SFCR, or the Solvency and Financial Condition Report, is the final part of the Solvency II: the public reporting of information.
The publication of these reports, and their accompanying public Quantitative Reporting Templates (QRTs), is a big issue for companies. In particular, companies have to decide what they are going to include, within the reporting guidelines. But the thinking time is now almost over. The majority of SFCRs will be published from May this year, and some firms have to publish even earlier. A few have already published their first SFCRs.
The difficulty is that the regulations and guidance leave most of the decisions about what to disclose with the firm itself. The regulation sets out the structure and headings required in the report. But, individual firms have to decide what to include, taking account of their own situation, and the likely audience. While policyholders will obviously be interested, many firms are keenly aware that their competitors will be ready to pounce on anything interesting.
Publishing mandatory information is easy; it is always harder to decide what you should (and should not) disclose for yourself:
- What if you publish too much? You will be giving away information that could affect your operations, and others may take advantage.
- Almost worse, what if you hardly provide any information, and everyone else has disclosed more? You will start to look like you have something to hide. Even if you don’t, the media attention and the reputational damage could be a real problem.
No wonder that firms have been struggling to make decisions. It is clear that what is disclosed, and how, will provide real insights to commentators, analysts and other insurers.
The problem areas
The introduction and executive summary are unlikely to be a major problem. They are required to be understandable by policyholders, which means that they need to be in reasonably plain language, and set out the situation in an accessible manner.
Information about governance should also be fairly straightforward, but the devil may be in the detail. The regulation sets out what should be covered, including the governance structure and lines of accountability. So far, so anodyne. But the report also needs to explain how the elements of the governance structure are able to work: companies have to show where the ‘teeth’ are in the system. What if your system is not like other companies? What if it only works for your company, and would not translate anywhere else? Do you confront potential criticisms head-on, or wait for them to be expressed?
Another challenge is the ‘Any Other Information’ option. The reporting structure allows companies to choose to include ‘any other information’ in any of the five parts of the report. But what should be included? What will others choose to include? Commentators are already rubbing their hands in glee at the insights into the company’s concerns that may be obtained from a quick read of these sections. It seems unlikely that saying nothing will be considered acceptable.
Analysts expect to be able to use the information from these SFCR reports to review trends and changes over time. The idea is that they will reveal market thinking and concerns across different countries and regions, as well as the impact of local and global events.
Those reports that have been published so far show that companies are taking the reporting requirements very seriously. Far from being the tick-box exercise that some had feared, the disclosures to date have included a wide range of information. Companies are using them to highlight and identify particular features and elements of their business. This makes them a key tool to gain market share, and highlight unique positions and skills. These reports, are, in fact, almost marketing brochures for the companies concerned.
What is perhaps more interesting is that these reports may be vital in maintaining transparency in financial services. The financial crisis seems a long time ago, and the pendulum has swung back towards deregulation. The SFCR reports could serve to remind policy-makers, commentators and even the wider public why public disclosure is important, even if companies are able to make their own choices about what to disclose.
Public reporting does matter, because it tells us about how the company wishes to be seen by its policyholders and its competitors. What is disclosed, as well as what is kept hidden, and the differences between companies, tell us a lot about the health and approach of both individual companies and the industry itself.
But there’s one more consideration; an important one at that. Even when you have developed a view on your disclosure scope, how aligned are your implementation resources? The temptation to fulfill the pure quantitative requirements first by generating all the required QRTs means many teams do not leave enough time to review and analyse feasible disclosure. The path to effectiveness includes a review of risk management infrastructure, aiming at a higher grade of automation for what can be automated, giving teams the time for the decisions that also matter.