The challenges of Solvency II reporting
Recently, InsuranceERM released an article arguing that most Solvency II reporting mistakes happen in solvency ratios. The findings were based on an analysis conducted by Insurance Risk Data, which found that in 68% of cases where errors in quantitative reporting templates were discovered, the errors were surrounding solvency and minimum capital ratios.
What are the capital requirements under Solvency II?
There are two different capital requirements under the Solvency II directive. They are the solvency capital requirement and the minimum capital requirement. Both requirements, in their own way, are used to measure how much risk an insurance or reinsurance company faces.
As part of the Solvency II directive, the solvency capital requirement outlines how much capital insurance and reinsurance companies within the EU must hold. The ratio must be recalculated at least once a year and is set at a level that is designed to make sure that insurance or reinsurance companies can meet their obligations over the course of the next 12 months with a 99.5% confidence level.
Aside from the solvency capital requirement, there is the minimum capital requirement, which is set at a lower confidence level of 85%. This represents the minimum amount of capital that an insurance or reinsurance company is required to hold before intervention would be required.
Although Solvency II requirements are stringent, they help provide a level of comfort and reassurance to the vast majority of policy holders.
What impact could these reporting errors have?
While it’s never encouraging to hear that insurance and reinsurance companies are making mistakes in their reporting, the evidence of errors in the reporting of solvency ratios naturally bring some additional cause for concern. This is due to the fact that solvency ratios are a crucial part of Solvency II reporting, and they are numbers that policyholders and other stakeholders solely rely on.
However, it may also be worth noting that the latest Solvency II regulations are still new, relatively speaking, as they came into effect only in 2016. As such, it may be reasonable to expect that as companies and firms become more and more familiar with the requirements, the standards of reporting should increase.
The presence of regulators and organisations such as Insurance Risk Data and InsuranceERM should also provide a level of oversight to Solvency II reporting to hold firms accountable when reporting errors do arise. Finally, the fact that according to Insurance Risk Data, insurers commonly updated their quantitative reporting templates once the error was highlighted, offers reassurance that firms are willing to address and, where necessary, correct reporting errors.
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