Accounting related disclosures for general insurance companies arising from Solvency II - Pillar III

Abstract

Purpose: The objective of this study is to analyse the disclosure requirements of Solvency II - Pillar III, focusing on the disclosures required in the SFCR. Any similarities to and differences from the current financial reporting requirements are also identified. It aims at evaluating the impact that Pillar III will have on local insurance companies and whether there is the need to invest in additional systems in order to cope with the requirements of Pillar III. Design: The findings of this study were reached through semi-structured interviews with three local general business insurance companies, three audit firms and an official from the MFSA. Findings: Insurance companies intend to employ additional human resources in order to be able to cope with the requirements of Pillar III. Although insurance companies are expected to face certain challenges, different benefits were pointed out by the respondents, including the ease of comparability. Although market discipline is expected to increase, the question is whether policyholders and investors would understand such disclosures for such discipline to materialise. The current priority of insurance companies is that they are able to report under Solvency II, whilst preparing for IFRS 4 Phase II is being postponed after Solvency II preparations. Ideally preparations are being done in parallel but differences in implementation timetables resulted in companies focusing more on Solvency II. Conclusion: Although respondents at local insurance companies did lack knowledge in certain technical areas, overall they seem to be preparing well for the reporting required under Solvency II. When SFCRs will be made available to the public, the financial statements would still maintain their relevance since they have different objectives. There are certain disclosures that are considered to be sensitive and competitive advantage could be gained in such areas. Value: As recommended by the study, the general public should be educated about this reporting so that achieving the objective of a more disciplined market is facilitated.