For the purposes of the adequacy test, insurers take the difference between the fair value and the balance sheet value of the assets that serve as cover for the technical provisions (in accordance with Section 121(3) of the Bpr). In assessing the fair value of mortgage loans, DNB uses the definition of the term market value in Section 4 of the Fair Value Decree (Besluit actuele waarde – Baw) (in accordance with Section 1 of that Decree), which corresponds to the definition of fair value in IFRS 13.9. Market value means the price for which an asset could be sold or a liability settled between knowledgeable and willing, independent parties in an arm's length transaction.
Importance of correct valuation of mortgage loans
The fair value of mortgage loans is relevant when implementing the adequacy test (Section 121(3) of the Bpr) and, for insurers in possession of an excess value ruling (Section 97(1) of the Bpr), when calculating the insurer's solvency. An incorrect calculation of the fair value may lead to incorrect outcomes for the adequacy test and possibly an inaccurate representation of the insurer's solvency.
If no observable prices for the mortgage loans on its balance sheet are available, the insurer is required, in accordance with IFRS 13.3, to make as much use as possible of relevant information from the market when determining the fair value of the mortgage loans. IFRS 13 stipulates that if the fair value cannot be determined on the basis of quoted prices in an active market (Level 1), as in the case of mortgage loans, it should be determined on the basis of observable market data of comparable market instruments (Level 2). The Level 3 valuation method should only be applied when insufficient observable and relevant market data are available to perform a full valuation based on observable inputs.
Article 75 of the Solvency II Directive (2009/138/EC) will apply to the valuation of mortgage loans from 1 January 2016. This article provides that assets (including mortgage loans) of insurance undertakings are valued at the amount for which they could be exchanged between knowledgeable and willing independent parties in an arm's length transaction.
Insurers use a valuation method to value their mortgage loans. This method comprises determining cash flows and deciding on an appropriate discount rate. At this, insurers take into account all relevant market data. An insurer applies the following principles when valuing its mortgage loans. com:office:office" /?>