In accordance with IFRS an IFRS liability adequacy test is performed to establish whether the balance sheet provision less the related capitalised acquisition costs and Value of Business Acquired (VOBA) is adequate to meet the
commitments vis-à-vis the policyholders with a large degree of certainty. When performing this test, best estimate future contractual cash flows are projected, taking into account current and future developments of mortality, disability, the behaviour of policyholders, claims handling and management costs, and differences in the valuation of investments (to the extent they are not recognised at fair value). Valuation of the future expected profit sharing and the time value of embedded derivatives is included in these cash flows. The estimate is increased by a risk margin. The Cost of Capital method is used in calculating the risk margin. Finally the cash flows are discounted. If the thus calculated provision turns out to be higher than the book value of the technical provision present in the balance sheet, VOBA is impaired or this shortfall is added to the provision and charged directly to the income statement.
This IFRS liability adequacy test is performed every quarter for the entire life insurance portfolio to determine whether the reported technical provision, based on the most current assumptions, is still adequate.
The following current assumptions were used in performing the IFRS liability adequacy test as at 31 December 2011:
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Discount rate calculated on the Dutch Central Bank curve with an add-on to ECB all-government yields.•
Profit allocation where surplus interest exceeds the assumed interest plus 0.5%, with tranches of surplus interest running off over time.•
Cost allocation and distribution of efficiency advantages based on internal assessment.•
Projected mortality data for the entire population (CBS statistics Netherlands data from 2010) adjusted for experience in the company’s portfolio based on internal research.•
Lapse and early surrender data based on internal research.•
Inflation derived from market data.•
Salary increases in collective labour agreements in accordance with the inflation assumption.The primary discount rate is the ECB all-government curve. Due to the volatile interest rate developments in 2011, the sensitivity of interest decreases was assessed with an additional test. This showed that even at lower interest rates the provision was adequate.
Mortality tables are used in the test on the provision for insurance contracts. These tables contain historical information (data) on mortality. SRLEV uses what is referred to as the PLT tables prepared by the Dutch Association of Insurers. The model as was used by SRLEV to forecast the mortality development has been updated to the most recent mortality observations as taken by CBS up to and until 2010.
The mortality rates used in the projection of the liabilities is the probability according to the population mortality rate multiplied by a portfolio factor. The portfolio factor measures the difference between population mortality and mortality in the insurance portfolio. This factor is also dependent on product characteristics, gender, and elapsed time / age. This portfolio factor is revised annually based on internal research and the mortality rates of the latest CBS observations.
17.3.6.3 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 SRLEV 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 are tested collectively for impairment.
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). Mortgages losses 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 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.
17.3.6.4 Fair value of financial assets and liabilities
The fair value of financial assets and liabilities is determined on the basis of list prices where available. Such list prices are primarily derived from trade prices for listed instruments. If trade prices are not available, market prices from independent market traders or other experts are used. Financial assets are recognised at their bid prices and financial liabilities at their offer prices.
In markets where activity has decreased considerably or the market is inactive, the range of the prices from different sources can be large to one and the same investment. Selecting the most appropriate price valuation requires sound judgement. Using a different price may lead to a materially different valuation.
For some financial assets and liabilities, no prices are available. The fair value of these financial assets and liabilities is determined with valuation techniques, which may vary from net present value calculation to valuation models that use accepted economic methods. Input in the models is as far as possible based on observable market data. All valuation methods used are assessed and approved in-house according to internal governance procedures.
17.3.6.5 Impairment charges of intangible assets and financial instruments
Intangible fixed 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:
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The value in use is determined for CGU individually.•
The value in use is based on the business plans of the CGU concerned.•
The discount rate is determined on the capital asset pricing model, in which the beta is calculated on the basis of a group of comparable companies. This reference group is determined individually per CGU.Capitalised acquisition costs and Value of Business Acquired (VOBA)
The acquisition costs and VOBA are tested simultaneously using the IFRS liability adequacy test for insurance contracts. If, on the balance sheet date, the combined book value of the VOBA and the capitalised costs is higher than the
difference between the book value of the provision for insurance contracts and the test provision (best estimate market value provision for insurance contracts plus a risk margin), the shortfall will be charged to the results.
Software and other intangible assets
On each reporting date, the capitalised costs for software, distribution channels and client portfolios are reviewed for indications of possible impairments.
The Zwitserleven brand name is tested for impairment once every year. The recoverable value is determined by a value in use calculation. The key assumptions used herein are the discount rate and the royalty rate. Management believes that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.
Reversal of impairments on intangible fixed assets
Except for goodwill, VOBA and internal acquisition costs, impairment losses on intangible fixed assets are reversed if there is proof that a change to the estimates of the realisable value occurred after the impairment loss was recognised. The reversal is included under ‘impairment charges’ in the income statement. The book value after reversal can never exceed the amount before recognition of the impairment loss.