From BaFin's point of view, the insurers’ reporting on variations in own funds under the European supervisory regime Solvency II (see “Key Solvency II figures and their calculation”) fulfils its supervisory purpose, i.e. it provides supervisors with the opportunity to examine changes in the undertakings’ own funds. Nevertheless, BaFin sees a need for improvement.

Insurers had to submit reporting templates to BaFin for the first time for the 2017 financial year (see “The four templates of the reporting package on variation analysis”). The undertakings were required to use these templates to give more detail on changes in their own funds from 31 December 2016 to 31 December 2017. BaFin examined the extensive reporting packages in great depth. The European Insurance and Occupational Pensions Authority (EIOPA) had already previously provided insurers with explanations on the completion of the templates.

Data quality and consistency

In view of the fact that this was the first time the complex reporting templates had had to be submitted, BaFin found the data quality and consistency at the overall market level to be largely acceptable. Nevertheless, it is of high importance to supervisors that improvements be made.

One negative observation was that, in several cases, reporting templates were incomplete or contained sign errors. Certain cells in the templates require negative signs. These cells include, for example, the effects of unwinding, the neutralisation of projected cash flows for the financial year and the derecognised non-life annuities in reporting template S.29.03.

In its review, BaFin also noted that some undertakings had incorrectly determined the total contribution of technical provisions to the variation of the item “Assets over Liabilities” (line R0360 in reporting template S.29.03). Since it is of particular supervisory interest that this essential item can provide a conclusive explanation for the changes in own funds, BaFin recommends that the undertakings use the correct calculation method as specified in the EIOPA explanatory notes in future.

Cross-sectoral findings

BaFin’s initial review shows that there is a cross-sectoral trend: despite a slight rise in technical provisions, the market average Solvency II own funds increased in the financial year 2017.

Due to the different business models and risk profiles, BaFin separated the reporting templates at sector level and evaluated them separately for life and non-life business. SLT (similar to life techniques) health insurance was allocated to life insurance business whereas non-SLT health insurance was treated as non-life business. Reinsurance business was predominantly allocated to non-life business.

Findings with regard to non-life business

In the case of non-life insurers, the variation of excess of assets over liabilities mainly results from variations due to technical provisions. The Best Estimate is an essential component of the technical provisions. Variations of the Best Estimate were driven by the premium provisions for future accident years, the technical provisions for the current accident year and the neutralisation of the technical cash flows. In contrast, currency and interest rate effects had virtually no impact on Best Estimate variations.

The reconciliation reserve proved to be the main component of the excess of assets over liabilities.

BaFin’s review also showed that the undertakings found it difficult to distinguish between the risk drivers “Variation of Best Estimate due to experience” and “Non-economic assumptions” in template S.29.03.

• In principle, all changes to the Best Estimate due to new information, such as a new diagonal in the run-off triangle, fall under the risk driver “Variation of Best Estimate due to experience”. In particular, new information results in a change in model parameters if the reserving method used is not changed. For example, a new diagonal in the run-off triangle would also result in new chain ladder development factors. These effects should also be captured under the risk driver “Variation of Best Estimate due to experience”.
• In contrast, the risk driver “Non-economic assumptions” reflects the effects of a changed reserving method. This includes switching to another method or choosing a potentially different mix of methods, as well as variation in tail estimation (i.e. the estimation of reserves for outstanding business beyond the observation period) or specific new data adjustments, for example the elimination of a specific calendar year.

Finally, the allocation of direct claims settlement expenses to the item “Expenses” in templates S.29.03 and S.29.04 poses a practical challenge to undertakings since these expenses cannot be easily separated from the run-off triangles. However, as long as the items “Claims and benefits” and “Expenses” are correctly captured in total, the allocation of direct claims settlement expenses does not affect the variation of own funds. Direct claims settlement expenses can therefore also be captured under the item “Claims and benefits”.

Findings with regard to life business

After deducting liabilities from assets, the excess for life and health insurers is higher than in previous years. The variation of the Best Estimate on the liabilities side is primarily driven by technical provisions for the current underwriting year, the neutralisation of the technical cash flows, the variation due to experience and the changes in economic assumptions. The variation on the assets side results from interest rate-driven investments.

In contrast to non-life insurance, in health and life insurance model changes (cell “Exceptional elements” in template S.29.03) and, in particular, interest rate effects also have an important role in explaining the variation of the Best Estimate.

Outlook for the 2020 review

BaFin will continue to analyse the reporting templates at sector level in the coming years. It is assumed that higher data quality will increase the benefits of variation analysis still further. In the overall review of Solvency II in 2020, reporting per se will also be put to the test.

Within the European discussion, BaFin will continue to seek to make reporting leaner and more effective in terms of supervision. On the basis of its findings to date, BaFin will critically examine which information it regards as unnecessary for the future and which information should be added. In light of this, the data quality of the 2018 reporting packages is of particular importance.