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CEA Response to CEIOPS’ SRP and Reporting Requirements
CEA reference: / ECO 8305 - Pillar II and III Task Force / Date: / 29 October 2008Referring to: / SRP and Reporting Requirements / Solvency II
Related CEA documents:
Contact person: / Alberto Corinti ECOFIN department / E-mail: /
Pages: / 4
1. Background
1.1 CEIOPS has published an issues paper on Supervisory Review Process (“SRP”) and reporting requirements that under Article 35 of the Framework Directive Proposal undertakings will need to regularly perform. CEIOPS has asked for comments by 12 November 2008. This paper provides the CEA’s comments
1.2 The CEA welcomes CEIOPS’ paper and the debate on a possible framework for supervisory review and reporting requirements. The CEA is keen to work with CEIOPS and the European Commission to develop Level 2 implementing measures on reporting and other Level 3 guidance, a framework to converge supervisory practices and reporting requirements. In order to fulfil this objective, CEA will start building up, right away, the details of this framework. Transparency in the way the information received by supervisors is assessed and how this information will be used is a key element to promote reliance on the supervisory activities
1.3 The views expressed in this document represent the CEA’s views at this stage of the project. As our work develops, these views may evolve. Also, these views need to be considered in the context of the CEA’s other publications, which can be found on the CEA’s website www.cea.eu.
2. Key points
Harmonization and Proportionality principles are key elements
2.1 The CEA agrees that harmonisation should not be understood as adding up national requirements. We think that the absolute quantity of information is not the key in achieving pillar II and III aims but meaningful information at appropriate level. Too much information will lead to confusion of readers and making an assessment or a comparison of the information given quite difficult
2.2 The CEA agrees that additional guidance is needed on the requirements for groups. In groups, risk management, internal control and other key functions are typically carried out at group level. It is therefore important to take into account this reality when developing the reporting requirements for groups. The implications of a single function covering multiple entities should be considered and in particular when the organizational structure of the undertaking is different than the legal one
On Supervisory Review Process and Information analysis
2.3 Supervisory disclosure helps enhancing the effectiveness of supervision and fostering a level playing field. The CEA supports the convergence of practices and consistent implementation of EU legislation. As stated in the CEA response to CP17, the application of capital add-ons should be harmonised. With this objective, supervisors should disclose the extent and duration of capital add-ons in the different jurisdictions and conduct a peer review
2.4 Paragraph 4.11 states that supervisors should perform a preliminary assessment of the risk profile of the undertaking and a follow-up assessment to define the risk profile of the company. In addition to this, supervisors should conduct a final assessment that should be communicated and discussed to the undertaking and should also be reviewed and updated when appropriate. When reviewing the risk strategy the supervisor should not make judgements related to the business strategy.
The CEA believes that supervisors should always state the reasons for asking for additional information outside the scope of the normal procedures (SFCR, RTS.) for information requirements. Supervisors should explain additional demands for information that goes beyond the "standard" requirements.
2.5 The statement made in paragraph 3.4 that the SRP is not envisaged to require the same actions for all undertakings given their size, should not imply a new definition of the proportionality principle. The proportionality principle should be linked to the nature, scale and complexity of risks
2.6 Paragraph 4.33 of CEIOPS paper states that on-site inspections cannot be done on a random basis but needs specific criteria to be fulfilled beforehand. More clarification is needed if there will be purely risk based supervision or will supervisors also randomly select low risk undertakings for a more thorough SRP
Reduction of burden for Companies
2.7 The Commission has put administrative costs on the agenda by issuing "Action Programme for Reducing Administrative Burdens in the European Union" (COM (2007)23). According to this programme the administrative burdens due to "Information Obligations" should be reduced by 25% by 2012. This reduction target includes all existing regulation in the EU and does not include measures to reduce information obligations in future legislation. But the issue is on the agenda and is of special relevance to Pillar III of the Solvency II regime
2.8 Costs imposed by information obligations should be measured and unnecessary requirements should be suppressed if considered as not necessary: No reporting should be required if the information is not going to be analysed by the supervisors. Supervisors use and purpose of reporting should be disclosed to the reporting companies
2.9 Some of the information detailed as part of the reporting requirement can be available in on-site inspections and should not be reported (this applies to information not included in the public disclosure).This information could be handled in internal policy documents or in Board minutes. Regarding the frequency of reporting, a distinction should be made between regular reporting and reporting in specific circumstances. Narrative information should follow the same reporting frequency.
2.10 When developing Pillar II and III, for both public and private disclosures, particular attention should be paid to other reporting requirements in place, in order to minimize duplication of information. In addition, public disclosure requirements shouldn’t go beyond what is stated in the legislation.
2.11 According to Article 44 the insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own risk and solvency assessment (ORSA) as part of the information reported under Article 35. Information already reported to the supervisors through the ORSA process should not be required again as part of its reporting requirements
Early Warning indicators to identify undertakings’ deteriorating financial conditions
2.12 The use of early warning indicators could be a cost efficient and proactive monitoring tool for supervisors to sort out undertakings with a deteriorating financial position or an increased risk profile. It is however important that the nature of used early warning indicators is disclosed by supervisors and that there is a level of harmonization across Europe. Early warning indicators should be used as a means to achieve risk based supervision, and as such be a trigger for reporting by exception.
2.13 We agree that early warning indicators should not function as new solvency control levels. The suggested list of indicators may not measure the deteriorating financial and solvency position of the undertaking due to some factors such as the short term volatility captured by these indicators and trends already captured in business plans etc
2.14 The need for early warning indicators should be proportionate to the risk of breaching the SCR.
Clear distinction should be made between public and private disclosure
2.15 The different objectives for supervisory reporting and public disclosure implies that there needs to be a clear distinction between the information needed by supervisors to fulfil their job and what is needed to be publicly disclosed. Public information should be addressed to market participants comprising the financial conditions. Information sent individually to policyholders is not an issue of pillar III and should not be mixed up with it.
2.16 Defining a framework of principles is essential to define what be public and what be private disclosure before the full requirements (like in annex 1) have been established. In this regard the CEA believes that public disclosure should remain principle-based. In addition to the principles defined in article 35 and articles 50 to 55 of the Framework Directive, it is necessary to include the principle of materiality. Information would be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions. This definition is consistent with International Accounting Standards and with many national accounting frameworks
2.17 Flexibility is needed to ensure that the proportionality principle will apply to the Supervisory Review Process and to the Reporting Requirements. The information to be reported and disclosed should reflect the nature, scale and complexity of the risks of the undertaking. Flexibility is also needed when dealing with confidentiality issues. The confidentiality principle should prevail over the need of public disclosure. To this end article 52 of the Framework Directive recognised the possibility of not disclosing information under some circumstances. A company should not disclose information on business conditions or business situations if it is of vital economic importance for the company that the information is not disclosed.
2.18 It is worth mentioning that the Framework Directive (Art. 50 (2) allows for a member state option in reporting (Though the proposal requires all undertakings to publicly disclose annually a report on their solvency and financial condition an exception is possible for individual capital add-ons for a transitional period (not exceeding five years). A transition period helps to avoid distortions by a non harmonised application of capital add-ons in different countries and justifies therefore a perhaps non-harmonised reporting across Europe in this special case
2.19 The CEA believes that the benchmark for setting qualitative and quantitative disclosure requirements should be based on minimum requirements and not in best practice considerations. In this regard, minimum requirements on information, both qualitative and quantitative, to be publicly disclosed should be developed. Annex 1 in CEIOPS paper is a good attempt to start a discussion on the content of a reporting template, but should be reworked carefully. The CEA is keen to have a further discussion on the information that should be publicly and privately disclosed.