Transitional measure on technical provisions

Moving to Solvency II technical provisions, measured at market value, would have revealed in one step the gap against provisions held under earlier regimes, a gap that is large for older life portfolios carrying high guaranteed rates. Rather than force immediate capital raises or business closures, the regime provided a transitional deduction, calculated once at the date of application and declining linearly over sixteen years, from 2016 to the end of 2031. It is a smoothing and not an exemption: the economic liability exists in full from day one, only its prudential recognition is spread. The result is two readings of the same balance sheet, one with and one without the measure, and the second is the one an analyst must look at, since it says where the undertaking will stand once the deduction has run out. Supervisors require both to be disclosed, and a comfortable ratio that becomes inadequate without the transitional is the single most important signal a solvency report can give.

The transitional measure on technical provisions provided by the Solvency II Directive, applicable since 1 January 2016, declines linearly over sixteen years to expire on 31 December 2031, and undertakings applying it must disclose their solvency ratio both with and without it.

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