Regulator allows small insurers to escape external audits

Regulator allows small insurers to escape external audits

The Prudential Regulation Authority (PRA) will exempt small UK insurers from the requirement to have their annual Solvency and Financial Condition Report (SFCR) externally audited.

The PRA confirmed this after proposals in its consultation paper in April and industry feedback earlier this year.

The changes to the external audit requirement will take effect from 15 November and the PRA estimates the amendments will apply to more than 150 small UK Solvency II firms, including mutuals.

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Trade body the Association of Financial Mutuals (AFM) was among the respondents to the PRA’s proposals in May.

It told the regulator the extra audit work had added additional pressure on small firms already on a tight reporting timescale, claiming it had more than doubled many organisations’ audit costs without providing any clear benefit to readers of the SFCR.

In light of yesterday's announcement Martin Shaw, chief executive of the AFM, said: "We are grateful to PRA for exempting our members from this requirement, which gold-plated the Solvency II rules, and has not been adopted by any other European country.  

"Members of a mutual already receive a copy of the report and accounts of their insurer, and this gives a strong account of how the business is run in their best interests.  

"The SFCR is a technical document which has added up to £50,000 to audit costs, and which our evidence demonstrated, is only read by industry professionals."

The SFCR is the key public disclosure under the Solvency II directive which sets out regulatory requirements for insurance firms and groups, covering financial resources, governance and accountability, risk assessment and management.

However, concerns had previously been raised that requiring smaller firms to externally audit their public disclosure created unnecessary cost and work.

The regulator will define small firms based on their revenues and projected cashflow.

This was despite a number of respondents raising concern the definition was too complex and would lead to confusion over which firms it would apply to.

Peter Chadborn, director and adviser at Plan Money, said smaller insurers are vital in maintaining diversity in the insurance market and the choice to advisers and their clients.

He said: "Disproportionately expensive accounting cost have a detrimental effect on smaller insurers and so I am pleased to see that the PRA has recognised this and relaxed these obligations.

"Hopefully this means cost savings can be passed on to policy holders, which in turn gives these insurers a competitive edge."