Valuation

1.1

Unless otherwise stated, this Part applies to:

1. (1) a UK Solvency II firm;
2. (2) in accordance with Insurance General Application 3, the Society; and
3. (3) in accordance with Insurance General Application 3, managing agents.

2.1

A firm must, except where otherwise provided, value:

1. (1) assets at the amount for which they could be exchanged between knowledgeable willing parties in an arm’s length transaction; and
2. (2) liabilities at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm’s length transaction.

[Note: Art. 75(1) of the Solvency II Directive]

2.2

For the purposes of 2.1(2) when valuing liabilities no adjustment must be made to take account of the own credit standing of the firm.

[Note: Art. 75(1) of the Solvency II Directive]

3.1

A firm must value assets and liabilities based on the assumption that the firm will pursue its business as a going concern.

4.1

5 to 12 apply to the recognition and valuation of assets and liabilities, other than technical provisions.

5.1

A firm must recognise assets and liabilities in conformity with UK-adopted international accounting standards.

5.2

A firm must value assets and liabilities in accordance with UK-adopted international accounting standards provided that those standards include valuation methods that are consistent with the valuation approach set out in 2. Where those standards allow for the use of more than one valuation method, a firm must only use valuation methods that are consistent with 2.

5.3

Where the valuation methods included in UK-adopted international accounting standards are not consistent either temporarily or permanently with the valuation approach set out in 2, a firm must use other valuation methods that are consistent with 2.

5.4

By way of derogation from 5.1 and 5.2, a firm may recognise and value an asset or a liability based on the valuation method it uses for preparing its annual or consolidated financial statements provided that:

1. (1) the valuation method is consistent with 2;
2. (2) the valuation method is proportionate with respect to the nature, scale and complexity of the risks inherent in the business of the firm;
3. (3) the firm does not value that asset or liability using UK-adopted international accounting standards in its financial statements; and
4. (4) valuing assets and liabilities using international accounting standards would impose costs on the firm that would be disproportionate with respect to the total administrative expenses.

5.5

A firm must value individual assets separately.

5.6

A firm must value individual liabilities separately.

6.1

A firm must, when valuing assets and liabilities in accordance with 5.1, 5.2 and 5.3, follow the valuation hierarchy set out in 6.2 to 6.7, taking into account the characteristics of the asset or liability where market participants would take those characteristics into account when pricing the asset or liability at the valuation date, including the condition and location of the asset or liability and restrictions, if any, on the sale or use of the asset.

6.2

As the default valuation method a firm must value assets and liabilities using quoted market prices in active markets for the same assets or liabilities.

6.3

Where the use of quoted market prices in active markets for the same assets or liabilities is not possible, a firm must value assets and liabilities using quoted market prices in active markets for similar assets and liabilities with adjustments to reflect differences. Those adjustments must reflect factors specific to the asset or liability including all of the following:

1. (1) the condition or location of the asset or liability;
2. (2) the extent to which inputs relate to items that are comparable to the asset or liability; and
3. (3) the volume or level of activity in the markets within which the inputs are observed.

6.4

A firm’s use of quoted market prices must be based on the criteria for an active market, as defined in UK-adopted international accounting standards.

6.5

Where the criteria referred to in 6.4 are not satisfied, a firm must use alternative valuation methods.

6.6

When using alternative valuation methods, a firm must rely as little as possible on undertaking-specific inputs and make maximum use of relevant market inputs including the following:

1. (1) quoted prices for identical or similar assets or liabilities in markets that are not active;
2. (2) inputs other than quoted prices that are observable for the asset or liability, including interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads; and
3. (3) market-corroborated inputs, which may not be directly observable, but are based on or supported by observable market data.

All market inputs must be adjusted for the factors referred to in 6.3.

To the extent that relevant observable inputs are not available including in circumstances where there is little, if any, market activity for the asset or liability at the valuation date, a firm must use unobservable inputs reflecting the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. Where unobservable inputs are used, a firm must adjust undertaking-specific data if reasonable available information indicates that other market participants would use different data or there is something particular to the firm that is not available to other market participants.

When assessing the assumptions about risk referred to in this paragraph a firm must take into account the risk inherent in the specific valuation technique used to measure fair value and the risk inherent in the inputs of that valuation technique.

6.7

A firm must use valuation techniques that are consistent with one or more of the following approaches when using alternative valuation methods:

1. (1) market approach, which uses prices and other relevant information generated by market transactions involving identical or similar assets, liabilities or group of assets and liabilities. Valuation techniques consistent with the market approach include matrix pricing;
2. (2) income approach, which converts future amounts, such as cash-flows or income or expenses, to a single current amount. The fair value must reflect current market expectations about those future amounts. Valuation techniques consistent with the income approach include present value techniques, option pricing models and the multi-period excess earnings method; and
3. (3) cost approach or current replacement cost approach reflects the amount that would be required currently to replace the service capacity of an asset. From the perspective of a market participant seller, the price that would be received for the asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable quality adjusted for obsolescence.

7.1

A firm must recognise contingent liabilities, as defined in accordance with UK-adopted international accounting standards, that are material, as liabilities.

7.2

Contingent liabilities are material where information about the current or potential size or nature of those liabilities could influence the decision-making or judgement of the intended user of that information, including a supervisory authority.

7.3

The obligation to recognise material contingent liabilities in 7.1 applies irrespective of whether a liability is required to be recognised in accordance with UK-adopted international accounting standards.

8.1

A firm must value the following assets at zero:

1. (1) goodwill; and
2. (2) intangible assets other than goodwill, unless the intangible asset can be sold separately and the firm can demonstrate that there is a value for the same or similar assets that has been derived in accordance with 6.2, in which case the asset must be valued in accordance with 6.

9.1

For the purposes of valuing the assets of individual insurance undertakings and reinsurance undertakings, a firm must value holdings in related undertakings, in accordance with the following hierarchy of methods:

1. (1) the default valuation method set out in 6.2;
2. (2) the adjusted equity method referred to in 9.3 where valuation in accordance with point (1) is not possible;
3. (3) either the valuation method set out in 6.3 or alternative valuation methods in accordance with 6.5 provided that both of the following conditions are fulfilled:
   1. (a) neither valuation in accordance with (1) nor (2) is possible; and
   2. (b) the undertaking is not a subsidiary undertaking.

9.2

By way of derogation from 9.1, for the purposes of valuing the assets of individual insurance undertakings and reinsurance undertakings, a firm must value holdings in the following undertakings at zero:

1. (1) undertakings that are excluded from the scope of the group supervision under Group Supervision 2.3; and
2. (2) undertakings that are deducted from the own funds eligible for the group solvency in accordance with Group Supervision 10.6.

9.3

The adjusted equity method referred to in 9.1(2) requires the participating undertaking to value its holdings in related undertakings based on the share of the excess of assets over liabilities of the related undertaking held by the participating undertaking.

9.4

When calculating the excess of assets over liabilities for a related undertaking, the participating undertaking must value the undertaking's individual assets and liabilities in accordance with:

1. (1) 2; and
2. (2) if the related undertaking is:
3. 1. (a) required to calculate technical provisions in accordance with the Technical Provisions Part, Matching Adjustment Part, Conditions Governing Business Part and Solvency Capital Requirement – General Provisions Part; or
   2. (b) a special purpose vehicle;

also in accordance with the technical provisions in the Technical Provisions Part, Matching Adjustment Part, Conditions Governing Business Part and Solvency Capital Requirement – General Provisions Part.

9.5

When calculating the excess of assets over liabilities for related undertakings other than insurance undertakings or reinsurance undertakings, the participating undertaking may consider the equity method as prescribed in UK-adopted international accounting standards to be consistent with 2, where valuation of individual assets and liabilities in accordance with 9.4 is not practicable. In such cases, the participating undertaking must deduct from the value of the related undertaking the value of goodwill and other intangible assets that would be valued at zero in accordance with 8.1(2).

9.6

Where the criteria referred to in 5.4 are satisfied, and where the use of the valuation methods referred to in 9.1(1) and (2) is not possible, holdings in related undertakings may be valued based on the valuation method the firm uses for preparing its annual or consolidated financial statements. In such cases, the participating undertaking must deduct from the value of the related undertaking the value of goodwill and other intangible assets that would be valued at zero in accordance with 8.1(2).

10.1

A firm must value financial liabilities, as referred to in UK-adopted international accounting standards, in accordance with 5 upon initial recognition. A firm must not make any subsequent adjustment to take account of the change in own credit standing of the firm after initial recognition.

10.2

A firm must value contingent liabilities that have been recognised in accordance with 7. The value of contingent liabilities must be equal to the expected present value of future cash-flows required to settle the contingent liability over the lifetime of that contingent liability, using the basic relevant risk-free interest rate term structure.

11.1

A firm must recognise and value deferred taxes in relation to all assets and liabilities, including technical provisions, that are recognised for solvency or tax purposes in accordance with 5.

11.2

Notwithstanding 11.1, a firm must value deferred taxes, other than deferred tax assets arising from the carry forward of unused tax credits and the carry forward of unused tax losses, on the basis of the difference between the values ascribed to assets and liabilities recognised and valued in accordance with 2 and in the case of technical provisions in accordance with Technical Provisions Part, Matching Adjustment Part, Conditions Governing Business Part, Solvency Capital Requirement – General Provisions Part and the values ascribed to assets and liabilities as recognised and valued for tax purposes.

11.3

A firm may only ascribe a positive value to deferred tax assets where it is probable that future taxable profit will be available against which the deferred tax asset can be utilised, taking into account any legal or regulatory requirements on the time limits relating to the carry forward of unused tax losses or the carry forward of unused tax credits.

12.1

A firm must not value financial assets or financial liabilities at cost or amortised cost.

12.2

A firm must not apply valuation models that value at the lower of the carrying amount and fair value less costs to sell.

12.3

A firm must not value property, investment property, plant and equipment with cost models where the asset value is determined as cost less depreciation and impairment.

12.4

A firm which is a lessee in a financial lease or a lessor must comply with all of the following when valuing assets and liabilities in a lease arrangement:

1. (1) lease assets must be valued at fair value;
2. (2) for the purposes of determining the present value of the minimum lease payments, market consistent inputs must be used and a firm must not make subsequent adjustments to take account of the own credit standing of the undertaking; and
3. (3) valuation at depreciated cost must not be applied.
4.  

12.5

A firm must adjust the net realisable value for inventories by the estimated cost of completion and the estimated costs necessary to make the sale where those costs are material. Those costs are to be considered material where their non-inclusion could influence the decision-making or the judgement of the users of the balance sheet, including a supervisory authority. Valuation at cost must not be applied.

12.6

A firm must not value non-monetary grants at a nominal amount.

12.7

When valuing biological assets, a firm must adjust the value by adding the estimated costs to sell if the estimated costs to sell are material.