Answers to the European Commission on the ... - Eiopa - Europa

liability. The precise treatment of option take-up rates within best
estimate cash flows, insurance liabilities and <strong>the</strong> SCR will need fur<strong>the</strong>r
consideration.
Profits at inception
7.17 Valuing insurance liabilities by using <strong>the</strong> best estimate approach may
lead <strong>to</strong> <strong>the</strong> recognition of profits or losses at inception of an insurance
contract. On this issue, it is stated in <strong>the</strong> Basis for conclusions IFRS 4 16
that:
"Assets and liabilities arising from insurance contracts should be
measured at fair value. In <strong>the</strong> absence of market evidence <strong>to</strong> <strong>the</strong>
contrary, <strong>the</strong> estimated value of an insurance liability shall not be less,
but may be more, than <strong>the</strong> entity would charge <strong>to</strong> accept new contracts
with identical contractual terms and remaining maturity from new
policy holders. It follows that an insurer would not recognise a net gain
at inception of an insurance contract, unless such market evidence is
available."
7.18 For with-profit contracts and in a number of o<strong>the</strong>r cases, any surplus at
inception might not be recognised as profit because of requirements in
national law <strong>to</strong> distribute surplus <strong>to</strong> policyholders. In <strong>the</strong>se cases,
calculating <strong>the</strong> best estimate of guaranteed benefits may lead <strong>to</strong> a
number of practical difficulties. A pragmatic approach might be <strong>to</strong> value
<strong>the</strong> contract on a tariff basis at inception, although valuation postinception
would require fur<strong>the</strong>r consideration.
7.19 Alternatively, any difference between <strong>the</strong> fair value of a policy and <strong>the</strong>
valuation of a policy based on guaranteed benefits discounted using a
risk-free interest rate could be interpreted as a technical provision
corresponding <strong>to</strong> future or potential bonus, ra<strong>the</strong>r than as 'profit'.
Segmentation
7.20 Assessing <strong>the</strong> probability distributions of future cash flows requires a
classification of underwriting risks in<strong>to</strong> groups with similar
characteristics, known as homogenous risk groups. This classification
must be based in part on information from his<strong>to</strong>rical data on <strong>the</strong>
liabilities portfolio, <strong>the</strong> undertaking’s specific circumstances and
relevant data from <strong>the</strong> insurance industry.
7.21 Conceptually, <strong>the</strong> risk margin related <strong>to</strong> <strong>the</strong> quantitative level of
prudence should be calculated at <strong>the</strong> level of <strong>the</strong> insurance undertaking
as a whole. However, in practice, a valuation of liabilities will require a
classification of underwriting risks in<strong>to</strong> homogenous risk groups.
CEIOPS would need <strong>to</strong> assess whe<strong>the</strong>r <strong>the</strong>se homogenous risk groups
might vary from national market <strong>to</strong> national market, according <strong>to</strong>
criteria defined at EU level.
16 IASB (2004) – Basis for conclusions on IFRS 4 Insurance Contracts.
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