PRA reviews external audit of public disclosure rules

The Prudential Regulation Authority (PRA) is consulting on a revision to the rules for the external audit of public disclosure requirements under Solvency II, which would see certain smaller insurers excluded from the requirement

The consultation, Solvency II: external audit of the public disclosure requirement - CP8/18, sets out a proposal to amend the rule that requires the external audit of parts of the Solvency and Financial Condition Report (SFCR), under Rule 2 of the External Audit part of the PRA Rulebook. The SFCR is the key public disclosure under Solvency II.

This CP is relevant to all UK Solvency II firms including mutuals, auditors and users of SFCRs, and any changes will come into force for financial years ending on or after 15 November 2018.

The PRA estimates that the proposed amendments would remove the SFCR external audit requirement from the end of 2018 for more than 150 smaller UK Solvency II firms (including mutuals) and groups. The PRA considers that this change would improve the proportionality of the requirement.

The proposal would remove the audit requirement for most of those insurers that pose less risk to the PRA’s objectives, and those where the costs of the audit requirement were relatively higher than expected. The PRA considers that excluding Small Insurers from the external audit requirement would support a transparent and more proportionate application of the public disclosure audit policy.

For those firms where SFCRs are no longer subject to external audit, the PRA would continue to monitor the quality of regulatory data and public disclosure. It would also in certain instances use other supervisory tools, including skilled persons reviews under section 166 of the Financial Services and Markets Act 2000 (FSMA 2000), to carry out individual or thematic reviews.

As part of the plan a tighter definition of ‘small insurer’ will be determined, based on risk factors and a risk metric score. This metric applies a risk factor to reported gross written premiums (GWP) and best estimate liabilities (BEL).

The proposals are part of the PRA’s review of the insurance prudential framework having learned lessons from the UK’s implementation of Solvency II.

The consultation closes on 11 July 2018. Comment should be sent to CP8_18@bankofengland.co.uk

Solvency II: external audit of the public disclosure requirement - CP8/18, issued 11 April 2018

Report by Sara White

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