Regulatory reporting and disclosure for insurers

The PRA is reviewing the regulatory reporting it receives from UK insurers. It finds itself in the second phase of a multi-stage process that began in July 2021 and will continue over the course of 2023. The PRA estimated that the first phase resulted in a 15-40% reduction in the regulatory reporting burden. While insurers will welcome further reductions in the reporting frequency of many quantitative reporting templates (QRTs) as part of this current phase, regulatory reporting teams will also need to reconfigure their reporting systems and source new data to meet new requirements. There is also a re-think of what insures disclose publicly.

In this latest article in the KPMG Solvency UK — What will change? series, we look at upcoming changes in supervisory reporting obligations, how this compares with developments in the EU, and the PRA's increasing focus on public disclosure.

Previous articles in the Solvency UK series cover changes to the fundamental spread, operational implications and capital optimisation. This mini-series now takes a pause while attention shifts to the PRA consultation on Solvency II in June.

Regulatory reporting increased significantly for insurers following the introduction of Solvency II. While the policymakers achieved a harmonised and comparable reporting package across all European insurers, they also created a heavy reporting burden by accommodating many of the proposals put forward by each of the supervisory authorities across the EU. Following Brexit, the UK no longer needs to align to the EU with its reporting, but instead it can tailor its requirements to the PRA's supervisory approach.

In 2022, in a speech at the ABI annual dinner, the then Economic Secretary to the Treasury, John Glen signposted “a major cut in the EU-derived regulations which make up the current reporting and administrative burden”. Sam Woods agreed — in an October 2022 Mansion House speech where he described the reporting rules as "ripe for simplification".

The PRA has adopted a multi-stage approach to its review of supervisory reporting:

• Phase 1: Policy Statement 29/21 deleted some templates and extended the quarterly reporting waiver to Category 3 firms.  The changes came into effect on 31 December 2021
• Phase 2: CP14/22 Review of Solvency II: Reporting (Phase 2) consultation proposes a suite of further reporting changes, including deletions, migrations/mergers and new requirements.  The PRA proposes that these changes will take effect for annual and quarterly reporting dates falling on and after 31 December 2024

The PRA will consult later this year on further changes to reporting requirements that result from other aspects of Solvency II reform. We suspect that this might be included in the June and September consultations this year. The final policy statement, covering all reporting changes, is expected later this year.

The PRA is also looking to review the narrative reporting requirements — the Solvency and Financial Condition Report (SFCR) and the Regular Supervisory Report) — but is not specific on timing and scope.

The final rules and templates will be consolidated in the PRA Rulebook, which would improve usability. This should complete the reporting change agenda for the foreseeable future — the PRA has signalled there will be "a period of implementation and embedding" before any future reporting reviews.

There are improvements for smaller firms, but not a material — if any — overall reduction in the reporting burden for larger insurers. While insurers will report some QRTs less frequently (or not at all), the PRA proposes to modify other QRTs and to introduce new ones. For example, a significant number of data items from deleted QRTs have migrated onto other QRTs or National Specific Templates (NSTs).¹ Even small or housekeeping changes to templates can have material IT and systems impacts, and insurers will face one-off implementation costs and some ongoing compliance costs to embed these changes.

The new proposed requirements include templates for cyber underwriting risk, excess capital generation for firms writing more than £1bn in non-unit linked life contracts and a new template on non-life obligations. The PRA is also looking to introduce new reporting on debts, disputes and write-offs in relation to outwards non-life reinsurance. 

While the EU Solvency II review is waiting for the European Parliament to form a shared position on the generosity of the overall capital relief and the treatment of sustainable assets, EIOPA is continuing to update its reporting taxonomy.

The timeline below illustrates the increasing divergence in UK and EU taxonomies over time. For year-end 2022, UK insurers continued to use EIOPA Taxonomy 2.6, while the EU moved to 2.7, although the differences have been minor. The gap will widen as EU insurers adopt Taxonomy 2.8 for year-end 2023, and further still the year after as the UK implements the changes from the Solvency UK review. The exact nature and scale of the upcoming divergence remain to be seen.

Diverging UK and EEA reporting requirements will be an operational challenge for groups with subsidiaries in both markets, who will need to have systems in place to track and report on two different bases. UK insurers thus find themselves in a curious position of not having a truly substantial overhaul of inherited EU requirements while bearing the costs of non-aligned standards.

Charlotte Gerken (PRA Executive Director for Insurance Supervision), signalled in a speech on 27 April 2023 that the PRA is moving towards greater public disclosure for insurers which would help to act as a `sign of a market working efficiently'. 

The PRA's focus is on the disclosure of Matching Adjustment (MA) attestations. The recently concluded Subject Expert Group (SEG) on Matching Adjustment attestation considered possible disclosures of key elements of the attestation to improve market discipline and comparability across firms' approaches. A “minimal” disclosure would reference in the firm's SFCR that an attestation took place.

The PRA is now convening further SEGs to discuss the detailed principles for a stress testing regime that would allow the publication of firm-level results for life firms. The PRA also wants to assess what would be most useful from a user perspective, including to support pension trustees' decision-making in light of the anticipated increase in Bulk Purchase Annuity (BPA) deals. While it is not clear how wide-ranging this revamp will be, Gerken's remarks are broad enough to leave ample room for change in what insurers disclose publicly.

It will be interesting to see how the PRA's approach tracks against the EU. EIOPA is proposing splitting the disclosure into two parts — a detailed report for analysts, rating agencies and investors, and a concise document for policyholders.  A two-pager would certainly be more digestible than the SFCR, also ostensibly aimed at policyholders but often running to around 100+ fairly technical pages. SFCR reports also currently vary widely in terms of content (e.g., whether they contain a breakdown by lines of business) and accessibility — this could be another target area for clearer regulatory expectations.

The good or bad news — depending on how you look at it — is that reporting practitioners are likely to be in as much demand as ever following the current round of Solvency reporting and disclosure changes. During 2023, the suite of Solvency UK reporting changes will be finalised, followed by a sprint to implement the required system changes in time for 31 December 2024. Over the short to medium term, managing two sets of diverging reporting taxonomies will require a recalibration to processes, systems and the flow of information.

Firms will also need to get ready for greater transparency and public disclosure. Insurers have long protested against the disclosure of individual firm stress testing results but will now have to work through how to approach attempting to manage the responses of key stakeholders and the investment community.  

Potential disclosure of the Matching Adjustment attestations brings into question whether and how the attestations come under the scope of audit. Depending on how the attestation is designed, this would be another level of complexity given the difficulties in attesting to the liquidity premium. 

This brings to a pause the KPMG Solvency UK — What will change? series. Attention now turns to the PRA's consultations, which will, for the first time, set out the detailed proposed implementation of the Solvency framework under which UK insurers will operate.

KPMG professionals have a wealth of experience in regulatory change, capital optimisation and regulatory reporting support. If you want to discuss your preparations for the UK Solvency II review, please reach out to your KPMG contact.