Insurers clamour for materiality guidance on Solvency II reporting

PRA claims it cannot offer advice until publication of Implementing Technical Standards

UK insurers are urging regulators to lay out clear guidance on materiality thresholds for Solvency II's regulatory reporting requirements, amid concerns that current policy will force firms to submit excessive amounts of data.

Firms want to know how much information they need to provide when reporting intragroup transactions and details of investments in funds and funds-of-funds.

They are concerned that without proper guidance on materiality, Solvency II rules as currently written would require firms to report potentially thousands of intragroup transactions, and relay a burdensome amount of data on their investments in funds, thanks to strict look-through regulations.

The calls were made in a published record of a meeting of the Prudential Regulation Authority's (PRA) Solvency II regulatory reporting industry working group. The working group includes representatives of the Lloyd's market, the Association of British Insurers, the Association of Financial Mutuals, as well as PRA officials.

Solvency II requires insurers with holdings in investment funds (categorised as ‘Assets D4' in the quantitative reporting templates) to ‘look through' the funds and report on asset category, geographical exposure and currency exposure of the underlying assets.

Tamsin Abbey, London-based insurance partner at Deloitte, says: "The requirements suggest that you need to show all of the holdings held by a fund you invest in as part of a fund-of-funds, even if it is a very small holding.

"If you've only invested say, half-a-per cent of your portfolio in a fund, you will have a very small amount invested in each individual asset. In these circumstances, you have to question the value of an insurer collecting and disclosing this information. The result could be a very long list of holdings worth not very much each," she adds.

Regulators need to address this issue urgently, says Abbey, as firms need ample warning to configure their asset reporting systems. "It's expensive to run a big system working at this level of granularity, because of longer processing times and varied data sources. It would help to have materiality thresholds set so firms can scope out some of the unnecessary detail and construct cheaper systems," she adds.

European Insurance and Occupational Pensions Authority (Eiopa) guidance from July 2012 notes that quarterly reporting of fund data is only required from undertakings that hold more than 30% of their portfolio in investment funds, but that annual reporting of all Assets D4 will be required from all insurers regardless of materiality. Eiopa says this is "essential" for better understanding of insurers' investments through investment funds.

In the absence of firm guidance on materiality thresholds for Pillar III, firms are making their own assumptions.

Financial protection insurer Unum has started to define materiality thresholds within its reporting framework. Kevin Borrett, UK chief risk officer at Unum, based in Surrey, says: "The challenge we face at the moment is there remains a lack of clarity on some requirements for regulatory reporting, plus the fact that the accounting regimes, in particular the International Financial Reporting Standards, continues to evolve.

"Therefore we are taking a softly-softly approach given the number of uncertainties that still exist".

Reporting intragroup transactions are also a concern for insurers. Solvency II asks firms to list all transfers between different entities within a group to monitor intragroup dependencies.

Without further clarity about which intragroup transactions are material, insurers cannot determine precisely which transactions need to be included – some of these transactions can be numerous and date back a long time.

"The PRA does not write these rules but companies feel it would be helpful if they had more guidance sooner rather than later, so that the rules are interpreted consistently across Europe," says Danny Clark, insurance partner at KPMG in London.

Solvency II reporting requirements are outlined in Quantitative Reporting Templates (QRTs) drawn up by Eiopa. A spokesperson for the PRA says details on materiality and look-through standards will be covered by the Implementing Technical Standards (ITS) under development by the European Commission.

The first set of ITS will be released for public consultation in April, the second set in December, and both will be published by July 2015 according to the current timetable.

The European Commission has proposed in the unofficial draft level 2 text that insurers investing in collective funds can calculate their regulatory capital on the basis of the fund's target asset allocation, if certain conditions are met. However, this simplification applies only to the Pillar I solvency capital requirement calculation, not to Pillar III reporting requirements.