Prudential Standard FSI 2 (Valuation of Assets, Liabilities and Eligible Own Funds)

Question 1

Key principles when valuing assets and liabilities

Answer 1

• Economic
• Market-Consistent
  approach to valuation

Consistent with this, value at the amount for which
(in an arm’s length transaction between knowledgeable and willing parties):
- assets could be exchanged,
- liabilities could be transferred, or settled.

Question 2

Consistency with IFRS

Answer 2

Assets and liabilities (other than technical provisions) valued in accordance with IFRS will be consistent with an economic valuation approach.

Insurers should use the values under IFRS for financial soundness purposes, unless otherwise specified by the Prudential Authority or in the Financial Soundness Standards for insurers.

Question 3

In instances where valuation under IFRS can result in either a fair value, or another value,
which method should be used?

Answer 3

fair value

Question 4

Hierarchy of Valuation Approaches

Answer 4

1. Insurers should use a mark-to-market approach to measure the economic value of assets & liabilities.
2. Where a mark-to-market approach is not possible, a mark-to-model approach should be used.

Question 5

Mark-to-market approach

Answer 5

Use readily available prices in orderly transactions that are sourced independently (quoted market prices in active markets).

Question 6

Mark-to-model approach

Answer 6

Relies on 
- benchmarking,
- extrapolation, or
- other modelling of other market inputs 
to derive valuations.

Insurers should maximise the use of relevant observable market inputs.