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

consequence on <strong>the</strong> balance sheets of insurance companies: as an
illustration, equalisation provisions represent 1% of <strong>the</strong> net premiums
in Sweden and more than 60% in Finland 52 .
8.97 There is a clear need for harmonising <strong>the</strong> treatment of equalisation
reserves for <strong>the</strong> purposes of solvency assessment. Whe<strong>the</strong>r <strong>the</strong>re is a
need <strong>to</strong> improve consistency between Member States, as regards <strong>the</strong>
compulsory nature of <strong>the</strong>se reserves, <strong>the</strong>ir tax treatment and <strong>the</strong> rules
of calculation for o<strong>the</strong>r purposes needs <strong>to</strong> be considered fur<strong>the</strong>r.
The management of technical provisions (life & non-life)
8.98 According <strong>to</strong> current IAIS core principles technical provisions of an
insurer have <strong>to</strong> be adequate, reliable, objective and allow comparison
across insurers.
8.99 The management estimation of of technical provisions is an ongoing
process that is required <strong>to</strong> ensure that <strong>the</strong> technical provisions are
adequate for covering <strong>the</strong> liabilities especially with respect <strong>to</strong>
policyholder protection, by using appropriate underwriting as well as
provisioning. There are two aspects <strong>to</strong> this: <strong>the</strong> business management
of all risks and exposures related <strong>to</strong> this; and <strong>the</strong> estimation, reporting
and moni<strong>to</strong>ring of technical provisions. This process continues as a
cycle of management of <strong>the</strong> business over time at least annually. 53 This
'experience based' process tends <strong>to</strong> be a strong feature of insurance
management practices, perhaps more so than in o<strong>the</strong>r types of
financial institutions. The process affects not only provisioning, but also
<strong>the</strong> setting of premiums. However, past experience should be used with
caution, as it is not always predictive of <strong>the</strong> future.
8.100 The methodologies and accounting practices used in establishing <strong>the</strong>
technical provisions and in <strong>the</strong> treatment of <strong>the</strong> assets, particularly
those available <strong>to</strong> cover <strong>the</strong> technical provisions, have <strong>to</strong> be considered
when forming <strong>the</strong> solvency requirements that build upon <strong>the</strong> technical
provisions. Never<strong>the</strong>less CEIOPS recognises that a harmonisation is
under way.
8.101 Reliability and comparability of technical provisions is enhanced by <strong>the</strong>
use of experts. The objective assessment of provisions means an
unbiased assessment using an objective actuarial and management
process.
8.102 It is important for <strong>the</strong> management of technical provisions <strong>to</strong> set out
goals in what <strong>to</strong> achieve by a proper management. Whilst shareholders,
policyholders, tax authorities, analysts and o<strong>the</strong>rs have an interest in
52
MARKT/2529/02 (2002) - Report of <strong>the</strong> working group on non-life technical provisions <strong>to</strong> <strong>the</strong> IC Solvency
Subcommittee.
53 According <strong>to</strong> IFRS 4 (Liability Adequacy Testing) an insurer shall assess at each reporting date whe<strong>the</strong>r its
recognised insurance liabilities are adequate, using current estimates of future cash flows under its
insurance contracts. If that assessment shows that <strong>the</strong> carrying amount of its insurance liabilities is
inadequate in <strong>the</strong> light of <strong>the</strong> estimated future cash flows, <strong>the</strong> entire deficiency shall be recognised in profit
or loss.
45