Solvency II narrative reporting: The Story of Goldilocks and the Fire Drill
30 November 2016
By Andy Moore
I have always fancied myself as something of a writer (not necessarily with any agreement from others) but if you were expecting a children’s story based on the title, I’m afraid that I have misled you.
I have written about Pillar 3 a number of times. It often feels to me like the forgotten Pillar of Solvency II – or certainly the poor relation when it comes to the amount of time and money companies have allocated to it to date. Every year, I have declared “this is the year when companies will have to start taking it seriously” and each year been proved wrong. It has always been too distant, too far into the future and there have always been more important things to focus on.
Until now, that is. I have been in so many meetings, committees and board sessions recently where management and finance teams have come the stark realisation of how the size, complexity and speed of reporting will impact them and how quickly the first external public disclosure is coming around.
First time narrative reporting
Most finance teams’ time and attention has to date been focused on quarterly reporting. As the narratives aren’t due until mid-2017, the temptation has been for companies to put this in the ‘not now, later’ tray.
As companies start to look at the detail required in the Solvency and Financial Condition Report (SFCR) and the regulatory supervisory report (RSR), they begin to realise the significance of the challenge they face. Reporting to both the public and the regulator will open up windows into their organisation that have never been opened before. The volume of public disclosure is unlike anything that companies have had to face. There really is a huge amount of disclosure, with detailed explanations of risk exposures, their impact on performance and capital adequacy, details of models and information on systems of governance just to name a few. The disclosure is mostly new and not used for any other purpose: it therefore requires extensive preparation and quantitative justification. The disclosures drill down much further than anything firms have had before, including cutting information in new ways.
This is where Goldilocks comes in – how do companies come up with a balance which is just right– not too much, not too little? Complying with the regulations and guidelines, but not disclosing more than is required. How can companies understand the level of information they need to disclose to policyholders to remain - meaningful and insightful without being too detailed.
The timing compounds the challenge. Most CFOs tell me that with the current transitional relief on submissions, quarterly reporting has been more straightforward than they expected. The first narrative disclosures will however be sandwiched into a crunch few weeks that also include the first quarterly submission of 2017 and follow swiftly on from a busy annual reporting seasons. Some companies are even thinking about finalising their reporting before the end of March.
A big risk is that in the rush to get all the information out, something will slip through that paints your business in a poor light and leads either regulators or analysts to question your strategy and performance. This is dangerous at any time, but amidst all the market turbulence, the potential dent on the credibility and share values of the enterprise could be magnified.
Taking the fire drill seriously
So how can you get on the right track?
1. A near as possible to live dry run is vital. There may be a temptation to make this a token exercise, without real numbers or board input. But this would be akin to a fire drill that gives no indication of the exits, assembly point or fire marshals. A proper dry run would include real numbers, prepared within real time constraints. Boards would also be on hand to review the disclosures, judge what they say about the business and identify any weaknesses or vulnerabilities that analysts may hone in on.
2. Make it clear. This includes signposting to guide the readers through the complex and extensive disclosures. To assist corporate readers such as analysts, it may be important to explain why some of the information might deviate from financial reporting data.
3. The right people having enough time to review. There will be a number of interested parties – Executive and Non-executive directors, Investor Relations, Compliance, Parent and Group companies. It is important that all of these parties have time to read and understand the disclosures. It will be important to be able to demonstrate compliance as well as producing disclosure which is consistent, accurate and useful to readers.
There is a short window of opportunity for companies to get this right before the year end – the time for action is now.