Solvency Assessment and Management:
Steering Committee
Second Errata to Position Paper 391 (v 8)
Assets and liabilities other than technical provisions
ERRATA
Three amendments to Position Paper 39 (v 8) as described below need to be implemented.
The reason for the errata is to update the wording and definitions in Position Paper 39 (v 8)
following the Task Group’s consideration of Chapter II “Valuation of Assets and Liabilities” of
the current European Commission Solvency II Delegated Act, Commission Delegated
Regulation (EU) No …/… of 10.10.2014. Brussels, C(2014) 7230 final.
Amendment 1 (page 1):
The bullet list at the bottom of the page under section 1 Introduction and Purpose needs to
be amended as follows:
Section of Position
Paper
Bullet list of sources of information
considered by the Assets Task Group
Additional item to be appended
to the bullet list
Bullet list at end
of
section
1
Introduction and
Purpose
 Solvency II Directive as published 25
November 2009
 Consultation papers as prepared by EIOPA
 International Financial Reporting
Standards
 The insurance regulatory regime of
Australia (APRA)
 The insurance regulatory regime of
Canada (OSFI)
 Insurance core principles (ICP) of the
International Association of Insurance
supervisors (IAIS).
 Quantitative Impact Study (QIS) 5 and the
QIS 5 report.
 The current Short-term Insurance Act and
Long-term Insurance Act of South Africa
together with the applicable regulations
and board notices.
 European Commission Solvency II
Delegated
Act,
Commission
Delegated Regulation (EU) No
…/… of 10.10.2014, Brussels,
C(2014) 7230 final.
Solvency Assessment and Management: Steering Committee
Second Errata to Position Paper 39 (v 8) – Assets and liabilities other than technical provisions
Amendment 2 (page 19):
The recommendation box under section 4.2.5 FINANCE LEASES – IAS 17 does not
adequately distinguish between the valuation of assets and liabilities associated with a
financial lease. In keeping with the EC Delegated Act and for clarification, the wording is to
be amended as follows:
Current wording in recommendation:
Finance leases should initially be measured at the net investment made by the lessor i.e. present
value of the minimum lease payments and any unguaranteed residual value accruing to the lessor.
The interest rate used for discounting should be the rate implicit in the lease.
Over the lease term the lessor accrues interest income on the net investment. In practice this comes
down to amortised cost of the initial fair value of the lease.
This, together with the requirement to test all assets for impairment at the reporting date, is
considered to be in line with Article 75 of the Solvency II Directive in that it will ensure that the
finance lease asset is not recognised at an amount exceeding its fair value.
Proposed wording:
Finance leases should initially be measured at the net investment made by the lessor i.e. present
value of the minimum lease payments and any unguaranteed residual value accruing to the lessor.
The interest rate used for discounting should be the rate implicit in the lease.
Over the lease term the lessor accrues interest income on the net investment. In practice this comes
down to amortised cost of the initial fair value of the lease.
This, together with the requirement to test all assets for impairment at the reporting date, is
considered to be in line with Article 75 of the Solvency II Directive in that it will ensure that the
finance lease asset is not recognised at an amount exceeding its fair value.
The property component in a finance lease should be valued in line with the requirements for
investment property or property, plant and equipment in this discussion document.
Where the (re)insurer is the leasee in a financial lease, the value of the associated liability shall be
the present value of the minimum lease payments using market consistent inputs and no
subsequent adjustments to take account of the own credit standing of the undertaking shall be
made. This is consistent with the recommended fair value approach used for other financial
liabilities (refer section 4.2.13).
Amendment 3 (page 24):
The fourth paragraph in the recommendation box under section 4.2.13 OTHER FINANCIAL
LIABILITIES – IAS 39 (to be replaced by IFRS 9 phase 1) refers to other financial liabilities
being valued at amortised cost, which is inconsistent with the Delegated Act Article 16, item
1. The wording needs clarification as follows:
Current wording in recommendation:
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Solvency Assessment and Management: Steering Committee
Second Errata to Position Paper 39 (v 8) – Assets and liabilities other than technical provisions
The Task Group recommends that own credit standing is only taken into account at initial
recognition of other financial liabilities and that subsequent changes in own credit standing is not
taken into account.
It is recognised that this approach will not always result in other financial liabilities being recognised
at their true economic value. However, this is consistent with Article 75(b) of the Solvency II
Directive, ICP 14 and QIS 5. Further, it will minimise ongoing differences with IFRS values which is
seen as a general objective under SAM.
Again we advocate a consistent approach, but recognise that the value of sub-ordinated debt is
included in own funds and hence not regarded as a liability but rather as long-term debt capital. This
differs in its treatment to that of senior debt, which is regarded as part of balance sheet items with
characteristics such as accounts payable and therefore part of other financial liabilities.
The result is that other financial liabilities are valued at amortised cost with cost reflecting fair value
on initial recognition. For the avoidance of doubt, this same treatment is to be followed for the
valuation of senior debt, if allowed and approved by regulator.
Lastly, QIS 5 report states that other financial liabilities did not comprise a significant proportion of
total liabilities.
Proposed wording:
The Task Group recommends that own credit standing is only taken into account at initial
recognition of other financial liabilities and that subsequent changes in own credit standing is not
taken into account.
It is recognised that this approach will not always result in other financial liabilities being recognised
at their true economic value. However, this is consistent with Article 75(b) of the Solvency II
Directive, ICP 14 and QIS 5. Further, it will minimise ongoing differences with IFRS values which is
seen as a general objective under SAM.
Again we advocate a consistent approach, but recognise that the value of sub-ordinated debt is
included in own funds and hence not regarded as a liability but rather as long-term debt capital. This
differs in its treatment to that of senior debt, which is regarded as part of balance sheet items with
characteristics such as accounts payable and therefore part of other financial liabilities.
The result is that other financial liabilities are valued at amortised cost with cost reflecting fair value
on initial recognition, with only changes in the market observable inputs (excluding changes in own
credit standing) taken into account for subsequent valuations. For the avoidance of doubt, this same
treatment is to be followed for the valuation of senior debt, if allowed and approved by regulator.
Lastly, QIS 5 report states that other financial liabilities did not comprise a significant proportion of
total liabilities.
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