SFCR audit no longer required for small insurers
Following CP8/18 “Solvency II: external audit of the public disclosure requirement”, in which the PRA proposed removing the external audit requirement for the SFCRs of certain small Solvency II firms and groups, the PRA has published PS25/18. The final rules largely follow those proposed in CP8/18, but with the introduction of a two year smoothing mechanism. The rules will apply from 15 November 2018 and therefore will apply to SFCRs published in respect of 2018 for firms with year ends after 15 November.
The PRA has not changed how it defines who the proposals will apply to, so the threshold will be defined by the result of a calculation based on gross written premiums and best estimate liabilities, although it has clarified that the calculation should use figures converted from reporting currency to sterling and made a minor change to the definition of gross written premium for life insurance to ensure it is consistent. The metric means that firms with gross written premiums of less than £100m and best estimate liabilities of less than £1bn are likely to be classified as small insurers and therefore not require an audit of their SFCR.
The PRA originally proposed that firms would determine whether they were small insurers and therefore exempt from the audit requirement for a financial year was based on data as at the end of a financial year. This has been amended to reduce volatility and now a firm will need to have its SFCR audited only if it is above the threshold for two consecutive years, and will not require an audit if it remains a small insurer for two consecutive years. The initial assessment after the introduction will however be based on one year. We welcome this change as firms will be more able to predict whether their SFCR will require an audit and is likely to be more efficient and less disruptive, particularly for firms with temporary increases in premiums or liabilities.
The PRA also proposes amendments to SS11/16 to reflect the changed requirements for small insurers and the continuing applicability of parts of SS11/16 to small insurers despite their exemption from the SFCR audit requirement, in addition to some minor changes to aid clarification.
The PRA does not propose to set out further expectations or details of ongoing monitoring for those firms whose SFCRs will not be audited.
The proposal will certainly reduce the scope and cost of the audits. However, the size of the reduction will depend on the views of the board and auditors on whether the Solvency Capital Requirement still needs to be audited, in order to be reflected in the accounts via the capital statement and the need to consider whether the insurer is a going concern. This will also depend on whether the liabilities in the accounts explicitly include the risk margin, which is based on the SCR. There does not yet seem to be a consistent view across auditors and boards.