Majesco
The Prudential Regulation Authority has opened up a consultation for changes around Solvency II reporting requirements, and while there is a willingness for change, Adrian Mincher of Majesco says changes can’t come quick enough for UK insurers and captives
Now solvency II has been live for two years, how are captives managing?
Two years in, the biggest impact has been the level of regulatory requirements, which has increased the burden up to eight-fold.
The issue for many captives is the information needed to meet the requirements resides in multiple locations, including spreadsheets, general ledgers for overheads, fund management software for returns, third-party reports and more.
The impact has been felt particularly by the smaller captives with limited resources, compared to the larger captives with the financial resources to invest in the process.
Solvency II has required firms to take a detailed and real-time look at income, overheads and liabilities. Reinsurance has become increasingly important in terms of offsetting risk exposure and securing balance sheets when firms calculate their solvency ratio.
The matrix depends a great deal on the volatility of the risks the captive is covering, but the minimum solvency ratio for high-volume low-volatility business starts at 100 percent.
What does Solvency II’s pillar III reporting actually entail for captive insurers and what challenges are they facing around those reporting requirements?
Pillar III focuses on the areas of reporting and disclosure. All regulated firms are required to make public the details of the risks they hold, their capital adequacy, and the risk-management measures they have adopted. The aim behind the requirement is to assist the market in improving the industry’s financial discipline. In reality, it has required the production of far more detailed reports to regulators to ensure the company’s Solvency Capital Ratio (SCR) is in line with the risks on their books. In effect, it means that firms need far more instant data to satisfy these requirements and to provide evidence of how that information is obtained to create the SCR.
Have you seen captives outsource their IT processes to third-party providers?
The vast majority of captive owners outsource the management of the captive. Many of the world’s insurance brokers such as JLT, Willis, and Aon have extensive captive management practices that provide IT processes to captives.
Captive owners increasingly rely on the captive managers to provide the infrastructure and therefore, assume the regulatory reporting function. These captive managers are well aware of the requirements and what needs to be done to meet them.
Do you think the captive managers are facing the burden of Solvency II as well, is it a lot more pressure on them?
Ensuring the captive meets regulatory requirements is a fundamental part of the captive manager’s job that they assume. In many situations, captive managers support a number of captives, which entails the provision of multiple returns for each of those captives. The issue for captive managers is the sheer volume of information they are required to hold, process and accumulate for each individual captive, as well as, ensuring that information is up to date.
Challenges emerge for captives who assume long tail risks, as by their nature, the liabilities will extend for potentially decades and those liabilities need to be tracked, understood and reported on an annual basis.
Are there any talks around changes or updates to the Solvency II reporting requirements or perhaps even a Solvency III directive?
For UK captives, there does seem to be some light at the end of the tunnel when it comes to reporting requirements. The industry has lobbied long and hard to suggest that the level of reporting it is asked to deliver is far too excessive.
It appears that finally, the Prudential Regulation Authority (PRA) is taking action to remedy this issue. Solvency II was over ten years in the making. However, for the smaller insurers they have needed a sledgehammer to crack that nut. The UK’s Brexit vote has been in many ways been a godsend for the smaller insurers, including captives. It has allowed the PRA to take a long hard look at how they want the industry regulated post-Brexit.
While there is a recognition that the UK must have rigorous rules, the PRA is consulting the market with a view to looking at easing to the regulatory burden for insurance entities with liabilities under £500 million.
How long do you think it will take before those new reporting amendments will be put in place?
The PRA consultation will last until April 2018 and while there is a willingness for change, the regulators will take time to assess and consider the responses. For UK insurers and captives, the changes cannot come fast enough. I think the plan will be to have a UK regulatory regime ready to go in time for the March 2019 deadline for Brexit.
There has been a view by many in the UK insurance sector that while our regulators have sought to implement the most stringent of adherence to the Solvency II rules, some of their European counterparts have not been as dogmatic leaving the UK underwriters at a disadvantage. An issue that needs to be addressed.
