How are assets valued
The valuation of assets mainly follows IFRS and the main requirement is that of market consistency and an economic (or fair value) valuation approach.
Basic own funds
Basic own funds are defined as the excess assets over liabilities (plus subordinate liabilities, less any regulatory adjustments)
Ancillary own funds
Ancillary own funds are off-balance sheet capital resources that can be called upon to absorb losses (instruments such as letters of credit and guarantees)
BEL
The best-estimate liability is determined as the discounted value of the projected cashflows on a policy-by-policy basis using best-estimate assumptions
Other liabilities
Are non-insurance liabilities such as tax liabilities (both current and deferred) and other creditors and can include subordinate debt. These are generally valued using IFRS fair value principles.
Standardized formula approach
Calculates the solvency capital requirement within risk modules and is quantified as the effect on the basic own funds of a pre-specified shock scenario or number of scenarios.
These correspond to the VaR of the basic own funds of an insurer subject to a confidence level of 99.5% over a one-year period.
Capital needed such that the insurer survives all but the worst 0.5% of outcomes over the next year. This corresponds roughly to a 1-in-200 year event.
Risk margin
The RM represents the premium over and above the best-estimate liabilities that one insurer would require to take on the obligations of another insurer.
The risk margin should be calculated by determining the cost of providing an amount of eligible own funds equal to the SCR necessary to support the insurance obligations over the lifetime thereof, assuming the business is transferred to a third party.
SCR cover/ratio
Own funds/SCR
Risk adjustment
The risk adjustment aims to reflect the compensation that the entity requires for bearing the uncertainty about the timing and amount of the cashflows that arises from non-financial risks.
IFRS17 does not specify the method required to calculate the RA but it does require the entity to disclose the confidence level used to determine the risk adjustment. Indirect costs such as operational risk are not allowed for under IFRS17.
FS (Free surplus)
Is the market value of any assets allocated to, but not required to support the in-force business at the valuation date.
RC (Required capital)
Includes any assets attributed to the covered business over and above the amount required to back liabilities for covered business whose distribution to shareholders is in practice restricted.
PVIF
Is the present value of future shareholder cashflows projected to emerge from the assets backing liabilities of the in-force covered business.
CoRC
Is the difference between the amount of required capital and the present value of future releases of this capital, allowing for future net of tax investment returns expected to be covered on this capital.
EV
Is the present value of the contribution of the covered business to shareholder distributable earnings after sufficient allowance for the aggregate risks in the covered business.
BSR
Is a measure of the financial soundness of a with-profits portfolio. If assets underlying a with-profits fund exceed the liabilities, then the fund has effectively declared a lower bonus rate than that supported by the distributable surplus that arose over that period.
The insurer could hold back this this surplus for later distribution by setting up an additional positive reserve, know as the ‘Bonus Stabilization Reserve’. It is determined as the excess assets relating to policyholder portfolio’s over liabilities.
The BSR collectively belongs to policyholders sharing in a fund and any positive BSR will be distributed to policyholders in the form of bonuses over time.
