Prudential Standard FSI 2.1 (Valuation of Assets and Liabilities Other than Technical Provisions)

Question 1

Approval for asset encumbrances

Answer 1

Any transaction that may result in an asset being encumbered must be approved by the Prudential Authority before the transaction(s) can be undertaken.

Approval for asset encumbrances will be considered on a case-by-case basis by the Prudential Authority.

Question 2

6 Types of assets that should be regarded as leading to possible encumbrance

Answer 2

• Assets of insurers held in branches
• Assets backing financial commitments
• Margins with exchanges
• Collateral assets/security deposit
• Financial Lease
• Subordinated loans

Question 3

Assets leading to possible encumbrance:

Assets of insurers held in branches

Answer 3

Where the law in a foreign jurisdiction in which a branch of an insurer is established requires that:

the assets covering the liabilities of the branch be held in trust in the jurisdiction,

the assets may be regarded as encumbered as the insurer may not be free to use the assets to cover policyholders’ liabilities in South Africa.

Question 4

Assets leading to possible encumbrance:

Assets backing financial commitments

Answer 4

Where an insurer has formally committed to the injection of additional capital in another entity, the assets backing the commitment may be regarded as encumbered as the assets may be invested in the entity at a future date.

Question 5

Assets leading to possible encumbrance:

Margins with exchanges

Answer 5

Where an insurer maintains a margin to trade on an exchange, the margin may be regarded as encumbered as the assets may not be withdrawn in full until the trade is closed out.

Question 6

Assets leading to possible encumbrance:

Collateral assets / security deposit

Answer 6

Assets that are held as collateral may be regarded as encumbered as the assets may not be withdrawn in full until the loan is repaid or the guarantee expires.

Question 7

Assets leading to possible encumbrance:

Financial leases

Answer 7

Assets which are held by an insurer under a financial lease agreement may be regarded as encumbered as the insurer cannot dispose of the asset until title is transferred to the insurer.

Question 8

Assets leading to possible encumbrance:

Subordinated loans

Answer 8

Where an insurer grants a subordinated loan to a subsidiary, the assets representing the loan may be regarded as encumbered.

Question 9

Restrictions on the use of encumbered assets in determining Eligible Own Funds

Answer 9

Any asset that is encumbered and has been approved by the Prudential Authority must NOT be recognised for the purposes of determining Eligible Own Funds.

Question 10

4 Assets requiring different treatment to IFRS

Answer 10

• Goodwill on acquisition
• Intangible assets
• Participations
• Financial Assets

Question 11

IFRS definition:

Goodwill acquired in a business

Answer 11

The payment made by the acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised.

Question 12

IFRS definition:

Intangible asset

Answer 12

An intangible asset is identifiable if it is separable or if it arises from contractual or other legal rights.

An insurer must have the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.

Question 13

Different treatment to IFRS of:

Goodwill on acquisition

Answer 13

For financial soundness purposes, goodwill on acquisition must be valued at NIL.

Question 14

Different treatment to IFRS of:

Intangible assets

Answer 14

The FAIR VALUE of intangible assets measured under IFRS must only be recognised if:

• it is separable and
• some evidence exists of exchange transactions for similar types of assets.

If a fair value treatment is not possible such assets should be valued at NIL.

Question 15

IFRS definition:

Participations

Answer 15

Investments in companies in which the insurer owns a significant proportion of the issued share capital,
or over which it exerts significant influence/control.

Question 16

Different treatment to IFRS of:

Participations

Answer 16

If listed:
- base the valuation on the quoted market value (using listed prices)

If a quoted market value is not available:
- value according to the “adjusted net equity” method.

If a quoted market value is not available and the “adjusted net equity” method is not possible:
- use the value as reported in their financial accounts

Otherwise:

• use quoted prices of similar participations
• or a mark-to-model approach

Question 17

“Adjusted net equity” method

Answer 17

Requires the value of the participation to be based on the insurer’s share of the excess of assets over liabilities less any goodwill or intangible assets not recognised under this Standard.

Question 18

How should participations in Asset Holding Interpediaries (AHIs), be valued?

Answer 18

Insurers should look-through to the underlying assets and liabilities of the AHI when valuing the participation on an economic basis.

I.e. the assets and liabilities of the AHI should be treated as if they were the assets and liabilities of the insurer for valuation and financial soundness purposes.

Question 19

Different treatment to IFRS of:

Financial assets

Answer 19

Financial assets must be measured at FAIR VALUE in all instances, regardless of whether IFRS allows for these assets to be measured at cost in some instances.

Question 20

IFRS definition of:
financial assets (5)

Answer 20

Financial assets include items such as:

• loans receivable and payable,
• debt and equity securities,
• asset backed securities,
• repurchase agreements, and
• derivatives.

Question 21

IFRS definition of:

financial liabilities

Answer 21

Financial liabilities should be recognised when an entity becomes a party to the contractual provisions of the instrument.

Question 22

IFRS definition of:

contingent liabilities

Answer 22

A contingent liability is either:

a) A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the insurer.

b) A present obligation that arises from past events but is not recognised because:
- - It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
- - the amount of the obligation cannot be measured with sufficient reliability.

Question 23

Treatment of:

Contingent liabilities

Answer 23

Contingent liabilities should be defined and
valued according to IFRS, but recognised as
a liability.

Contingent liabilities should be reported to the Prudential Authority and be subject to continuous assessment.

Question 24

Treatment of:

Contingent assets

Answer 24

Contingent assets must NOT be recognised for financial soundness purposes.