Valuation of Liabilities

Solvency II will see a decisive move toward market-based valuation of assets and liabilities.   

Currently, under Solvency I, volatility and uncertainty in the estimated value of liabilities is addressed in a fragmented way using broad assumptions that often do not reflect the underlying pattern of risk. Under Solvency I firms are obliged to include some additional ‘padding’ or prudence in their valuation of liabilities coupled with a series of simplistic capital requirements (which in the UK have been largely superseded by the Individual Capital Assessment (ICA) regime).  

Solvency II will provide a more transparent and sophisticated framework, providing clear links with market-based methodologies (see also section on ‘cost-of-capital’). It will enable firms and supervisors to more clearly identify and understand the nature of the insurance risks firms are taking and the degree to which these have been mitigated through capital and other means.