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Insurers’ accounting method may be flawed

The market consistent embedded value reporting principles could be altered after the body that designed them claimed they could prove “misleading” in the current market.

Insurers are required to adopt the MCEV principles by December 31, 2009, although they were encouraged to begin using them this year. MCEV aims to make insurers’ results more consistent and reflective of market conditions.

But the CFO Forum, comprising the chief financial officers of top European insurers, is reviewing the reporting standard due to market instability.

It says: “The MCEV principles were designed during a period of relative stability and their application could, in turbulent markets, lead to misleading results.”

Aviva was one of only a few firms to use the new principles this year, which may have contributed to its share price plunging 33 per cent.

Fitch senior director David Prowse says other insurers may have feared MCEV would have painted a more negative picture.

He says: “Where annuity liabilities are being backed by corporate bond assets, the shift from EEV to MCEV leads to an automatic decrease in the reported embedded value of the annuities. With credit spreads having ballooned, the difference is now very stark.”

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