On 11 April 2018, the PRA announced its consultation on the removal of the external audit requirement for "small firms" from 15 November 2018. Currently, Solvency II firms require an external audit of their Solvency and Financial Condition Report (SFCR), a key public disclosure under the regulatory regime. The PRA expects this proposed change to impact more than 150 small insurers and friendly societies.
To qualify as a "small firm for external audit purposes", the PRA proposes to introduce a firm risk metric ("score"). This is calculated using Gross Written Premiums and Best Estimate Liabilities, already calculated as part of the valuation process. A score of less than 100 will qualify the firm as above and remove the requirement for external audit.
The regulator reminds firms that fall within the above definition that they must continue to comply with PRA rules on policy and approval of the SFCR with their governing body following various responsibilities as stated in Chapter 2 of Supervisory Statement (SS) 11/16.
Our expectation is that all firms with less than £5bn technical provisions and gross written premiums of less than £100m a year will qualify.
OAC welcomes this proposed change and recognises the continuous lobbying efforts by the Association of Financial Mutuals (AFM) and its membership. The PRA acknowledged that "the burden for smaller firms is higher than anticipated." In removing the requirement for end of 2018 disclosures, with firms having completed the first full Solvency valuation at end 2016 and currently preparing to submit the end 2017 results, the regulator reasonably states that "many of the key benefits of the policy would be realised after the first two years of audit." This change is again supportive to small insurers and friendly societies in reducing the regulatory burden (and cost borne by members in the case of affected mutuals) in a proportionate way.
Of course, firms may wish to retain this audit process for a number of reasons. This proposal will allow smaller firms to exercise judgement and choose this option instead of being forced to do so.
The consultation deadline is Wednesday 11 July 2018, so we encourage firms to respond. Our consultants can help with any queries you may have.
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