An IFRS liability adequacy test is carried out twice a year to establish the adequacy of provisions for liabilities arising from the total portfolio of non-life insurance policies. This test is performed on the provision for non-life claims, the provision for unearned premiums and the provision for claims-handling expenses.
Methodology IFRS liability adequacy test on non-life insurance liabilities
The testing value of the insurance liability based on fair value assumptions consists of a best estimate, followed by a risk margin. The best estimate is made for each portfolio separately. The classification of portfolios (branch and distribution channel) has been determined in such a way, that there exists a risk homogeneous portfolio. The best estimate serves as a realistic estimate of future claim payments, claim-handling expenses and future expenses arising from insurance contracts. The cash flows of the disability insurance policies are discounted using the ECB AAA interest curve including the UFR. The uncertainty margin is based on the Cost of Capital method (Cost of Capital: 6%). Any shortfall is charged directly to the income statement.
19.3.6.3 Provision for bad debts
As far as the loans and advances with or without mortgage collateral are concerned, a provision for impairment is made if there are objective indications that SNS REAAL will not be able to collect all the amounts in accordance with the original contract. For loans and advances that are individually significant, the provision made equals the difference between the book value and the recoverable value. The recoverable value equals the expected future cash flows, including the amounts realised by virtue of guarantees and collateral, discounted at the initial effective interest rate of the loans and advances.
The criteria for impairment are applied to the entire loan portfolio. Homogenous groups of loans and advances with smaller amounts per individual loan or advance (and corresponding credit risk), such as mortgages and consumer credit, are tested collectively for impairment. The same applies to smaller business loans managed in a portfolio. The provision with respect to the collective approach is calculated using models, including risk-rating models for homogenous pools of consumer and SME loans. The loss factors developed using these models are based on historical loss data of SNS
The provision for impairment also covers losses where there are objective indications of losses likely to be incurred in the loan portfolio (IBNR: ‘incurred but not reported’). Losses on mortgages and mortgage-backed property finance are estimated on the basis of historical loss patterns of loans and advances that carry similar risk characteristics as the loans and advances held in the portfolio. Losses on non-mortgage backed property finance and other loans and advances are estimated on the basis of historic loss patterns and the creditworthiness of the borrowers. Both estimates take into account the current economic climate in which the borrowers operate.
If the amount of the impairment subsequently decreases due to an event occurring after the impairment, the previously recognised impairment loss is reversed in the income statement. When a loan is uncollectable, it is written off against the relevant provision for impairment. Amounts that are subsequently collected are deducted from the addition to the provision for impairment in the income statement.
19.3.6.4 Net realisable value of property projects
Property projects are valued at the lower of cost or net realisable value (NRV). NRV is the estimated sales price less sales costs, in which the projected revenues and costs (including the estimated sales price at the end of the exit period) are discounted at the weighted average cost of capital (WACC) of SNS Bank NV.
The estimated sales price at the exit date in the future is determined based on projections of the rental income, price per square meter, construction costs, interest costs and expected market returns on exit date and is based on valuations provided by professional external appraisers.
19.3.6.5 Fair value of financial assets and liabilities
The fair value of financial assets and liabilities is determined on the basis of quoted list prices where available. Such quoted list prices are primarily derived from transaction prices for listed instruments. If transaction prices are not available, market prices from independent market participants or other experts are used. SNS REAAL applies a transfer price when determining fair value; therefore financial assets are initially recognised at their bid prices and financial liabilities at their offer prices.
In markets where activity has decreased or in inactive markets, the range of prices from different sources can be significant for a certain investment. Selecting the most appropriate price requires judgement; available market information on fair value of the instrument is taken into account.
For certain financial assets and liabilities, no market price is available. The fair value of these financial assets and liabilities is determined using valuation techniques, which may vary from net present value calculation to valuation models that use accepted economic methodologies. Input into the models is as far as possible based on observable market information. All valuation methods used are assessed and approved in-house according to SNS REAAL governance procedures.
19.3.6.6 Impairment charges of intangible assets and investments in financial instruments
Intangible assets
An asset is subject to impairment if its book value exceeds the realisable value from continued use (value in use) or sale of the asset. The realisable value of assets not classified at fair value through profit or loss is estimated if there are indications of impairment of the asset. Goodwill, intangible assets with an indefinite useful life and intangible assets not yet available for use are tested at least once a year. If such intangible assets are initially recognised during the reporting period, they are tested for impairment before the end of the reporting period.
Goodwill
Goodwill created with the acquisition of subsidiaries, associated companies and joint ventures is allocated to cash-generating units. The book value of the cash-generating unit (CGU) (including goodwill) is compared to the calculated recoverable value, determined on the basis of value in use. If the recoverable value is lower than the book value, the difference will be recognised as impairment in the income statement. Assumptions used in these goodwill impairment tests: