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8.42 Discounting of non-life technical provisions is not widely practised at
<strong>the</strong> moment. Although <strong>the</strong> Directives 34 permit discounting under certain
circumstances, few Member States <strong>to</strong>lerate this option, and even in
<strong>the</strong>se States, few insurance companies make use of this possibility (see
<strong>the</strong> Manghetti report 35 for illustration).
8.43 However, in order <strong>to</strong> better reflect economic reality, <strong>the</strong> timing of
future cash flows would need <strong>to</strong> be taken in<strong>to</strong> account, resulting in <strong>the</strong>
use of discounted provisions.
8.44 Clearly, taking discounting effects in<strong>to</strong> account more explicitly cannot
be envisaged without taking in<strong>to</strong> account more precisely <strong>the</strong> converse
effects of inflation risks on claims and expenses. In particular, for longtail
claims, inflation and its uncertainty is one of <strong>the</strong> major risks. It is
important that this risk be properly considered. Inflation can have
different effects on different lines of business. For some lines of
business <strong>the</strong> rate of claims inflation (including all fac<strong>to</strong>rs that act <strong>to</strong>
increase claim amounts) can exceed <strong>the</strong> interest rate, and it would not
be uncommon for discounted provisions (that make full allowance for
inflation) <strong>to</strong> exceed undiscounted provisions, if <strong>the</strong> undiscounted
provisions do not take inflation in<strong>to</strong> account.
8.45 Although <strong>the</strong> current <strong>European</strong> regulation obliges insurers <strong>to</strong> take in<strong>to</strong>
account inflation in <strong>the</strong>ir estimation of ultimate cost, one of <strong>the</strong> main
benefits of discounting might be <strong>to</strong> force insurers <strong>to</strong> consider claims
inflation more explicitly. This would suggest <strong>the</strong> need for a requirement
on how <strong>to</strong> consider inflation explicitly.
8.46 Discounting would also be more consistent with assets marked-<strong>to</strong>market.
However, fur<strong>the</strong>r analysis is required <strong>to</strong> assess how <strong>to</strong> take
in<strong>to</strong> account <strong>the</strong> full range of ALM issues for a non-life insurer.
8.47 It should also be noted that <strong>the</strong> ongoing IASB insurance project may
result in <strong>the</strong> discounting of insurance liabilities under financial
reporting. However, <strong>the</strong> standards set by <strong>the</strong> IASB may be difficult <strong>to</strong>
apply <strong>to</strong> prudential reporting. The problem of compatibility between
financial and prudential reporting needs <strong>to</strong> be considered. Anyway,
being compatible does not mean that <strong>the</strong> same rules have <strong>to</strong> apply. For
example, it could prove easier <strong>to</strong> link <strong>the</strong> provisions discounted
following <strong>the</strong> future IASB rules with undiscounted technical provisions
than with technical provisions discounted following a very different
methodology.
34 See Article 60(19(g) of Directive 91/674/EEC.
35
Conference of <strong>the</strong> Insurance Supervisory Authorities of <strong>the</strong> Member States of <strong>the</strong> <strong>European</strong> Union (2001) –
Report on technical provisions in non-life insurance.
34