How do our specialist teams support motor insurers on the Rock? And what’s the best way to prepare for next year end’s audit?
The PKF global network of member firms draws on the specialist expertise of PKF Littlejohn in the insurance industry.
Our teams of experts in audit, actuarial and IT regularly pool their knowledge to support the member firms’ and we collaborate particularly closely with our colleagues in Gibraltar through a joint venture vehicle, PKF Littlejohn Canillas Limited. This is an approved auditor of public interest entities (PIEs) in Gibraltar set up to bring together the expertise of the UK and Gibraltar teams to serve insurance companies.
The teams also support other PKF firms in other countries within the network such as Luxembourg and Malta.
GFSC and FCA standards
There are 56 regulated insurance companies listed on the Gibraltar Financial Services Commission (GFSC) online register. Most are private limited companies authorised by the GFSC to conduct non-life insurance business (mainly motor) and carry out services in the UK.
So, the alignment of GFSC to UK regulatory standards makes good sense. For example, in Gibraltar the Solvency II regulation for the cost of capital rate has been amended to 4% in line with the Prudential Regulatory Authority (PRA) in the UK. The market rates to be used for discounting are not explicitly prescribed, but the GFSC considers the Bank of England’s Sterling Overnight Index Average (SONIA) interest rates to be an appropriate benchmark.
SONIA effectively provides the overnight interest rates applied to bank transactions in the British sterling market. The GFSC is committed to being a credible regulator and playing a key part in the successful implementation of the Gibraltar Authorisation Regime (GAR).
Guidance for our motor clients
So, how do our actuaries support their external audit colleagues with the review of GAAP/Solvency II (SII) reserves and solvency capital requirements (SCRs) for a motor client?
Our actuarial approach is typically a combination of independent re-projections for material segments or review of methodology and key assumptions. The chart below shows the areas we usually cover during our fieldwork. They’re designed to assure the audit partner that the client booked reserves adequately reflect its risks and uncertainties.
Another area which is often overlooked is disclosures regarding material judgements and estimations. For reserves, those can come from judgements in relation to whether to hold margins for uncertainty above best estimate and how that is done. In addition, companies should consider what the material sensitivities are – ie, being sensitive to assumptions or changes in methods that can drive a material change in the estimate. These need to be disclosed and explained in the notes to the financial statements, and will often require collaboration between finance and actuarial teams. But these disclosures will be of interest to your auditors and are a hot topic for regulators.
Topical tips
Here are our actuaries’ top four tips for the upcoming year end audit season:
- Remember that calculating gross of reinsurance reserves matters too. Some of our clients focus mainly on net of reinsurance results. But both are important for the audited financial statements in the report and accounts. So don’t forget to fully assess gross ultimate and earned claims, including IBNR, particularly for potential large losses. Then work out the potential recoveries that will mitigate those claims
- Ensure that any claims reserves for any life-changing personal injury cases that could potentially be lump sum settlements are based on the new Personal Injury Discount Rate (PIDR) of 0.5% that is effective from 11 January 2025
- Continue to monitor the impact of other external factors on the settlement of claims. These might include the recent Civil Liability Act reforms, and credit hire arrangements, as well as the ongoing effects of changing inflation. We expect credit hire to continue to be a key element of claims costs. This is because vehicle repair time is longer, on average, after Brexit due to the delay in obtaining spare parts
- Provide rationale for applying EIOPA or SONIA market rates for calculating SII reserves until GFSC publishes formal guidance.
If you would like to discuss the topics raised in this article further, please contact Pauline Khong.
