Economic value of own funds
Difference between assets and liabilities measured at market or market-consistent value, the only quantity Solvency II recognizes as available own funds.
Accounting equity results from historical conventions and depreciation rules; prudential own funds result from an economic valuation, and the two almost always diverge considerably. The prudential balance sheet values assets at market price and liabilities as the sum of a discounted best estimate and a risk margin, with no implicit prudence. The difference is the excess of assets over liabilities, the backbone of available own funds, to which eligible off-balance-sheet items are added and from which foreseeable dividends and certain participations are deducted. Three properties follow from that construction and are the source of most misunderstandings. The value is volatile, because both sides of the balance sheet move with markets and not at the same pace. It is highly sensitive to discounting conventions, last liquid point, ultimate forward rate, volatility adjustment, to the point that a change of convention shifts billions with no transaction taking place. And it is classified into quality tiers, so that a high figure says nothing until its composition has been examined.
European life insurer as of December 31, 2025. Local GAAP accounting equity 2.1 billion euros; prudential excess of assets over liabilities 3.4 billion. The 1.3 billion gap comes mainly from the present value of future margins on the in-force book, which local accounting does not recognize and which the prudential balance sheet embeds in the best estimate.
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