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MCEV principles to include liquidity premium

The CFO Forum has announced changes to its market consistent embedded value principles to reflect the inclusion of a liquidity premium.

In December last year, the group of European finance directors that developed the new accounting standards announced that its member companies would be reviewing the MCEV principles in light of turmoil in stock markets, in particular to address the application of market consistency.

Money Marketing revealed in May that UK life assurers would not have to adopt the new MCEV accounting standard until 2011.

Insurers were originally required to adopt the new rules for the year-end 2009 results. Aviva, Old Mutual and Scottish Widows have already implemented them.

But the CFO Forum decided implementation should be delayed.

Today, the group has concluded that the inclusion of a liquidity premium should be reflected in its MCEV principles and announced it is amending its principles to reflect this.

The changes confirm that the reference rate to be applied under MCEV should include both the swap yield curve appropriate to the currency of the cash flows and on top of it a liquidity premium, where appropriate.

The CFO Forum says it is working to develop more detailed application guidance to increase consistency going forward.

The CFO Forum says the inclusion and quantification of a liquidity premium are equally important for Solvency II as for the MCEV principles.

The European insurance industry has discussed this issue with CEIOPS and the European Commission and will continue to stress the importance of the inclusion of a liquidity premium under Solvency II, the group says.

Chairman Philip Scott says: “The CFO Forum has been working hard with other industry bodies to provide a robust basis for the inclusion of a liquidity premium and we have now developed our thinking sufficiently in this area to make relevant changes to the MCEV principles.

“These changes align our approach to MCEV with our views on Solvency II.”


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