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. The gap is large for older life portfolios carrying high guaranteed rates. To avoid 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 smooths without exempting: the economic liability exists in full from day one, and only its prudential recognition is spread. That gives two readings of the same balance sheet, one with the measure and one without. The analyst must look at the second, since it says where the undertaking will stand once the deduction has run out. Supervisors require both to be disclosed. A comfortable ratio that becomes inadequate without the transitional is the single most important signal a solvency report can give.