What the ECB will get

32px-Flag_of_FranceEver since it became clear that the ECB would require information from insurers as part of the Solvency II reporting package the question for industry has been: what does the ECB want, and will that mean more data to collect and report?

But before delving into the details and unleashing another reporting solution to devour another chunk of the budget, firms, and their oft-overworked reporting managers, should stop. Pause … and ask themselves these two questions: will ECB reporting apply to me, and if so, who do I report to?

Only then can they begin to understand the full impact of ECB reporting on their work.

What the ECB wants

ECB add-ons Solvency II 3The ECB has been hankering after European insurers’ data for its statistical and monetary policy operations for quite some time. Given that the industry comprises about half of Europe’s institutional investors, and the screaming need for more data following the financial crisis, it was never likely insurers could slink under the ECB’s regulatory reporting radar.

Back in 2013 Henning Ahnert, the then Head of Section Monetary & Financial Statistics at the ECB, explained the industry’s importance as follows, “Technical reserves of life insurance companies constitute a substantial part of households’ financial wealth so that’s one of the reasons why they are important for monetary policy. Furthermore, by investing in securities and shares, insurance companies are an important provider of funding for other sectors of the economy, such as non-financial corporations and governments. The insurance sector is also interesting for financial stability purposes, particularly the asset side of the balance sheet, given the size of the sector as a whole.”

The introduction of Solvency II presented an opportunity to expand and formalise the ECB’s existing data collection from the insurance industry, which is currently done on a voluntary basis via national central banks. It was therefore decided to align the ECB statistical reporting requirements with the Solvency II QRTs.

The ECB began extensive discussions with EIOPA (and industry) in 2013. An important part of the work tackled the question of reconciling the different objectives of the two institutions. The ECB is responsible for statistical and monetary policy while EIOPA is a supervisory agency. Minimising duplication and reducing the reporting burden for firms was at the forefront of the discussions. “We have identified what in our reporting is not possible to be derived from those Solvency II quantitative reporting templates (QRTs),” an ECB source told Solvency II Wire. “So we have defined what we call ECB add-ons.”

The ECB add-ons are about ten items of data that range from relatively simple additional information (such as dates and prices) to asset classification, through to approaches to data collection. Their eclectic nature will require some creative thinking to add them to the Solvency II reporting templates.

“We won’t incorporate ECB add-ons in the official QRTs themselves, but they will be integrated into the data flow defined by EIOPA,” the source explained. Quite how that integration will be done is yet to be finalised.

Unofficial QRTs

ECB add-ons Solvency II 2The data which the ECB requires is defined within ECB regulation 1374/2014, which was published on 28 November 2014 and came into force on 9 January 2015. However, the regulation only defines the ECB requirements for data collection from insurance firms and as such the so-called ECB add-ons are not easily identified within the text.

“The regulation only states what the ECB requirements are. But you will not see from that how much you will get from the Solvency II reports. So you can’t really get the ECB add-ons from just reading the regulation. You would have to spend quite a bit of time to analyse the ECB’s requirements and the QRTs to see this.”

“The plan is that in the course of February … we will publish unofficial QRTs with ECB add-ons included on the ECB website. We will probably include the new items as new tables in some cases and as additional cells in the existing QRTs in others. We are working on it in liaison with EIOPA.”

An EIOPA spokesperson told Solvency II Wire that the ECB add-ons will be integrated in the DPM templates and taxonomy but it was, “too early to say how exactly it will be done”.

Will ECB reporting apply to me?

In line with the Solvency II proportionality and materiality principle, in 2012 EIOPA proposed a number of thresholds for financial stability reporting purposes that exempt smaller entities from the quarterly reporting. At the time it estimated that the thresholds would reduce the number of reporting entities by about 30%.

The thresholds are based on size (€12 billion in assets, at Solvency II balance sheet) but are superseded by market coverage (50% of national market share). If the number of firms meeting the size threshold do not make up the required 50% market share, it is up to the National Competent Authority (NCA) to decide which companies will be included in the reporting.

However, for prudential reporting purposes, the Solvency II Directive (revised after Omnibus II) states that any exemption given must still cover at least 80% of national market share for quarterly reporting and annual item-by-item reporting. It is therefore possible that firms that would have been exempt from certain financial stability reporting obligations based on the thresholds would still have to provide information for prudential purposes.

But the ECB regulation requires coverage of 95% of national market share for annual reporting. Potentially widening the scope of firms that would have to provide data for the ECB.

Speaking at an AMICE Solvency II Conference in Paris last December, Ana Teresa Moutinho, Principal Expert on Solvency II, EIOPA, said, “Annually the ECB requires coverage of 95% of the market. This goes beyond the 80% requirement of Solvency II for the minimum annual requirement of item-by-item reporting. Even if NCAs give exemption based on 80% in Omnibus II for the item-by-item reporting, the ECB can still request those undertakings to report to make up 95% of market coverage.”

An impact on non-Eurozone countries

Because of the somewhat nebulous nature of the ECB add-ons it is difficult to know exactly which insurers will fall under the scope of the market coverage requirement. For firms based outside of the Eurozone there will be further uncertainty, as the ECB regulation is non-binding in these Member States.

ECB add-ons Solvency II 1The ECB explained that while the regulation is only binding on the Eurozone countries it could be possible that non-Eurozone countries will adapt the statistical requirements as well. “For instance we now have a so-called short-term approach so that countries are already sending some available statistics for insurance corporations and some non-Eurozone countries are already sending the data as well. It is possible that some countries will align their statistical requirements to the ECB regulation,” the ECB source said.

Who do I report to?

Once an insurer establishes that it needs to report they must understand where the data is to be delivered.

An important part of EIOPA’s work on reporting has been to ensure reporting entities have a single stream of data that is reported to a single data collection entity (the NCA). To that end, EIOPA has developed the QRTs and the XBRL format. But because the ECB regulation is addressed to national central banks, not NCAs (although in many cases that may be the same body), it is up to the central bank to decide how to collect the data from insurers and deliver it to the ECB.

ECB add-ons Solvency II 6a“The ECB regulation sets out the reporting scheme to the insurance undertaking,” the ECB source explained. “And the regulation is drafted in a way that allows the national central banks to use Solvency II reports to the maximum extent if they so choose. But they may also have completely separate statistical reporting.” In these instances insurers may have to report the ECB requirements to the relevant national central bank, in addition to the supervisory reporting requirements.

“We are aware that there are some countries that may implement a purely statistical collection and will not use the Solvency II reports for statistical purposes. One reason may be that they already have statistical reporting in place and they don’t want to expand on the supervisory reporting to cover the statistical reporting. In this case there will be two channels of reporting, one to the supervisors and one to the national central bank.”

In respect of the delivery stream there is no distinction between Eurozone and non-Eurozone countries. It is possible that even in the former insurers will have dual data delivery streams.

Details of the ECB add-ons

Understanding the full impact of the ECB add-ons on the reporting workload of insurers goes beyond questions of scope and delivery streams. The nature of the information itself and how it differs from, or adds to, the Solvency II requirements is equally relevant. These should become more apparent with the publication of the “unofficial QRTs”.

What follows is a non-exhaustive list that aims to explain the type of information that will be required and some of the challenges of integrating it into the Solvency II reporting package.

Issue dates

The ECB is interested in original maturities (information about when the securities and loans were issued), which is not covered by the Solvency II reports. The issue date is needed in order to derive the original maturity of the instrument in addition to the remaining maturity, which is what the Solvency II reports focus on.

Using ESA2010 as well as NACE

Solvency II requires the use of a NACE code for asset classification, but NACE is not compatible with the statistical standards used by the ECB’s statistics collection and monitoring system, which uses the European System of Accounts 2010 (ESA2010). Insurers will have to provide the ESA2010 classification in addition to NACE for certain assets.

Information on pillar 2 pensions

The ECB will also require information about employment-related pensions (so-called pillar 2 pensions). This is further split by defined benefit, defined contribution and hybrid pensions.

However, the ECB source said that the requirement was not yet finalised and that the ECB was still in discussion with national central banks on how to deliver this information.

Home vs host approach

One area where the ECB has conceded it may not get the information it wants is in the treatment of reporting data of foreign branches.

ECB add-ons Solvency II 5Solvency II uses a so-called ‘home approach’: information about branches based abroad are consolidated and reported with the head office report. “That is not really the approach that we want to have in statistical reporting,” the ECB source said.

“We focus on the residency of the institutions, regardless of whether they are head offices, subsidiaries or branches. Nevertheless, in order to reduce the reporting burden, we accept this home approach for those countries that use Solvency II reporting.” The data will then be adapted internally to fit with the ECB’s statistical standards, the source explained.

Reporting timelines (almost) fully aligned

A further reduction in the reporting burden has been achieved by aligning the reporting timelines of the two institutions.

For those entities that have to report quarterly the timelines are identical: 8 weeks after quarter end in 2016, gradually reduced to five weeks by 2019. Annual reporting will have the same duration: 20 weeks in 2016, gradually reduced to 14 weeks by 2019. But the reference point for reporting the data is different. While Solvency II reporting begins after the undertaking’s financial year end, the ECB timeline begins after year end. In the relatively small number of cases in the Eurozone where this is relevant, the national central bank will discuss the reporting modalities with the insurance firms.

Group data and P&L on the horizon

The ECB requirements only apply to solo undertakings, but as it already indicated in 2013, it would like further information still. “The ECB is interested in having more data on the insurance sector in the future, for instance group-level data and also profit and loss accounts.”

There are more items on the list, but for now industry will have some respite as any potential amendment of the statistical requirements aren’t planned before the second half of 2016.

The amendments will also be subject to a detailed merits and costs assessment, where the user requirements are assessed and weighed against the costs of producing such new statistics. But the ECB source emphasised, “Two of the highest ranked future requirements are the group data and profit and loss.”

Integration into the reporting stream

With the publication of the recent ECB regulation we now know what the ECB wants and what elements are additional to the Solvency II reporting requirements: the so-called ECB add-ons. What we don’t yet know is quite how the ECB add-ons will be integrated into the Solvency II reporting stream and, in some cases, exactly which insurers they will impact.

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ECB add-ons Solvency II

ECB add-ons Solvency II

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