News & Articles > PRA publishes consultation on removing requirement for smaller firms to have external audit of SFCR

18 April 2018

The PRA has published a Consultation Paper CP8/18. Solvency II: external audit of the public disclosure requirement which would amend the rule that requires parts of the
Solvency and Financial Condition Report to be externally audited. Any amendments would be effective for financial years ending on or after 15 November 2018, and is expected to benefit over 150 smaller UK Solvency II firms (including mutuals) and groups.

To ascertain which firms would no longer require an external audit of their SFCR to take place, the PRA proposes that all firms calculate a risk metric ‘score’ based on their gross written premiums and best estimate liabilities, which are each multiplied by pre-determined risk factors. Any firms with a score of less than 100 are then defined as small insurers and are exempt from the external audit requirement. As the risk factors are of the order of 10-7 for gross written premiums and 10-8 for best estimate liabilities, it is likely that only firms with gross written premiums in excess of £100m and/or best estimate liabilities of £1bn could reach a score of over 100.

The proposal will certainly reduce the scope and cost of the audits. However, the size of the reduction will depend on the views of the Board and auditors on whether the Solvency Capital Requirement still needs to be audited, in order to be reflected in the accounts via the capital statement and the need to consider whether the insurer is a going concern.