EFAMA KPMG Solvency II Report

4.3.3 Asset Valuation
4 WORKING GROUP FINDINGS | 49
Requirements
Solvency II imposes market based valuation of assets and liabilities as well as the
capital requirements. IFRS 4 Phase 2 will go some way to increase convergence
between the Solvency II framework and accounting standards since it is generally
expected to be more market-consistent, although much is still to be decided.
Most market participants expect this will lead to increased volatility in reported results,
leading to a shift away from long-term products with embedded guarantees towards
products where the investment risk is born by the policyholder, and changes to
re-insurance programmes.
However, when looking at the relation with local GAAP, Solvency II will have a different
impact in different countries across the EU. In several European countries, including
Belgium and Germany, local GAAP is not fair-value based, and so Solvency II will
increase the gap between regulatory capital requirements and local accounting
compliance. For other countries, for instance Spain and the UK, local GAAP is more
market consistent. The interplay between Solvency II and local GAAP rules may lead
to confl icting views on the measurement of risk and return.
Differences in accounting rules can lead to confl icting KPI’s, making optimal asset
allocation less straightforward as certain trade-offs will need to be made. Furthermore,
for several EU countries, the current regulatory capital framework is not truly risk-based,
but rather volume-based.
In these jurisdictions, asset allocation by insurers is currently not heavily impacted by
capital requirements. The introduction of Solvency II will change this signifi cantly for
most insurers, as capital held against fi nancial risks may account for more than 50%
of their total SCR. For life insurers it is even expected that on average around 75% of
the SCR will be due to fi nancial risk. Clearly, this will have implications for the strategic
asset allocation of insurers.
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