General Insurance Article - Audit requirements for Solvency II firms

The PRA has recently published PS24/16, its policy statement on the external audit requirements for Solvency II firms. This follows two consultation papers, CP43/15 and CP23/16 which set out the PRA’s proposals. This article summarises the new Rules and explains what firms need to do as a result.

 By David Lechmere Head of ActuarialI at OAC
 Interestingly there is no actual requirement within the Solvency II Directive for an external audit opinion of the calculations or the reporting. It is the European Insurance and Occupational Pensions Authority (EIOPA) which has come out in favour of external audit, although it has no authority to impose such a requirement.
 Having said that there is a long tradition of UK statutory returns being subject to audit and so this is not something completely new. The proposed focus of the audit is the Solvency and Financial Condition Report (SFCR). This is because it is a publicly available document and is likely to be scrutinised, at least by analysts, for information about the firm.
 The new Rules
 The PRA’s Rules require the Valuation for Solvency Purposes and the Capital Management sections of the SFCR to be within the audit scope. Where a Group SFCR is produced, the same sections would also be within scope. The audit scope will include the following quantitative templates:
  1.   Balance Sheet.
  3.   The calculation of technical provisions.
  5.   The impact of long-term guarantees and transitional measures.
  7.   Own funds.
  9.   The calculation of the Solvency Capital Requirement (but only for Standard Formula Firms).
  11.   The Minimum Capital Requirement.
  13.   Undertakings in the scope of the group (but only for groups).
 Firms which use a full or partial internal model will not be required to have the SCR calculations audited. The PRA has stated that "more risk-focused tools such as [Skilled Persons Reviews] may be more cost effective for their purposes".
 The PRA’s original Consultation Paper suggested that the new requirements could increase audit fees by up to 400%.
 The requirements themselves are contained in a short chapter of the Solvency II Rule Book (External Audit). This is backed up by a Supervisory Statement (SS11/16). Paragraph 4.3 of SS11/16 states "for firms that write life insurance business, the PRA expects that auditors, in undertaking the external audit, will obtain and pay due regard to the work of a suitably qualified actuary who is independent of the firm." This means that the role of Reviewing Actuary will still apply for firms writing long-term insurance business.
 It should be noted that, as covered in section 2 of SS11/16, the PRA expects the governing body to sign the SFCR and attach the written acknowledgement to the SFCR (acknowledging their responsibility).
 The first report to be subject to these requirements is the report for the year ending after 15 November 2016 so, for most firms, this will be the valuation performed at 31 December 2016.
 What should firms do now?
 Firms need to talk to their auditor, to ensure there is common agreement on what is in scope and out of scope of the requirements. It may be beneficial to have some work done before the year-end as some, at least, of the narrative is likely to be ready by then.
 Firms will need to have a discussion about fees because, as indicated above, these may be significantly higher. It may also be helpful for firms to find out who the auditor is planning to use as the Reviewing Actuary and establish a link with them because work on methods, assumptions and experience analysis will probably be done before the year-end and can be reviewed at that time.
 As 2017 will be the first time that the SFCR is being produced there will be significant advantage to covering as much work as possible in advance of the year-end. 

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