CFO forum backs liquidity premium for MCEV and Solvency II

Author: Laurie Carver

Source: Life & Pensions
22 Oct 2009


After months of speculation the Chief Financial Officer (CFO) Forum has amended the principles of its controversial Market Consistent Embedded Value (MCEV) metric to include a liquidity premium, and endorsed its use for Solvency II.



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The group also used the announcement to reaffirm industry support for a reference rate based on swaps, in contrast to the AAA government bond rate favoured by the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops) in its recent consultation papers on the implementation of the directive.



Under the changes, assets and liabilities will be discounted using a rate, including a premium "where appropriate", added to the swap-yield curve corresponding to the currency of the cashflows. A spokesman for the group's chairman, Phillip Scott of UK insurer Aviva, would give no further details on the implementation other than that the CFO Forum would be working to develop more detailed guidance.



The CFO forum is keen to have the MCEV approach adopted as the methodology for balance-sheet assessment under Solvency II and will continue to lobby for the inclusion of the measures in the directive. "These changes align our approach to MCEV with our views on Solvency II," said Scott.



The industry body said the existence of a liquidity premium was "clear", and claimed this was "evidenced by a wide range of academic papers and institutions", although no references were given.



The CFO Forum has been locked in talks to amend the accounting method since December last year, when it came under fire as a pro-cyclical and volatile means of determining a firm's value.