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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 47 / 51

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The EEV also requires companies to adopt a standard definition of ‘Required Capital’ (G5.1 –G5.2)

“The Required Capital should be at least the level of solvency capital at which the supervisor is empowered to take action, including any ‘encumbered’ amount which is restricted in distribution to shareholders. The Required Capital should include amounts required to meet internal objectives, such as those based on internal risk assessment or required to obtain a targeted credit rating”

This is a an improvement on the traditional EV since there were wide variations between countries on the definition of capital on which the calculations were based. Although companies will now have to determine their definition and also choose an appropriate RDR it still leaves considerable scope for judgement and interpretation.

In summary the key areas that the EEV addresses relate to the setting of the discount rate, the explicit recognition of financial guarantees and options, and the definition of ‘required capital’, as well as the standardisation of disclosure. The effect of these changes have been reported by companies such as the Prudential plc who state in their June 2, 2005 press release:

“The adoption of the EEV methodology by Prudential results in a 1% reduction in the Group’s total shareholders’ funds to £8.5bn and an uplift of 8% in the value of new business for the year ending 31 December 2004 to £741m. The main impact on the results arises from the effect of changes to the assumed level of locked- in capital allocated to each business, the adoption of product-specific risk discount rates, and an explicit valuation of the time value of options and guarantees. The EEV results also include the value of future profits from service companies (including fund management operations) that support the Group’s long-term business and the UK defined benefit pensions scheme deficit.”

b) Geneva Association, 2004 Impact of a Fair Value reporting System on

Insurance Companies This is a survey (authored by Dickinson,G. and Liedtke, P.M.) of the attitudes of CEOs/CFOs/senior managers of forty international insurance companies worldwide to the likely impact that an international financial reporting standard based on a full fair value methodology would have on a number of key corporate policy areas. It is a sequel to an earlier study (Dickenson, 2003) which recommended that insurance liabilities be treated as ‘held-to-maturity’ or ‘available for sale’ mirroring the respective treatments of assets under IAS39/SFAS115. The survey also builds on views expressed by a range of participants (including CEOs) in the session on ‘The Impact of Insurance Accounting on Business Reality and Financial Stability’ at the 30th General Assembly of the Geneva Association, June 2003.72 The executive summary indicates that generally companies do not support the introduction of a ‘full fair value’ standard and foresee a number of adverse consequences for both internal

72

reported in Geneva Papers on Risk and Insurance: Issues and Practice, vol. 29:1 (January 2004).

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