For most companies with a 31 December year-end, the first annual reporting deadline under Solvency II is on 20 May 2017. In preparation for this I think it's interesting to look at some of the first examples of published Solvency and Financial Condition Reports (SFCRs).
What does an SFCR really look like?
To date, a number of companies with year-ends before 31 December have published their reports and I have included links below:
| Company | Link | Country | Reporting Date |
| Evolution Insurance Company Ltd | Link | Gibraltar | 30/06/2016 |
| Vitality Life Ltd | Link | UK | 30/06/2016 |
| The Wren Insurance Association Ltd | Link | UK | 30/06/2016 |
| Care Insurance Co | Link | Gibraltar | 30/06/2016 |
| Cornish Mutual Assurance Co Ltd | Link | UK | 30/06/2016 |
| Euroguard Insurance Co PCC Ltd | Link | Gibraltar | 30/06/2016 |
| Hansard Europe dac | Link | Ireland | 30/06/2016 |
| International Diving Assurance Ltd | Link | Malta | 30/06/2016 |
| Municipal Mutual Insurance Ltd | Link | UK | 30/06/2016 |
While clearly a small sample, there is a variety of company types, lines of business, and territories represented in the selection above. In addition to the Solvency II requirements themselves, looking at what others have published can provide a useful reference point as you prepare your own SFCR report. As a health warning, it should be noted that these SFCRs represent approaches taken by some individual companies and can't yet be taken as established market practice. We also have no feedback yet on the expectations and views of the various European supervisors.
Differences in approach
While the Solvency II requirements are generally clear on what should be included in the SFCR, as always there is scope for different interpretations. Furthermore, it is a general principle that the SFCR should be proportionate to the nature, scale, and complexity of the undertaking. It is therefore reasonable to expect variations in the length and level of detail in these reports. It is worth remembering that the SFCR is a public document for policyholders and other key stakeholders.
How long is a piece of string?
Looking at the nine publicly available SFCRs mentioned above, there is a wide variation in length, with the shortest report coming in at 24 pages, while the longest is 73 pages.
The longest section on average is the System of Governance chapter (B), while the shortest section is on Capital Management (E).
| Number of pages | Average | Min | Max |
| A. Business and Performance | 4.1 | 1.5 | 7.0 |
| B. System of Governance | 8.9 | 3.0 | 17.0 |
| C. Risk Profile | 5.4 | 1.5 | 10.0 |
| D. Valuation for Solvency Purposes | 4.9 | 2.0 | 10.0 |
| E. Capital Management | 3.0 | 1.0 | 5.5 |
| Appendix: Public QRTs | 19.1 | 5.0 | 39.5 |
| Total | 45.3 | 24.0 | 73.0 |
Layout
Generally, the SFCRs follow the order of required contents set out in the Level 2 Delegated Regulations Article 292 to 297, and the corresponding Level 3 Guidelines (with Chapters A to E, and subsections A1, A2, and so on). I think this is a sensible structure as it is easy for the reader to follow and ensures consistency across the industry.
Where a particular reporting requirement doesn't apply to a company, most SFCRs still include the section and give a reason why it is not applicable. In cases where firms simply skip the section, it becomes difficult for the reader to determine whether it is not relevant or whether they didn't complete it for another reason.
You are required to disclose your public quantitative reporting templates (QRTs) together with your SFCR. In almost all cases, the public QRTs are included as an Appendix.
Presentation
As a publicly available document, some companies have ensured their SFCRs are consistent with their brand and other policyholder documentation Vitality Life is a useful example here. On the other hand, a number of other companies have taken a more functional approach, with very little additional formatting. This choice probably depends on how likely policyholders are to access your SFCR and whether you view it as marketing material.
SFCR: A deeper look at key areas
Next I focus on a few areas of particular interest to see how companies have approached them.
Summary section
A key aspect of the SFCR is the summary. This summary should be understandable to policyholders and beneficiaries. That's the theory at least.
Generally, companies have provided a one-page summary, although some summaries stretch to several pages. Typically, there are one to two paragraphs summarising each of the five chapters that follow.
A.2 Underwriting performance
Companies are required to disclose underwriting performance by material business line and geographical area. This detail seems to correspond well to the public QRTs S.05.01.02 and S.05.02.02. Therefore, one sensible option is to ensure the underwriting performance disclosed in this section is consistent with these templates.
Looking at the SFCRs published so far, there is a wide range of interpretations around the contents of this section. While many provide the level of detail I've described above, some provide only premiums and others provide no figures at all.
B.1 General information on system of governance
Roles and responsibilities
In this section, you are required to describe the main roles and responsibilities of the administrative, management, or supervisory body (AMSB), usually the board of directors and its various committees. For most SFCRs, this section extends to several pages, including lists of responsibilities of each committee. This is one reason why the System of Governance section is the longest for most companies.
While listing the responsibilities of each committee certainly meets the requirements, I think there may be scope for companies to cut down on detail in this section and highlight the key responsibilities of each committee.
Remuneration
As clients draft their SFCRs, one of their most common questions is what to disclose on remuneration. You are required to cover the principles of the remuneration policy, including:
Fixed or variable proportions
Performance criteria for share options and variable remuneration
In all cases, companies have taken a high-level approach to this section and do not disclose remuneration amounts or entitlements of individuals. It is interesting to note that, unlike these SFCRs, Financial Statements of companies do include individual details.
B.8 Assessment of governance
One of the more ambiguous reporting requirements in the SFCR is the need to assess the adequacy of the system of governance to the nature, scale, and complexity of the risks inherent in the business. I was interested to see how firms have dealt with this requirement.
A common approach here is to point to the regular board reviews of the corporate governance structure of the business (i.e., annually). In some cases, firms also point to the internal and external audit processes as an extra safeguard.
C Risk profile
Overall level of detail
The risk profile section tends to be one of the longer sections of the SFCR. Typically, companies are including one to two pages per risk type. For each risk type, the SFCR should describe the risk exposure, risk concentration, risk mitigation, and risk sensitivity. Given the number of items to be reported on each risk type, it is difficult to meet the requirements with less content than this.
Mitigation techniques
For each risk category you are required to describe the method for mitigating risk, and monitoring effectiveness of this.
Companies have generally interpreted risk mitigation in a broad sense here and have included many different techniques, including:
- Investment strategy
- Hedging
- Counterparty limits
- Reinsurance
- Underwriting
- Geographic diversification
- Risk reporting
And lots, lots more
Risk sensitivities
For each risk category, you are also required to include a description of the assumptions, methodology, and result of stress-testing and sensitivity analysis for each material risk.
There are several SFCRs where I don't think this requirement has been addressed, perhaps for reasons of proportionality. In these cases, there is either no mention of the risk sensitivities or the document refers to Own Risk and Solvency Assessment (ORSA) scenarios. However, the ORSA document is not publicly available. Given the requirement, I was surprised not to see a little more detail here.
D. Valuation for solvency purposes
Balance sheet
While Section D addresses assets, technical provisions, and other liabilities separately, it is helpful to include an overall balance sheet table at the start of this section, as it provides the reader with a helpful overview.
Several of the published SFCRs did include a balance sheet at the start of the section, although it should be noted that this is not a requirement. The balance sheet template S.02.01.02 is included in the appendix of the SFCR.
D.2 Technical provisions uncertainty
One item that should be included in section D2 is a description of the level of uncertainty associated with the technical provisions. This section tends to be brief among the current sample of SFCRs, i.e., one paragraph listing the most sensitive assumptions or factors for the technical provision calculation.
Of the sample of SFCRs reviewed, firms have generally not included figures quantifying the sensitivity of technical provisions to specific variations in assumptions or inputs.
E.1 Own funds
This section should include information on the objectives, policies, and processes for managing own funds. This is an area where a wide range of approaches has been taken.
Typically, firms are including a few paragraphs on their capital objectives here. In some cases, firms have specified an internal target or minimum solvency coverage ratio on the Solvency Capital Requirement (SCR).
E.4. Difference between standard formula and internal model
Internal model firms will be interested to see how their peers have addressed this section. Having trawled through the available SFCRs, I haven't found an internal model company SFCR to date. So we'll have to wait a little longer to see the level of detail disclosed by internal model companies here.
D.5 Noncompliance with SCR/MCR
This section only applies to firms who are not complying with either the SCR or Minimum Capital Requirement (MCR) at year-end. If your firm falls into this category and you're looking to see what others have done on this question, Evolution Life's SFCR provides an example. In its case, it is currently using transitional arrangements and working with the supervisor to ensure it is compliant within two years.
Finally, it should be noted that these approaches have been taken by some individual companies and can't yet be assumed to represent established market practice. We also have no feedback yet on the expectations and views of the various European supervisors.