Consultation Paper No. 1/2006
FME releases today Consultation Paper No. 1/2006, a draft Guidance on the treatment of changes in insurance companies' own funds and liabilities, as a consequence of the take up of International Financial Reporting Standards (IFRS).
The Guidance affects insurance companies currently accounting according to IFRS, or those that will do so in the future. The purpose is to limit the consequence changes in own funds and liabilities could have on the solvency margin of insurance companies.
These prudential filters are based on CEIOPS Recommendations regarding the Implications of the IAS/IFRS Introduction for the Prudential Supervision of Insurance Undertakings which are meant to prevent that low solvency margin and the warning it implies for supervisors, is hidden because of IFRS related increases. According to Article 54, Paragraph 1 in Law no. 60/1994 on insurance activity, FME has the power to lower solvency items, calculated according to Articles 29-33.
To mention two examples of changes related to IFRS, we first mention the increase in own funds when assets previously valued by purchase cost are accounted for by the fair value principle. In that case FME prescribes no changes in the solvency margin, as the purchase cost valuation already implied hidden reserves.
On the other hand, FME will prescribe that if companies have removed equalisation provisions from their liabilities, and now have corresponding reserves in their own funds, the solvency margin should decrease by the amount corresponding to the former equalisation provisions.
For further information: Sigurður Freyr Jónatansson (Tel: +354 525-2731).