The Solvency and Financial Condition Report (SFCR)

What is the Solvency and Financial Condition Report?

Solvency II, Article 35 (Information to be provided for supervisory purposes)

1. Member States shall require insurance and reinsurance undertakings to submit to the supervisory authorities the information which is necessary for the purposes of supervision.

That information shall include at least the information necessary for the following when performing the process referred to in Article 36:

(a) to assess the system of governance applied by the undertakings, the business they are pursuing, the valuation principles applied for solvency purposes, the risks faced and the risk-management systems, and their capital structure, needs and management;

(b) to make any appropriate decisions resulting from the exercise of their supervisory rights and duties.

2. Member States ensure that the supervisory authorities have the following powers:

(a) to determine the nature, the scope and the format of the information referred to in paragraph 1 which they require insurance and reinsurance undertakings to submit at the following points in time:

(i) at predefined periods;

(ii) upon occurrence of predefined events;

(iii) during enquiries regarding the situation of an insurance or reinsurance undertaking;

(b) to obtain any information regarding contracts which are held by intermediaries or regarding contracts which are entered into with third parties; and

(c) to require information from external experts, such as auditors and actuaries.

3. The information referred to in paragraphs 1 and 2 shall comprise the following:

(a) qualitative or quantitative elements, or any appropriate combination thereof;

(b) historic, current or prospective elements, or any appropriate combination thereof; and

(c) data from internal or external sources, or any appropriate combination thereof.

4. The information referred to in paragraphs 1 and 2 shall comply with the following principles:

(a) it must reflect the nature, scale and complexity of the business of the undertaking concerned, and in particular the risks inherent in that business;

(b) it must be accessible, complete in all material respects, comparable and consistent over time; and

(c) it must be relevant, reliable and comprehensible.

5. Member States require insurance and reinsurance undertakings to have appropriate systems and structures in place to fulfil the requirements laid down in paragraphs 1 to 4 as well as a written policy, approved by the administrative, management or supervisory body of the insurance or reinsurance undertaking, ensuring the ongoing appropriateness of the information submitted.

6. The Commission shall adopt implementing measures specifying the information referred to in paragraphs 1 to 4, with a view to ensuring to the appropriate extent convergence of supervisory reporting.

Those measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 301(3).

Solvency and Financial Condition Report
Guideline 1 - Business

 Under section “Business” (A.1) of Annex XX of the Implementing Measures, insurance and reinsurance undertakings should disclose at least the following information regarding their business:

a) The name and location of the legal or the natural persons that are direct and indirect holders of qualifying holdings in the undertaking (including the immediate and ultimate parent entity or natural person), the proportion of ownership interest held and, if different, the proportion of voting rights held;

b) A list of material related undertakings including the name, legal form, country, proportion of ownership interest and, if different, proportion of voting power held;

c) A simplified organisational structure chart.

Guideline 2 - Governance Structure

 Under section “General information on the system of governance” (B.1) of Annex XX of the Implementing Measures, insurance and reinsurance undertakings should disclose at least the information explaining how risk management, internal audit, compliance and actuarial functions are integrated into the organisational structure and the decision making processes of the undertaking.

 This information should include an explanation of how the functions have the necessary authority, resources, professional qualifications, knowledge, experience and operational independence to carry out their tasks and how they report to and advise the administrative, management or supervisory body of the insurance and reinsurance undertaking (hereinafter “AMSB”).

Guideline 3 - Risk management system

 Under section “Risk management system including the own risk and solvency assessment” (B.3) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should, when explaining how the risk management function is integrated in their organisational structure and in the decisionmaking process and when using a partial or a full internal model approved in accordance with Articles 112 and 113 of Solvency II to calculate the Solvency Capital Requirement, disclose at least information addressing the governance of the internal model, including:

a) Responsible persons and specific committees if any, their main roles, position and scope of responsibilities;

b) The way existing committees interact with the AMSB in order for the latter to meet Article 116 of Solvency II;

c) Material changes to the internal model governance during the reporting period;

d) A description of the validation process of the internal model to monitor its performance and its on-going appropriateness.

Guideline 4 - Underwriting risk

 Under section “Underwriting risk” (C.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should, in relation to the use of special purpose vehicles, disclose at least information on whether the special purpose vehicle is authorized under Article 211 of Solvency II, what risks are transferred to it and how the fully funded principle is assessed on an ongoing basis.

Guideline 5 – Assets – Information on aggregation by class

 Under section “Assets” (D.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should, when aggregating assets into classes, in order to describe the valuation basis that has been applied to them, aggregate assets into classes based on the nature, function, risk and materiality for solvency purposes of the assets.

 Classes other than those used in the Solvency II balance sheet template should only be used if the undertaking can demonstrate to the supervisory authority that another presentation is clearer and more relevant.

Guideline 6 – Content by material classes of assets and liabilities other than technical provisions

 Under section “Assets” (D.1) of Annex XX of the Implementing Measures, insurance and reinsurance undertakings should, in relation to each material class of asset and liability other than technical provisions, disclose at least quantitative and qualitative information on:

a) Recognition and valuation basis applied, including methods and inputs used;

b) Any changes made to the recognition and valuation bases used or on estimations during the period;

c) Assumptions and judgments including those about the future and other major sources of estimation uncertainty.

Guideline 7 – Valuation of material intangible assets

1.21. Under section “Assets” (D.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose, where they value intangible assets at an amount other than zero and the amount is material, at least the following information:

a) The nature of the assets;

b) Information on the evidence and criteria they have used to conclude that an active market exists for those assets.

Guideline 8 – Valuation of material financial assets

 Under section “Assets” (D.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose regarding material financial assets, where relevant:

a) The criteria used to assess whether markets are active;

b) If they are inactive, a description of the valuation model used;

c) Significant changes to valuation models used and to model inputs, including the impact of and reasons for the change.

Guideline 9 – Valuation of material financial and operating leases

1.23. Under section “Assets” (D.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose, separately in relation to material classes of assets subject to financial leases and operating leases, at least a general description of their leasing arrangements, separately disclosing information for financial leases and operating leases.

Guideline 10 – Valuation of material deferred taxes assets and liabilities

 Under section “Assets” (D.1) and “Other liabilities” (D.3) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose, regarding material deferred taxes assets and liabilities:

a) The origin of the recognition of deferred tax assets and liabilities;

b) The amount and expiry date if applicable, of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset and liability is recognised in the balance sheet.

Guideline 11 – Valuation of related undertakings

Under section “Assets” (D.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose, where related undertakings were not valued using quoted market prices in active markets or the adjusted equity method, an explanation why the use of these methods was not possible or practical.

Guideline 12 – Valuation of technical provisions

 Under section “Technical provisions” (D.2) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose the significant simplified methods used to calculate technical provisions, including deriving the risk margin.

Guideline 13 – Liabilities other than technical provisions – information on aggregation by class

 Under section “Other liabilities” (D.3) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should, when aggregating other liabilities than technical provisions into classes, in order to describe the valuation basis that has been applied to them, aggregate these liabilities based on their nature, function, risk and materiality for solvency purposes.

Classes other than those used in the Solvency II balance sheet template should only be used if the undertaking can demonstrate to the supervisory authority that another presentation is clearer and more relevant.

Guideline 14 – Valuation of material lease liabilities

 Under section “Other liabilities” (D.3) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose at least a general description of material liabilities arising as a result of leasing arrangements, separately disclosing information on financial and operating leases.

Guideline 15 – Valuation of material provisions other than technical provisions and contingent liabilities

 Under section “Other liabilities” (D.3) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose at least the following information regarding material contingent liabilities and provisions other than technical provisions, separately:

a) The nature of the obligation and, if known, expected timing of any outflows of economic benefits;

b) An indication of uncertainties surrounding the amount or timing of the outflows of economic benefits and how deviation risk was taken into account in the valuation.

Guideline 16 – Valuation of material employee benefits

 Under section “Other liabilities” (D.3) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose at least the following information regarding material employee benefits:

a) The nature of the obligations with employee benefits and a breakdown of the amounts by nature of obligations;

b) The nature of the defined benefit plan assets, the amount of each class of assets, the percentage of each class of assets of the total defined benefit plan assets, including reimbursement rights.

Guideline 17 - Own funds – Solvency ratio

 Under section “Own funds” (E.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose at least their solvency ratio, calculated as eligible own funds as a percentage of the Solvency Capital Requirement.

 Where undertakings disclose additional ratios, because they believe that the ratios are relevant to providing an understanding of their solvency position and are compatible with the solvency ratio, undertakings should:

a) Clearly explain in the SFCR the additional ratio;

b) Ensure that the additional ratios do not divert attention from the disclosure of the solvency ratio.

Guideline 18 - Own funds – Information on the structure, amount, quality and eligibility of own funds

 Under section “Own funds” (E.1) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should disclose at least the following information regarding their own funds:

a) in relation to the information on structure, amount and quality of own funds, the information required in Article 297 (1) of the Implementing Measures should be provided for each own fund item set out in Article 69, Article 72, Article 74, Article 76 and Article 78, as well as for items that received supervisory approval as per Article 79 of the Implementing Measures distinguishing between basic and ancillary own fund items;

b) for each own fund item, the extent to which it is available, subordinated, as well as its duration and any other features that are relevant for assessing its quality;

c) an analysis of significant changes to own funds, including the value of own fund items issued during the year, the value of instruments redeemed during the year, and the extent to which the issuance has been used to fund redemption;

d) in relation to subordinated debt, an explanation of the changes arising from movements in the risk free rate and, if relevant, from fluctuations between the currency in which the subordinated debt is issued and the reporting currency;

e) when disclosing information on the amount of own funds eligible to cover the Solvency Capital Requirement and Minimum Capital Requirement classified by tier, an explanation of any restrictions to available own funds and the impact of limits on eligible Tier 2 and Tier 3 capital, and on restricted Tier 1 capital;

f) details of the principal loss absorbency mechanism used to comply with Article 71 (1)(e) of the Implementing Measures, including the trigger point, and its effects so that all providers of own funds items are aware of the potential impact;

g) an explanation of the key elements of the reconciliation reserve;

h) for each basic own fund item subject to the transitional arrangements:

i. the tier into which each has been classified and why;

ii. the date of the next call and the regularity of any subsequent call dates, or the fact that no call dates fall until after the end of the transitional period.

i) when disclosing information on the description of each material ancillary own fund item, information on the form of arrangement and the nature of the basic own funds items it would become on being called up or satisfied, including the tier, as well as when the item was agreed by the supervisory authority and for how long.

j) where a method has been used to determine the amount of an ancillary own fund item, undertakings should disclose:

i. how the valuation provided by the method has varied over time;

ii. which inputs to the methodology have been the principal drivers for this movement;

iii. the extent to which the method takes account of past experience, including the outcome of past calls, and how the amount calculated is affected.

k) Regarding items deducted from own funds:

i. the total excess of assets over liabilities within ring-fenced funds, identifying the amount for which an adjustment is made in determining available own funds;

ii. the extent of and reasons for significant restrictions on, deductions from or encumbrances of own funds.

Guideline 19 - Differences between the standard formula and any internal models used

 Under section “Differences between the standard formula and any internal model used” (E.4) of Annex XX of the Implementing Measures insurance and reinsurance undertakings should consider, when disclosing the main differences in methodologies and underlying assumptions used in the standard formula and in the internal model, at least the following:

a) Structure of the model;

b) Aggregation methodologies and diversification effects;

c) Risks not covered by the standard formula but covered by the internal model.


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Solvency II, Article 36 (Supervisory review process)

Member states shall ensure that the supervisory authorities review and evaluate the strategies, processes and reporting procedures which are established by the insurance and reinsurance undertakings to comply with the laws, regulations and administrative provisions adopted pursuant to this Directive.

That review and evaluation shall comprise the assessment of the qualitative requirements relating to the system of governance, the assessment of the risks which the undertakings concerned face or may face and the assessment of the ability of those undertakings to assess those risks taking into account the environment in which the undertakings are operating.


Solvency II, Article 51 (Report on solvency and financial condition: contents)

1. Member States shall, taking into account the information required in paragraph 3 and the principles set out in paragraph 4 of Article 35, require insurance and reinsurance undertakings to disclose publicly, on an annual basis, a report on their solvency and financial condition.

That report shall contain the following information, either in full or by way of references to equivalent information, both in nature and scope, disclosed publicly under other legal or regulatory requirements:

(a) a description of the business and the performance of the undertaking;

(b) a description of the system of governance and an assessment of its adequacy for the risk profile of the undertaking;

(c) a description, separately for each category of risk, of the risk exposure, concentration, mitigation and sensitivity;

(d) a description, separately for assets, technical provisions, and other liabilities, of the bases and methods used for their valuation, together with an explanation of any major differences in the bases and methods used for their valuation in financial statements;

(e) a description of the capital management, including at least the following:

(i) the structure and amount of own funds, and their quality;

(ii) the amounts of the Solvency Capital Requirement and of the Minimum Capital Requirement;

(iii) the option set out in Article 304 used for the calculation of the Solvency Capital Requirement;

(iv) information allowing a proper understanding of the main differences between the underlying assumptions of the standard formula and those of any internal model used by the undertaking for the calculation of its Solvency Capital Requirement;

(v) the amount of any non-compliance with the Minimum Capital Requirement or any significant non-compliance with the Solvency Capital Requirement during the reporting period, even if subsequently resolved, with an explanation of its origin and consequences as well as any remedial measures taken.

2. The description referred to in point (e)(i) of paragraph 1 shall include an analysis of any significant changes as compared to the previous reporting period and an explanation of any major differences in relation to the value of such elements in financial statements, and a brief description of the capital transferability.

The disclosure of the Solvency Capital Requirement referred to in point (e)(ii) of paragraph 1 shall show separately the amount calculated in accordance with Chapter VI, Section 4, Subsections 2 and 3 and any capital add-on imposed in accordance with Article 37 or the impact of the specific parameters the insurance or reinsurance undertaking is required to use in accordance with Article 110, together with concise information on its justification by the supervisory authority concerned.

However, and without prejudice to any disclosure that is mandatory under any other legal or regulatory requirements, Member States may provide that, although the total Solvency Capital Requirement referred to in point(e)(ii) of paragraph 1 is disclosed, the capital add-on or the impact of the specific parameters the insurance or reinsurance undertaking is required to use in accordance with Article 110 need not be separately disclosed during a transitional period ending no later than 31 October 2017.

The disclosure of the Solvency Capital Requirement shall be accompanied, where applicable, by an indication that its final amount is still subject to supervisory assessment.


Solvency II, Article 53 (Report on solvency and financial condition: applicable principles)

1. Supervisory authorities shall permit insurance and reinsurance undertakings not to disclose information where:

(a) by disclosing such information, the competitors of the undertaking would gain significant undue advantage;

(b) there are obligations to policy holders or other counterparty relationships binding an undertaking to secrecy or confidentiality.

2. Where non-disclosure of information is permitted by the supervisory authority, undertakings shall make a statement to this effect in their report on solvency and financial condition and shall state the reasons.

3. Supervisory authorities shall permit insurance and reinsurance undertakings, to make use of – or refer to – public disclosures made under other legal or regulatory requirements, to the extent that those disclosures are equivalent to the information required under Article 51 in both their nature and scope.

4. Paragraphs 1 and 2 shall not apply to the information referred to in point (e) of Article 51(1).


Solvency II, Article 54 (Report on solvency and financial condition: updates and additional voluntary information)

1. In the event of any major development affecting significantly the relevance of the information disclosed in accordance with Articles 51 and 53, insurance and reinsurance undertakings shall disclose appropriate
information on the nature and effects of that major development.

For the purposes of the first subparagraph, at least the following shall be regarded as major developments:

(a) non-compliance with the Minimum Capital Requirement is observed and the supervisory authorities either consider that the undertaking will not be able to submit a realistic short-term finance scheme or do not obtain such a scheme within one month of the date when noncompliance was observed

(b) significant non-compliance with the Solvency Capital Requirementt is observed and the supervisory authorities do not obtain a realistic recovery plan within two months of the date when non-compliance was observed.

In regard to point (a) of the second subparagraph, the supervisory authorities shall require the undertaking concerned to disclose immediately the amount of non-compliance, together with an explanation of its origin and consequences, including any remedial measure taken.

Where, in spite of a short-term finance scheme initially considered to be realistic, non-compliance with the Minimum Capital Requirement has not been resolved three months after its observation, it shall be disclosed at the end of that period, together with an explanation of its origin and consequences, including any remedial measures taken as well as any further remedial measures planned.

In regard to point (b) of the second subparagraph, the supervisory authorities shall require the undertaking concerned to disclose immediately the amount of non-compliance, together with an explanation of its origin and consequences, including any remedial measure taken.

Where, in spite of the recovery plan initially considered to be realistic, a significant non-compliance with the Solvency Capital Requirement has not been resolved six months after its observation, it shall be disclosed at the end of that period, together with an explanation of its origin and consequences, including any remedial measures taken as well as any further remedial measures planned.

2. Insurance and reinsurance undertakings may disclose, on a voluntary basis, any information or explanation related to their solvency and financial condition which is not already required to be disclosed in accordance with Articles 51 and 53 and paragraph 1 of this Article.


Solvency II, Article 55 (Report on solvency and financial condition: policy and approval)

1. Member States shall require insurance and reinsurance undertakings to have appropriate systems and structures in place to fulfil the requirements laid down in Articles 51 and 53 and Article 54(1), as well as to have a written policy ensuring the ongoing appropriateness of any information disclosed in accordance with Articles 51, 53 and 54.

2. The solvency and financial condition report shall be subject to approval by the administrative, management or supervisory body of the insurance or reinsurance undertaking and be published only after that approval.


Solvency II, Article 56 (Solvency and financial condition report: implementing measures)

The Commission shall adopt implementing measures further specifying the information which must be disclosed and the means by which this is to be achieved.

Those measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 301(3).


Solvency II, Article 256 (Group solvency and financial condition report)

1. Member States shall require participating insurance and reinsurance undertakings or insurance holding companies to disclose publicly, on an annual basis, a report on the solvency and financial condition at the level of the group.

Articles 51 and 53 to 55 shall apply mutatis mutandis.

2. Where a participating insurance or reinsurance undertaking or an insurance holding company so decides, and subject to the agreement of the group supervisor, it may provide a single solvency and financial condition report which shall comprise the following:

(a) the information at the level of the group which must be disclosed in accordance with paragraph 1;

(b) the information for any of the subsidiaries within the group which must be individually identifiable and disclosed in accordance with Articles 51 and 53 to 55.

Before granting the agreement in accordance with the first subparagraph, the group supervisor shall consult and duly take into account any views and reservations of the members of the college of supervisors.

3. Where the report referred to in paragraph 2 fails to include information which the supervisory authority having authorised a subsidiary within the group requires comparable undertakings to provide, and where the omission is material, the supervisory authority concerned shall have the power to require the subsidiary concerned to disclose the necessary additional information.

4. The Commission shall adopt implementing measures further specifying the information which must be disclosed and the means by which this is to be achieved as regards the single solvency and financial condition report.

Those measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 301(3).


European Parliament legislative resolution of 22 April 2009 on the amended proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance

Article 54
Report on solvency and financial condition: policy and approval

1. Member States shall require insurance and reinsurance undertakings to have appropriate systems and structures in place to fulfil the requirements laid down in Articles 50, 52 and 53(1), as well as to have a written policy ensuring the on-going appropriateness of any information disclosed in accordance with Articles 50, 52 and 53.

2. The solvency and financial condition report shall be subject to approval by the administrative or management body of the insurance or reinsurance undertaking and be published only after that approval.

Article 55
Solvency and financial condition report: implementing measures

The Commission shall adopt implementing measures further specifying the information which must be disclosed and the means by which this is to be achieved.

Those measures designed to amend non-essential elements of this Directive, by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3).


Article 260
Group solvency and financial condition report

1. Member States shall require participating insurance and reinsurance undertakings or insurance holding companies to publicly disclose, on an annual basis, a report on the solvency and financial condition at the level of the group.

Articles 50 and 52 to 54 shall apply mutatis mutandis.

2. Where a participating insurance or reinsurance undertaking or an insurance holding company so decides, and subject to the agreement of the group supervisor, it may provide a single solvency and financial condition report which shall comprise the following:

(a) the information at the level of the group which must be disclosed in accordance with paragraph 1;

(b) the information for any of the subsidiaries within the group which must be individually identifiable and disclosed in accordance with Articles 50 and 52 to 54.

Before granting the agreement in accordance with the first subparagraph, the group supervisor shall consult and duly take into account any views and reservations of the members of the college of supervisors referred to in Article 252.

3. Where the report referred to in paragraph 2 fails to include information which the supervisory authority having authorised a subsidiary within the group requires comparable undertakings to provide, and where the omission is material, the supervisory authority concerned shall have the power to require the subsidiary concerned to disclose the necessary additional information.

3a. The Commission shall adopt implementing measures further specifying the information which must be disclosed and the means by which this is to be achieved as regards the single solvency and financial condition report.

Those measures designed to amend non-essential elements of this Directive by supplementing it shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3).


Is the Solvency and Financial Condition Report (of Solvency ii) in line with the international standards?

INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS (IAIS) GUIDANCE PAPER ON ENTERPRISE RISK MANAGEMENT FOR CAPITAL ADEQUACY AND SOLVENCY PURPOSES - OCTOBER 2007

Supervisors should require appropriate information on risk management and risk and solvency assessments from each insurer they regulate.

This not only provides supervisors with a long-term assessment of capital adequacy to aid in their assessment of insurers, but encourages insurers to use risk management effectively.

This could also be achieved by, for instance, a supervisor requiring or encouraging insurers to provide a solvency and financial condition report.

Such a report could include a description of the relevant material categories of risk that the insurer faces, its overall financial resource needs, its economic capital and regulatory capital requirements, and projections of how such factors will develop in future.

Where an insurer fails to report adequate information about its risk management practices, processes and procedures from which the supervisor can monitor the insurer, the supervisor should intervene or apply penalties appropriately.

In addition, an insurer should have a duty to report to the supervisor a breach in regulatory requirements as soon as it occurs.

Any requirements for public disclosure of information on risk management, including possible disclosure of elements of a solvency and financial condition report, should be carefully considered by supervisors taking into account the proprietary nature of the information, whether it is commercially sensitive and the potential for its publication to have adverse effects on insurers, distort competition or give some insurers an unfair advantage.

On the other hand, requiring insurers to disclose sufficient financial information would enhance market discipline and market confidence in insurers.