XBRL Should Be Adopted for the Solvency II Insurance Framework

Written by Bob Schneider     Posted on May 20, 2010

Solvency II is a new regulatory structure for Europe’s insurance industry being developed under the direction of CEIOPS. The framework’s primary goals are (1) to facilitate the development of a single European market in insurance services, and (2) provide an adequate level of consumer protection. Among other objectives, it seeks to improve product development and pricing, increase the transparency of risk reporting, raise industry standards of risk management, and upgrade companies’ internal controls. Toward these ends, Solvency II comprises three so-called pillars:

• Pillar 1 consists of quantitative requirements (including rules relating to the calculations of capital requirements)
• Pillar 2 sets out qualitative requirements for governance, risk management, and effective supervision, including internal controls
• Pillar 3 focuses on disclosure and transparency requirements

Europe’s insurers, supervisory agencies, and other industry stakeholders are now gearing up for adoption of Solvency II, which is scheduled to go into effect in October 2012. Discussions are under way concerning the implementation of information systems, including the harmonization of reporting standards and formats. Among the possible candidates for a data standard are a flat-file format, such as comma-separated value (CSV); XML; and XBRL. A basic flat-file format has substantial shortcomings, however, for data of some complexity; for example, it would not permit syntactical validation. The more realistic choice is therefore between XML and XBRL.

In his Financial Reporting Using XBRL (pp. 56-65) and XBRL for Dummies (pp.33-34), Charlie Hoffman contrasts XML with XBRL and enumerates the latter’s advantages. He points out that:

• While XML articulates only syntax, XBRL expresses meaning XBRL can express business meaning or rules, called semantics, such as Assets = Liabilities + Owners' Equity. (Charlie recently wrote a great post about this topic.)
• XBRL allows content validation against the expressed meaning “With XBRL, you can exchange [across business systems] both the information itself and the business rules that support creating accurate information, allowing you to effectively communicate business information.” Business rules enforce the integrity of information, which is key for ensuring its usefulness along the business reporting supply chain.
• XBRL separates concept definitions from the content model, which allows you to express multiple hierarchies of explicit relations This feature increases XBRL’s flexibility and allows it to better express complex dimensional disclosures often contained within business reports.
• XBRL provides organized, prescriptive extensibility, whereas XML is endlessly extensible “XBRL provides flexibility where you need it, whereas XML provides too much flexibility where you don’t.”
• XBRL provides a multidimensional model “Online analytical processing (OLAP)-type systems can use XBRL’s multidimensional model to provide flexible information presentation and the ability to ‘slice and dice’ information.”  
• XBRL enables intelligent, meta-driven connections to information “With XBRL, business users can connect information by adjusting metadata rather than by requiring technical people to write code. As such, rather than build multiple-point solutions, XBRL enables the creation of effective and efficient solutions that allow extensibility and that don’t require programming modifications to connect to new information or new information models.”

Taken together, these advantages provide valuable benefits for the business information supply chain:

• Semantic meaning from existing taxonomies that enhance comparisons, benchmarking, and analysis
• Standardized formulas that increase data and validation quality
• Standardized references that allow explicit relationships between regulated disclosure elements and the relevant regulations, laws, instructions, or solvency rules

The upshot is that XBRL improves company reporting processes, helps regulators enhance analytical processes, and permits both to share references to relevant regulations and rules in ways that XML cannot.

In his paper Solvency II and XBRL: New Rules and Technologies in Insurance Supervision, Professor Enrique Bonson notes that the EU has already supported the XBRL standard in having the Committee of European Banking Supervisors (CEBS) adopt it for both financial reporting (FINREP) and common reporting (COREP), which includes capital requirements. Summarizing his analysis, Professor Bonson has three arguments for implementing XBRL for Solvency II:

• The standard possesses proven technological quality;
• The organizational qualities of the XBRL consortium have been demonstrated to be of great help in the implementation of analogous regulatory frameworks (eg, FINREP/COREP);
• Previous experience represents a background of inestimable value, with a substantial number of persons and entities ready to give support in this venture, from the XBRL consortium itself at the European and international levels, to the myriad entities that comprise the consortium in their individual capacities.

Importantly, Professor Bonson notes that it is IFRS that “…will  really provide the financial information support to enable the effective application of Solvency II; of particular relevance is IFRS 4, which specifically addresses contracts of insurance.” The XBRL taxonomy framework for IFRS is designed to implement each of its standards, and thus there is an XBRL taxonomy specific to the reporting needs of insurers.

This XBRL taxonomy will no doubt be extended for IFRS Phase II, which will modernize the insurance accounting reporting framework. In a paper prepared by Deloitte titled IFRS Phase II and Solvency II: Heading in the Same Direction, the authors state:

Although there is still uncertainty around the final outcomes of SII [Solvency II] and Phase II, we believe that the calculation of the core components of an insurance liability can be used carrying out similar bases and models, with the possibility to develop adjustments that reflect the differences as they emerge from the parallel refinement of the detailed requirements…We believe, regardless of the differences between the two regimes, there are already tangible opportunities for synergies and companies should consider the requirements of Solvency II  and Phase II in an integrated way to minimize implementation costs and maximize benefits.

It would certainly seem that if companies will be tackling Solvency II and Phase II together, then adopting a common data standard of XBRL would make sense for both the insurers and their regulators.

Some benefits for XML over XBRL could be suggested, such as initial start-up cost and the availability of both human and nonhuman resources.  But XBRL has been adopted extensively by business registrars throughout Europe, and the pool of available XBRL talent and software products is continually increasing.

Indeed, as XBRL Planet’s World Wide Adoption Survey documents,  the key trend of all business reporting in Europe is toward XBRL. Standard Business Reporting (SBR), which incorporates XBRL, is being adopted in the Netherlands for the electronic filing of financial, tax, and statistical statements for all companies. XBRL is being implemented in Spain for banking, local governments, financial reporting, and other reporting needs. In the UK, both Companies House and HMRC is working toward implementations for company accounts and tax information.

If XBRL is becoming the data standard in Europe for company registrars, banking, tax, and statistics – and is also gaining favor in areas like sustainability reporting and government budgeting --  wouldn’t it make sense to harmonize all forms of  reporting, including insurance, on XBRL as well?