Prudential Regulation Authority Rulebook

2.1

The PRA reminds governing bodies of NDFs to review their compliance with the Insurance Company – Overall Resources and Valuation Part of the PRA Rulebook on valuation uncertainty and prudent valuation and expects firms to have governance and processes in place to meet these requirements.

2.2

In order to comply with the Insurance Company – Overall Resources and Valuation Part of the PRA Rulebook, NDFs must monitor and manage valuation risk. This risk is often most material for portfolios of structured products or illiquid securities. In such cases, the insurers’ assessment and quantification of valuation uncertainty needs to be sufficiently robust and complete. Valuation uncertainty is the term used to refer to the existence, at the reporting date and time, of a range of plausible values for a financial instrument or portfolio of positions. Determining a prudent valuation requires an assessment of valuation uncertainty, which is a measure of valuation risk.

2.3

The assessment and quantification of valuation uncertainty needs to be underpinned by adequate standards of financial asset valuation governance and control. This includes sufficient independence in valuing assets, adequate documentation of policies and procedures, appropriate control over valuation models (including an understanding of model assumptions and limitations), suitable management information and consistent governance between internally and externally managed funds. Where governance and control failings over asset valuations exist, the increased valuation uncertainty should be reflected in reporting on the affected portfolio.