Annual report 2006 - Dexia.com

RAPPORT DE GESTION
CONSOLIDATED
FINANCIAL STATEMENTS
COMPTES SOCIAUX
Shadow loss adjustment
To determine the need for a shadow loss adjustment Dexia
determines if additional liabilities would be required, assuming
current market investment yields rather than the estimated
return of the assets. If the level of liabilities required is higher
than total liabilities, then the deficiency should decrease the
unrealized gains recorded in equity and increase liabilities
through a shadow premium deficiency adjustment.
This requires the liability adequacy test (see Liability Adequacy
Test) to be performed after all shadow adjustments - if any.
Should there be insufficient unrealized capital gains left in
equity to accommodate the shadow loss adjustment, the
additional liability increase should be charged to income
(P/L).
Discretionary participation feature (DPF)
Discretionary participation feature is a contractual right to
receive, as a supplement to guaranteed benefits, additional
benefits:
• that are likely to be a significant portion of the total contractual
benefits;
• whose amount or timing is contractually at the discretion
of the issuer; and
• that are contractually based on:
• the performance of a specified pool of contracts or a specified
type of contract;
• realized and/or unrealized investment returns on a specified
pool of assets held by the issuer; or
• the profit or loss of the company, fund or other entity that
issues the contract.
All unrealized gains and losses coming from investments
backing insurance contracts and investment contracts with
DPF are categorized proportionally for the part related to the
insurance contracts and investment contracts with discretionary
participation features in a separate line of the equity.
Proportional calculation happens on the basis of the carried
reserves and by separated management of the assets.
Insurance contracts with deposit component
(unbundling)
All unit-linked products that contain both an insurance contract
and a deposit component will be unbundled. Accounting
policies for insurance contracts are applied for the insurance
component; accounting policies for financial instruments are
applied for the deposit component.
The unit-linked products that can be converted into a guaranteed
investment product (branch 21) with profit sharing
fall under IFRS 4 (investment with DPF) and will not be
unbundled.
Embedded derivatives
IAS 39 applies to derivatives embedded in an insurance contract
unless the embedded derivative is itself an insurance
contract. The requirements for insurance contracts with DPF
also prevail for financial instruments with DPF elements.
As an exception to the requirement in IAS 39, an insurer need
not separate, and measure at fair value, a policyholder’s option
to surrender an insurance contract for a fixed amount (or for
an amount based on a fixed amount and an interest rate),
even if the exercise price differs from the carrying amount
of the host insurance liability. However, the requirement in
IAS 39 does apply to a put option or cash surrender option
embedded in an insurance contract if the surrender value varies
in response to the change in a financial variable (such as
an equity or commodity price or index), or a non-financial
variable that is not specific to a party to the contract.
DPF in financial instruments
If the issuer classifies part or that entire feature as a separate
component of equity, the liability recognized for the whole
contract shall not be less than the amount that would result
from applying IAS 39 to the guaranteed element.
Dexia reviews at each reporting date whether this minimum
requirement is met and in case of an insufficiency, the corresponding
liabilities are adjusted accordingly.
Liability Adequacy Tests
An insurer applies a liability adequacy test (LAT) for its insurance
products and investment contracts with DPF. Dexia
assesses at each reporting date whether its recognized insurance
liabilities are adequate, using current estimates of future
cash flows under its insurance contracts.
If that assessment (based on the entire life and nonlife insurance
portfolios separately) shows that the carrying amount of
its insurance liabilities (less related deferred acquisition costs
and related intangible assets) is inadequate in the light of the
estimated future cash flows, the entire deficiency shall be recognized
in profit or loss.
For life insurance, LAT uses the following parameters, which
are based on the Royal Decree of November 14, 2003 with
respect to the life business :
• premiums: collected inventory premiums plus contractual
provided inventory premiums;
• interest rate for actualization cash flows: yields of the assets
backing insurance liabilities;
• mortality table: experience table of the country (Assuralia
for Belgium);
• costs : calculation based on the last updated tariff costs and
the booked costs;
• tariff costs take into account the inventory surcharges, commercial
surcharges and fixed sums;
• real assigned costs take into account management
expenses, claims handling expenses and commissions. These
costs are stipulated by product group and are indexed. Considering
lapses, death and expiration period the annual delta
is stipulated between the costs in the tariff and real assigned
costs. Deltas are then actualised to the LAT-rate.
For nonlife insurance, the LAT that examines if the premium
and claim provisions are sufficient to settle definitely the
opened claim files and the claims that will occur within the
contractual duration of the contracts to open and to settle
definitively.
A LAT is carried out for all products. The test is subdivided into
two parts. During the first part Dexia examines if the build up
reserves for claim files already opened are sufficient, and in a
second part Dexia makes an estimation of the expected loss
burden for insurance portfolios and examine if the unearned
premium reserves are sufficient.
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Dexia / Annual Report 2006