreporting and disclosure will be requiredfor the first time. When obtaining datafrom existing sources, it is important toconsider whether this is the right level ofgranularity or classification to supportPillar 3 requirements. Pillar 3 is going todemand considerable changes to datamanagement, both in terms of existingfinancial reporting processes, and linkingthese to Solvency II valuation andcalculation processes. In this section, weprimarily focus on the data granularityissues in respect to the asset and liabilityQRT templates, as many of the otherQRTs will draw on this information orfrom Pillar 1 or Pillar 2 results.

Data as the cornerstoneGood data has always been the lifebloodof a successful insurance business.

Effective risk management requires aclose watch on risk exposures across theenterprise and this monitoring is only asgood as the data that feeds it. Solvency IIrecognises the vital importance of data inthe safe running of the business bymaking proper governance and qualitycontrols over data processes a

Getting down to the right levelof detail

cornerstone of the Directive. If companiesare not confident about their own data,how can they assure their supervisor?

Although the full reporting requirementshave yet to be finalised, we already have agood idea of what is likely to be required,and little change is expected. The lastconsultation rounds were quite stable,other than perhaps some additions thatmay ease the demands on smallercompanies (The ‘Applying proportionalityto your reporting demands’ section onpages 20–22 looks at how application fordifferent companies may vary).

Under the Solvency II Directive,data must be:

• Accurate – the degree of confidencethat can be placed in data

• Complete – is the informationsufficiently comprehensive for the task?

• Appropriate – the data must not beskewed towards a particular viewpoint;it needs to be appropriate to the specificrisks that are being assessed and to thecalculation of the capital requirementsto cover these risks.

These would appear to be straightforwardcommon sense expectations, but thedetail of the Pillar 3 reportingrequirements belies this seemingsimplicity. The quarterly round of datasourcing and updating is going to stretchexisting reporting systems (as well as themodelling systems used for Pillar 1calculations).


There could be considerable difficulties incollating the right level of detail onliabilities within the tight timelines.Significant challenges also exist on theasset side, especially since much of theinformation will have to come from thirdparties and the third party will need todemonstrate that the data still passes theaccurate, complete and appropriate test(the ‘Developing an effective partnershipwith your asset managers’ section onpages 28–31 looks at the third partyconsiderations in more detail).

Most of the data is likely to be availablealready, but preparation is required toreport and disclose the right data at theright level of detail, within a tighttimeframe, while ensuring data qualityand consistency at all times.

While there is significant resistance fromthe insurance industry, policymakers havemade clear that this level of granularity iskey and is unlikely to be watered down forcarriers of more complex business. It istherefore important to prepare on theassumption that the level of granularity inexisting guidance will be required.

Asset dataCurrent guidance requires insurers todisclose asset data by individual securityfor quarterly reporting to the supervisor.Detailed information on each asset isrequired, including, for example:

• ID code, ID code type• Duration• Maturity date• External rating, rating agency• Quantity• Acquisition price• Issuer name, sector, group (code) andcountry of custody

• Complementary information code

While most QRTs present information ata point in time, some transactionalinformation over the period will berequired (see Figure 6). This is clearlygoing to add to the reporting and databurden.

The overall reporting package will requireinformation on asset exposures todifferent categories of risk; theserequirements could necessitate additionalsystem applications. This type of data

may not typically be held directly byinsurers in their current general ledgersystems or data systems.

In addition, the so-called ‘look-through’principle means that for collectiveinvestment vehicles you may have to workwith your asset managers to drill downinto the fund-of-funds or other pooledvehicle and identify information on theunderlying assets (a key area covered inthe ‘Developing an effective partnershipwith your asset managers’ section onpages 28–31).

The logistical challenges are evident.Insurers may have an array of serviceproviders helping them to executedifferent parts of their asset strategy.There may be multiple assetadministrators, fund managers,custodians and other service providers.Identifying where in the range ofproviders the necessary informationresides is the first major complication.Ensuring that information being providedfrom each is in a consistent format isanother challenge, and doing so withinthe timeframe just adds to the complexity.Even in the case of a single asset manageror administrator they may not have timelyaccess to all of the information requiredby the Directive, nor will they have all theinformation on a single platform orsystem. Existing licence agreements, non-disclosure and service level agreementsmay need to be renegotiated toaccommodate these new requirements.

Liability dataAlthough the challenges around datapreparation and reporting on the assetside have received reasonable coverage inthe industry press, less attention has beenfocused on the data hurdles on theliability side. It might be assumed thatinsurers should have access to sufficientinformation on underwriting risk, as thisis central to their business. However, thedetail required by the QRTs means thatthe challenges are still extensive.

Figure 6: Asset QRTs

Assets – D1Investments data –portfolio list

Assets – D1QInvestments data –quarterly summary

Assets – D1SStructured productsdata – portfolio list

Assets – D20Derivatives data –open positions

Assets – D2TDerivatives data –historical derivativestrades

Assets – D3Return on investmentassets (by assetcategory)

Assets – D4Investment funds(look-throughapproach)

Assets – D5Securities lendingand repos

Assets – D6Assets held ascollateral

Source: PwC analysis of proposed Solvency II Directive and draft delegated acts



The QRTs package includes 13 annualtemplates for life and non-life businessincluding: a full breakdown of technicalprovisions, projection of future cash flowsand two quarterly templates covering thegross best estimate and risk margin (seeFigure 7). Line of business reporting is animportant feature of these templates, anddepending on how many lines of businessthe company underwrites, as many as5,000 separate data entries could berequired for these templates, though thiswill vary widely depending on the natureand type of the business.

The data granularity required in the QRTfor underwriting risks (E7A/B) poses aparticular challenge as sufficient policyrecords may not be maintained onsystems. Examples might include businesswritten under a delegated authority.Many such third parties tend to sendsummarised information, so yourbusiness may have to renegotiate existingcontracts to obtain the required level ofinformation.

For life and health SLT technicalprovisions, the QRT TP(L) – F1 requires asplit of the guarantees and the risk

margin by line of business. Non-lifeinsurers will also have to provide a splitof the risk margin by line of business.Depending on the simplifications thathave been applied to split out thetechnical provisions from Pillar 1 intothis level of granularity, this may posechallenges. It is important to considerthe data requirements of Pillar 3 in thePillar 1 results or work on allocation rulesfor reporting purposes to map localbusiness to the lines of business asdefined in Solvency II.

Figure 7: Liability templates

TP (L) – F1Life and Health SLTTechnical provisions

TP (L) – F1QLife and Health SLTTechnical provisions –Quarterly

TP (L) – F2Projection of futurecash flows (Bestestimate – Life)

TP (L) – F3Life obligationsanalysis

TP(NL) – E3Non-Life insuranceclaims information

TP (L) – F3AOnly for variableannuities – descriptionof guarantees byproduct

TP (L) – F3BOnly for variableannuities – hedging ofguarantees

TP(L) – F4Information onannuities stemmingfrom Non-Life andHealth non-SLTinsurance obligations

TP(NL) – E1Non-Life and Healthnon-SLT TechnicalProvisions – Annual

TP(NL) – E1QNon-Life and Healthnon-SLT TechnicalProvisions – Quarterly

TP(NL) – E2Projection of futurecash flows (Bestestimate – Non-Life)

TP(NL) – E7BUnderwriting risks(mass risks)

TP(NL) – E4Movements of RBNSclaims

TP(NL) – E6Loss distributionprofile Non-Life

TP(NL) – E7AUnderwriting risks(peak risks)

Life & Health SLT

Non-Life & Health Non-SLT

Source: PwC analysis of proposed Solvency II Directive and draft delegated acts

Although the challenges around datapreparation and reporting on the asset side havereceived reasonable coverage in the industrypress, less attention has been focused on the datahurdles on the liability side.

For the technical provisions QRTs, TP(L)– F2 (Best Estimate - Life) and TP(NL) –F2 (Best Estimate – Non-Life), yourbusiness will need to include a projectionof all future cash flows split by futurepremiums, claims and expenses by line ofbusiness each year for the next 50 years.The aim is to give an overall idea of theduration of liabilities used in thecalculation of the best estimate. You willneed to allow for this within your Pillar 1projections. This can be particularlydifficult for contracts with options andguarantees and split into homogeneousrisk groups.

The life obligations analysis template TP(L) – F3 is designed to break down theinformation by product. While therequired level of information should beavailable on IT systems, the detail neededrequired may require upgrades. Lifeinsurers will also be required to give adescription of the guarantees on theirvariable annuities by product and thehedging techniques used in QRTs TP (L) –F3A and F3B.

Under the technical provisions templatefor variable annuities, TP (L) – F3A andF3B, if policies are split between twocompanies, for instance a life companyand a non-life company for the guarantee,the company with the guarantee isrequired to fill this template. Thisproposed reporting template introduceshigher reporting standards forundertakings selling variable annuitiescompared with other product types.Companies are required to include adescription of the guarantees and thehedging strategy used for variableannuity business.

For the movements of reported but notsettled (RBNS) claims TP (NL) – E4, therequired level of detail could be especiallydifficult. For example, the holistic view oncalendar claims year does not allow for adistinction between outstanding claims atthe end of the year which were carriedforward from the start of the year, thosereported through the year and thosewhich have been reopened during the

year. The reporting of reopened claimsduring the year and closed at the end ofthe period may be a particular challenge.

Collecting the required information oncatastrophe exposures could be a toughcall for many non-life insurers. Particularissues relate to the age of data, as thereare potentially long lags between theproduction of useable datasets(exacerbated for reinsurers), and a lack ofgranularity about geographical locationfor all the risks. The reliability of data onbuilding types and other descriptor fields,which is also required, is oftenquestionable at best.

Assessing the impactThe high level of detail is an intrinsicfeature of Solvency II’s quarterly andannual reports. Both asset managers andinsurers will need to provide a range ofinformation which isn’t disclosed in thecurrent returns. The SFCR will heightenthe market scrutiny on investmentstrategies, asset-liability management andthe underlying risks.

Your business is likely to have beenaccumulating historical data on mostpolicy types for many decades. However,data has usually been collected for dailyoperations and financial reporting, ratherthan for the calculation of risk-basedcapital and risk monitoring. In turn ITlegacy systems may be outdated andorganised in multiple silos acrossdifferent departments; this causesduplication of data and inconsistencyof values.

Your business will eventually have nomore than five weeks at each quarter endto complete your quarterly returns, givingyou and your asset managers a very briefoperational window to assure quality anddeliver data to support these cycles.



The need for more robust, more detailed and more frequent regulatory andpublic reporting is likely to place immense pressure on your internal processes,systems and architectures. Approaching the three Solvency II pillars in aholistic manner and integrating your Pillar 3 disclosure requirements into youroverall financial and risk reporting and governance plans will help lay firmfoundations for building them into business as usual. Finance functions mayneed to re-think their target operating model to enable faster reporting and

enhanced integration with actuarial, risk and other departments.

A key step in addressing the granularity challenges is to develop anappropriate level of open and practicable communication between yourbusiness and your fund administrators. The insurance industry, incollaboration with the fund administrators, should ideally seek to define a

core/standardised set of data designed to meet the needs of the threeSolvency II pillars. Fund administrators need to define the data points that arecurrently available and identify the gaps and any associated developmentefforts. In addition, both asset managers and administrators need to recognisethat reporting data represents only part of the insurer’s overall data needs, as amore detailed breakdown will be required for the calculations themselvesunder Pillar 1.

Next steps

The reporting of reopened claims during theyear and closed at the end of the period may bea particular challenge.


The breadth, detail and timelines forthe Pillar 3 data needed from yourasset managers (either operatingwithin your group or outsourced) aregoing to require more than just astraightforward request forinformation.

Managing this critical element of yourquarterly and annual regulatory reportingdemands is likely to require a review ofthe choice, contract terms and workingrelationship with your asset managers.Particular challenges include the look-through approach, timings,confidentiality and data governance.Any slip-ups could potentially lead tocapital add-on by the regulator.

So what are the key considerations fordeveloping an effective partnership withyour asset manager?

Huge extra demandsThe evaluation and preparation of Pillar 3disclosures will require far moreinformation about the value, make-upand risks relating to your asset portfoliothan current regulatory returns in manyEuropean countries.

Figure 8 provides a breakdown of thequantitative reporting templates (QRTset) for assets. The QRTs will be sharedwith your supervisor but do not need tobe made public.

Developing an effectivepartnership with yourasset managers

The first key challenge to overcome is thescope and level of detail. This includesbreakdowns by currency, geography andtype of asset. Some of the information,such as identification of the (underlying)assets, data on counterparties andgeographical breakdown per zone ofissues will also be required for Pillar 1capital evaluation, and it will beimportant to co-ordinate requests to yourasset managers.

Figure 9 outlines how assets will becategorised according to aComplementary Identification Code(CIC) provided by EIOPA. The mainreason for introducing the CIC is to createa standardised set of codes to helpinsurers determine where to assignparticular assets. Each of the categories inFigure 9 must be brought into line withthe Pillar 1 calculations.

Look-through approachThe required granularity is going to beespecially taxing in relation to the ‘look-through’ approach, under which youwould have to provide details on each ofthe assets within a fund or fund-of-funds.

EIOPA believes that the level of detailcalled for under the look-throughapproach is needed to assess applicationof the ‘prudent person’ principle towardsinvestment strategy. The principle givescomplete freedom to insurers over theirinvestment strategy provided that theymake sure they can properly identify,measure, monitor, manage and controltheir investment risks.

In theory, your company might choose tostop the look-through at a certain level.But the draft delegated acts also require alook-through as part of the Pillar 1 SCRmarket risk module calculation. Inpractice, supervisors may argue that if thelook-through is not carried out to at leastthis level, you cannot substantiate thatyour company applied the prudent personprinciple.

Following consultations, the look-throughapproach applies to unit-linked assets inline with EIOPA’s interpretation of theprudent person principle.

Tracking down the precise assetallocation in alternative investments orfunds-of-funds could be especiallychallenging. Some portfolios are likely tobe spread out across many lines, withcertain types of assets making up a verysmall proportion of the overall portfolio(1% or less in many cases). Dealing withall these small allocations will add to thetime and effort. Your business could askyour asset manager to collate and supplythe information at the required level ofaggregation, though they would need thecapabilities and may charge a premium todo so. Alternatively, you might opt todevelop systems capable of taking in allthis multiplicity of data, but that willnaturally incur a cost.

The look-through approach is going to beespecially taxing for asset managers whodeal with third parties on behalf of theirinsurance clients. They need to ensure theright level of detail in the informationcoming from their data providers. Thiscould affect both the fees and the choiceof asset manager.

A further consideration is data storage.You need to make sure that you can storeall the data or ask your asset manager todo it for you. Either way, the costs willneed to be taken into account.


Figure 8: Asset reporting templates

Form Description Frequency (at least)*

Source: EIOPA *Supervisor may require additional submission in certain cases

D1 Investments Data – Portfolio list +D1Q

D1S Structured products Data –portfolio list

D20, D2T Derivatives data

D3 Return on investments assets

D4 Investment funds (look-throughapproach)

D5 Securities lending and repos

D6 Assets held as collateral

Detailed inventory of all assets(including investments funds butexcluding derivatives) disclosing a widerange of statistical information oneach asset.

Detailed information on structuredproducts.

A detailed list of all derivatives traded inthe reporting period.

Detailed information about assetsprofitability (including derivatives).

‘Look-through’ approach for investmentfunds demands additional informationon underlying instruments within funds.

A detailed list of securities lending andRepo operations needs to be reported forall contracts in the reporting period(including closed ones).

Detailed information on assets held ascollateral is required for all type ofinvestments.

Quarterly

Annually

Quarterly

Quarterly and annually



Annually

In practice, supervisors may argue that if thelook-through is not carried out to at least thislevel, you cannot substantiate that your companyapplied the prudent person principle.

Figure 9: Categories of assets

Category Definition

Source: EIOPA

1 Government bonds

2 Corporate bonds

3 Equity

4 Investment funds

5 Structured notes

6 Collateralised securities

7 Cash and deposits

8 Mortgages and loans

9 Property

A Futures

B Call options

C Put options

D Swaps

E Forwards

F Credit derivatives

Bonds issued by public authorities, whether by central governments, supra-national government institutions, regional governments or municipal governments

Bonds issued by corporations

Shares representing corporations' capital, i.e., representing ownership in acorporation

Undertakings the sole purpose of which is the collective investment intransferrable securities and/or in other financial assets

Hybrid securities, combining a fixed income instrument with a series of derivativecomponents. Excluded from this category are fixed income securities that areissued by sovereign governments. Concerns to securities that have embedded allcategories of derivatives, including credit default swaps (CDS), constant maturityswaps (CMS), credit default options (CDO). Assets under this category are notsubject to unbundling

Securities whose value and payments are derived from a portfolio of underlyingassets. Includes asset backed securities (ABS), mortgage backed securities (MBS),commercial mortgage backed securities (CMBS), collateralised debt obligations(CDO), collateralised loan obligations (CLO), collateralised mortgage obligations(CMO). Assets under this category are not subject to unbundling

Money in the physical form, bank deposits and other money deposits

Financial assets created when creditors lend funds to debtors, with collateral ornot, including cash pools. Doesn't include loans on policies

Buildings, land, other constructions that are immovable and equipment

Standardised contract between two parties to buy or sell a specified asset ofstandardised quantity and quality at a specified future date at a price agreed today

Contract between two parties concerning the buying of an asset at a referenceprice during a specified time frame, where the buyer of the call option gains theright, but not the obligation, to buy the underlying asset

Contract between two parties concerning the selling of an asset at a reference priceduring a specified time frame, where the buyer of the put option gains the right,but not the obligation, to sell the underlying asset

Contract in which counterparties exchange certain benefits of one party's financialinstrument for those of the other party's financial instrument, and the benefits inquestion depend on the type of financial instruments involved

Non-standardised contract between two parties to buy or sell an asset at a specifiedfuture time at a price agreed today

Derivative whose value is derived from the credit risk on an underlying bond, loanor any other financial asset



The look-through requirement mightseem needlessly onerous, but theinformation is of importance forunderstanding the individual investmentportfolio and to capture all material risks.For supervisory purposes this gives theEuropean Systemic Risk Board thenecessary granularity to assess andmonitor allocation and build-ups inconcentration among countries andinsurers across Europe.

Your business should consider all thesevarious issues before finalising yourquantitative reporting requirements withyour asset or fund manager.

Data governanceData from an external source will needto pass the same complete, accurateand appropriate standards built intoSolvency II. You will need to demonstratethat the fund managers and asset servicecompanies that you use have appropriatecontrols in place. Monitoring andverifying governance in funds or fund-of-funds may be especially challenging, asyou may not deal directly with the sourceof the information.

To demonstrate compliance to thesatisfaction of your board and yoursupervisor, you are likely to needdocumented assurances from your assetmanagers that the quality, consistencyand reliability of the risk information theysupply, and the governance and controlprocedures that underpin this, are up toscratch. It is possible that somestakeholders may press for ISAE 3402(former SAS 70) type validation, and thatthis is updated at least quarterly.

Tighter turnaroundAsset managers will need toprovide more data in less time forinsurers to meet the Solvency IIdeadlines. The required aggregations,sensitivity analysis, cash flow projectionsand other evaluation criteria are going toplace considerable strain on the reportingsystems and processes of even the largestand best-resourced firms. It isn’t just thescale of the required work, but thetransparency and validation that willneed to underpin it that will create hugechallenges.

Meeting these tight timelines will havea considerable impact on the operatingmodels of asset managers and their thirdparty administrators, as the informationcurrently available at this date may notmeet the rigorous granularity and qualitystandards demanded under Solvency II.It is also important to recognise thatmanagement as well as regulators arepressing for faster turnaround of key dataand analysis, especially in today’s volatileand uncertain market environment.

A key consideration is how the format ofthe data and procedures for its deliverymight vary from asset manager to assetmanager. It is also important to bear inmind that these issues could apply even ifthe asset manager is part of your group,as their approach may not necessarilyreflect those used at group level.

Confidentiality and equaltreatmentA further complication is confidentiality.Some service providers may placelimitations on sharing information withthird parties (such as EIOPA, group/solosupervisor) or charge for the services.

In the US, the Securities and ExchangeCommission restricts how quickly certaininformation can be released in case aninvestor in fund with multiple investorsderives an unfair advantage. Meeting thisequal access principle could provedisruptive for asset managers as they tryto deal with varying information requestsand preferences from different insuranceclients engaged within the same fund.

EIOPA insists that if you can’t access therequired data in time, you should not beinvesting in that fund (in line withprudent person principle).

Asset managers already have their work cut out dealing with a wave ofregulatory change in their own industry, including the Alternative InvestmentFund Managers Directive (AIFMD) and updates to the Undertakings forCollective Investment in Transferable Securities (UCITS). The timeline, controland governance requirements for Solvency II are going to compound thesealready pressing challenges.

It’s therefore vital that you sit down with them as soon as possible to gothrough your expectations, check if they can comply and, if not, what steps youor they will have to put in place before Solvency II goes live. The benefit forthem of setting out your requirements early would be in helping to make themost of any synergies in the various regulations they face and avoid digging upthe road more than once. It would also be useful to use any additional time

before Solvency II goes live to discuss matters with asset managers, asswitching a mandate can be a lengthy and potentially costly process.

Furthermore, asset managers may want to charge more for theadditional service. It will therefore be important to look closely at the

overall cost-benefits. The complexity of your holdings may be making itdifficult to evaluate your assets and hence lead to higher service fees. Does thebenefit justify the cost, or would simpler structures be more appropriate?While many insurers have diversified their asset management relationships,could the complications and potential costs thrown up by Solvency IIencourage businesses to reduce the number of partners they deal with?

Finally, it is important to remember that the ultimate responsibility for thedelivery and quality of the required asset information rests with the insurer,not the asset manager. Specific oversight procedures must be put in place forfunctions or activities that are critical or important. Outsourced functions andactivities may also be inspected by the supervisory authority or a third partyrepresenting the supervisory authority, and it is important to discuss thesetopics in full with any third party.

Next steps


Without greater automation, movingfrom today’s 80-12 day reportingcycles to the 5 week Pillar 3 quarterlydeadline is going to be unsustainablylabour intensive. Firms shouldconsider their approach to meetingthese accelerated deadlines and howto roll these out across theirorganisation.

Even the most sophisticated systemswon’t get you over the line every time.People, processes and technology are allgoing to have to be reviewed, rethoughtand brought into one single framework aspart of the ‘industrial’ approach needed tobuild Pillar 3 reporting into business asusual. So what systems, governance andorganisation will be needed to get yourPillar 3 delivery up to speed and how canyou make the reporting process as smoothand repeatable as possible?

Real testIf your company has tried to generatethe Solvency II numbers against ‘real’deadlines, either as part of a dry run oran earlier quantitative impact study, youwill know how demanding this is.

Bringing ‘all hands to the pump’ can getyou over the line first time, but in thelong run it will take too many key peopleaway from their jobs within the business.This includes claims teams, seniorexecutives and other frontline personnelas well as finance, actuarial and riskmanagement teams. At the very least,their time needs to be used moreproductively. Moreover, the demandsof Solvency II will create an even greaterproliferation of spreadsheets. Thesewill be harder to monitor and verify thanat present due to the much shorterturnaround times, heightening the riskof error, misstatement and resultingregulatory sanction and reputationaldamage.

Delivering on time, every time

The first key step is therefore to lookalong the critical path of data supply,evaluation, verification and eventualreporting sign-off to see how long eachstage will take with your currentreporting infrastructure and identify thegaps and hold-ups that will need to betackled to get down to the 25-dayquarterly and 70-day annual turnaround.The key considerations are: in whatformat is the data needed, who suppliesand validates it, what is done with it ateach stage, what is the required formatfor the output and who is the user? Theexpected reporting format for Solvency IIis the eXtensible Business ReportingLanguage (XBRL), which can either beembedded in your systems or can bebolted-on at the end of processes toconvert the data to the required format.There is evidence to suggest thatembedding XBRL could help to streamlineexisting reporting processes, as well asimprove the quality of reports.

The internal timescale will vary accordingto the complexity, organisation andinvestment in technology within thebusiness. But there are some commonsources of delay, many of which could addcrucial extra days and even weeks to theturnaround.

Readily available dataSolvency II requires a greater granularityof data for reporting than ever before(See ‘Getting down to the right level ofdetail’ section on pages 23–27). Theabsence of central data governance andthe resulting need for multiple validationsis one of the most needlessly time-consuming areas of the reporting process.

Data is often cleaned and checked at eachstage in the reporting chain. When youthink about how many sources of data arerequired to evaluate an area like thetechnical provisions and how many handsthey will go through, then the time taken

up by all this multiple validation soonstacks up. The hold-ups don’t just stemfrom the duplication, but also inpreventing different users from workingon data at the same time.

The answer is a repository of centrallygoverned, validated and ready-to-useSolvency II data (‘data mart’).Comparable central governance systemswere developed for Sarbanes-Oxley,which have not only simplified controlprocesses, but also given senior executivesgreater assurance over sign-off.

While the Pillar 3 data mart can be builtaround an existing data warehouse,Solvency II is likely to require its owndedicated staging area. Ideally, onefunction should take responsibility forcentral governance (e.g. IT or finance),but who does this will depend on thecircumstances and organisationalmake-up of your business.

Once in place, access to readily availabledata can provide the foundations fora well-coordinated and collaborativereporting infrastructure, in which eachcontributor works in sync rather than insequence to generate the necessaryevaluations and aggregations.

More robust, more detailed and morefrequent regulatory and public reportingcould place immense pressure on yourinternal processes, systems andarchitectures. Insurers who view the threePillars in a holistic manner and areintegrating their Pillar 3 reporting anddisclosure requirements into their overallfinancial and risk reporting andgovernance plans will be at a distinctadvantage.

Weighing up the systemsoptionsWith the data foundations in place, it’spossible to think about what systemswould be right for your business and howbest to deploy them. Figure 10 outlinesa typical technology architecture forSolvency II. The core components feedingPillar 3 reporting are the calculationengine (internal model or standardformula), Solvency central datarepository and finance brought togetherinto the reporting data mart. Thesecomponents need to be supported by atechnology platform providing datamanagement, workflow, managementinformation, document managementand analytics capabilities.


Figure 10: Technology architecture for Solvency II

Workflow & document management

Financialsystems

Fraudsystems

Policyadministration

Customerrelationshipmanagementsystems

Underwritingsystems

Other

Source: PwC *Mainly Pillar 1

The absence of central data governance and theresulting need for multiple validations is one ofthe most needlessly time-consuming areas ofthe reporting process.

Source data Dataintegration

Dataintegration

Data storage Reporting toolsApplications Reporting

Metadata management

Reporting datawarehouse E

xtract, transform and load tooling

Staging area

Results area

Riskmanagement*

Consolidation

Calculationengines

Oneversionot thetruth/detailsarea

Management

reporting

Disclosure

management

Financial

Investment

Risk

Other managementreporting

Solvency II

Extract, transform and load tooling

Pillar 3 reporting is the convergence of allSolvency II elements, enabling firms toprovide a consistent, accurate, complete,appropriate and timely reporting forinternal and external stakeholders. Assuch, Solvency II reporting is dependenton the entire accuracy, completeness andappropriateness of the Solvency IItechnology framework.

Software vendors have, or are developing,Pillar 3 systems. However, the best fit foryour organisation will clearly depend onyour budget and what systems you havein place already, along with the nature ofyour financial reporting demands and thesize and complexity of your business.The main choice is between dedicatedSolvency II Pillar 3 software (top-down)and building on existing capabilities(bottom-up) – see box. If your businesshas multiple reporting demands and ispart of a wider global group, the bottom-up approach is likely to be moreserviceable. If you’re a smaller orspecialist insurer, the top-down approachwould allow you to bring yourmanagement information capabilities intoline with your larger competitors, withouthaving to develop an extensive systemsinfrastructure. Whatever choice youdecide to make, it does not change or takeaway any of the principles from SolvencyII or the fact that an end-to-end processneeds to be completed.


Bottom-up: Building on existing foundationsA number of major vendors have developed bottom-up Solvency II ‘packages’,which would allow your business to capitalise on data warehouse infrastructure,while creating a dedicated workspace for Solvency II. This is especially trueif you’re using packages such as enterprise resource planning (ERP) or businessintelligence software, which include advanced reporting capabilities. Theimportant factor here is that these vendors have gone through a considerableproduct development for the last 3-5 years. The aim is to establish a Solvency IItechnology-enabling framework providing an integrated platform, which buildson existing systems and, where required, provides specific Solvency II capabilitiesacross three pillars. Some of these vendors already provide customers withmulti-GAAP management and group financial consolidation capabilities. Thelatter group of vendors will enable firms to have a robust bottom-up approachutilising financial management systems to support and facilitate a Pillar 3end-to-end process.

Top-down: Opting for point solution capabilitiesAnother set of vendors have developed point solution software for automatingPillar 3 reporting, drawing on their experience of developing dedicated softwarefor Basel II. These applications are designed to be integrated into your existing ITinfrastructure, using dedicated plug-ins for the most common data warehousesystems. Some of these vendors are also planning to offer a data warehousecomponent, together with a multi-business line data model. This is primarilyaimed at medium-size and specialist insurers, allowing them to take advantage ofa state-of-the-art reporting infrastructure, delivering regulatory spreadsheet andother business reporting needs.

Choosing the right systems: Bottom-up or top-down

Software vendors have, or are developing,Pillar 3 systems. However, the best fit for yourorganisation will clearly depend on your budgetand what systems you have in place already,along with the nature of your financial reportingdemands and the size and complexity of yourbusiness.

Although the various applications have the Pillar 3 templates in place ready to be populated, our workwith both suppliers and insurers suggests that a significant amount of adaptation and refinement willbe needed to fit the technology to your specific circumstances.

Once the technology is in place, you will need to think about how to bring people, processes, datamodels and technology into sync. Key considerations include what can be done from the beginning ofthe period-end or even prior to it, possibly in parallel with other activities, and what will need to waituntil source evaluations are ready (e.g. the solvency capital requirement will need to draw on various‘building blocks’ including the technical provisions and own funds). You can then look along thecritical path once again to check for duplication, areas that could be rationalised and how to makemore effective use of data processes, IT systems and resources.

A reporting dry run to see how the various elements knit together and identify any snags that willneed to be ironed out will help your business to prepare before the live date of Solvency II. When youcome to the dry run, it will be important to make sure the conditions are as real as possible. Thatmeans conducting it alongside current annual or period-end reporting so that the demands on keypersonnel and systems can be properly evaluated.

It is vital to develop a robust system and data architecture to facilitate core processes and deliver themore insightful risk, capital and financial management information needed to support effective

decision making.

Cutting one or even two months off your reporting cycle times is bound to be tough. There is areal danger in thinking that once you’re over the line first time, it’s going to get easier. Relyingon bringing in people or redeploying those that you already have is going to be unsustainablycostly, disruptive and distracting.

The key steps in delivering on time, every time are to identify areas that could be speeded up or run inparallel and then assess what systems will be needed to facilitate and support this faster turnaround.You can then look at how to industrialise the process by seeking to minimise manual intervention,duplication and error on the one side and assigning clear evaluation and governance responsibilitieson the other.

In order to meet the accelerated Solvency II reporting timeline, organisations should:• Continue with their Pillar 3 programme and ensure effective governance throughout the journey toSolvency II go live

• Clearly define and execute the scope of enhancements required along the critical path toimplementation

• Look at Pillar 3 as an integral part of the risk and finance roadmap from current to target statebetween now and the go live date

• Streamline and standardise (i.e. embed as business as usual) processes where possible.

For a long time, insurance financial and regulatory reporting has been a challenging and complexprocess. Companies can thus seize this opportunity to make the process as smooth and repeatableas possible.

Next steps



PwC is helping a range of insurersand reinsurers to get to grips with thepracticalities of Pillar 3 reporting anddisclosure. If you would like to knowmore about how to tackle thestrategic and implementationimplications, please call:

GlobalPaul ClarkePwC Global Insurance Regulatory Leader,PwC (UK)+44 20 7804 4469 [email protected]

Ed BarronSenior Manager, PwC (UK)+44 20 7213 [email protected]

FranceAntoine de la BreteschePartner, PwC (France)+33 15 657 [email protected]

Jimmy ZouPartner, PwC (France)+33 15 657 [email protected]

GermanyHendrik JahnPartner, PwC (Germany)+49 211 981-1537 [email protected]

Julia UnkelPartner, PwC (Germany)+49 69 9585 2667 [email protected]

Contacts

IrelandGarvan O'Neill Partner, PwC (Ireland)+353 1792 6218garvan.o'[email protected]

Paul Duffy Director, PwC (Ireland) +353 1792 [email protected]

Tony O'Riordan Director, PwC (Ireland) +353 1792 [email protected]

NetherlandsBas van de PasPartner, PwC (Netherlands)+31 88 792 69 [email protected]

Saskia Bosch van RosenthalSenior Manager, PwC (Netherlands)+31 88 792 68 [email protected]

South AfricaPieter CraffordPartner, PwC (South Africa)+27 82 855 [email protected]

SwedenAndré WallenbergPartner & Sweden FS Regulation Leader,PwC (Sweden) +46 10 212 [email protected]

Annica LundbladPartner & Sweden and Nordic FS Leader,PwC (Sweden)+46 10 213 [email protected]

UKAndy MoorePartner, PwC (UK)+44 20 7212 [email protected]

Charles GarnsworthyPartner, PwC (UK)+44 20 7804 [email protected]

James QuinPartner, PwC (UK)+44 20 7212 [email protected]

Jim BichardPartner, PwC (UK)+44 20 7804 [email protected]

We would like to thank all the contributorsfrom within the industry and within thePwC network for their contributions tothis publication. From within PwC, theseinclude Geraldine Ahern, Micael Cervin,Martin Eibl, Nick Foster, Marie-ChristineJetil, Manina Kunz, Gezim Llanaj,David Mbatha, Emir Mujkic,Ronan Mulligan, Niall Naughton,Rebecca Pratley, Christoph Schellhas,Deepa Seshadri, Mike Vickery,Stephen Walsh, Jeroen Willemstein andMara van Willigen.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PwC does do not accept or assume any liability, responsibility or dutyof care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Acronyms

EIOPA European Insurance and Occupational Pensions Authority

MCR Minimum capital requirement

ORSA Own risk and solvency assessment

QRT Quantitative reporting template

RSR Regular supervisory report

SFCR Solvency and financial condition report

SCR Solvency capital requirement

www.pwc.com/insurancePwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with more than 180,000 people who arecommitted to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

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