##urers ’ investment strategies related to the new ifrs 9 financial instruments. in contrast to the existing ias 39, going forward insurers may no longer be allowed to recognise realised gains or losses ( e. g. gains on sale ) on their longer - term equity investments ( e. g. in banks ) in profit or loss ( net income ), but only in a separate reserve within equity ( “ other comprehensive income ” ). bis central bankers ’ speeches discounted at the risk - free rate. the application of a liquidity premium on the liability side could in principle reduce the valuation mismatch and thereby avoid situations where insurers are unduly forced to dispose of illiquid assets. such a counter - cyclical mechanism might even mean that insurers would be willing to take on additional illiquid assets in a period of market distress. however, there are also some conceptual issues associated with this idea, mainly because insurance liabilities are different in nature from insurance assets and often do not have an accessible market. nevertheless, it is important to find a method defining a discount rate that would be consistent from a financial stability perspective. overall, accounting and regulatory changes bring important benefits in terms of financial soundness and disclosure. but they could also cause portfolio shifts affecting financial markets. for instance, firms may want to divest equity and shorten the duration of their corporate bond holdings. but to limit the resulting duration gap, they may have to use more long - term swaps or buy more long - term low - risk bonds, as defined by regulation. this would tend to flatten the risk - free term structure, but steepens the term structure for lower - rated credit. however, the financial market implications from asset allocation perspective may be transitory rather than permanent : other investors come in, and the phase - in period of solvency ii is very long and gradual. it remains to be seen to what extend the risk weight of the internal models will significantly differ from the standard regulatory risk weight. 3. financial system implications : let me now move to my final part and elaborate on the potential main financial system implications : first, insurers and pension funds are likely to continue to move away from products offering a guaranteed return or defined benefits. this trend is being reinforced by the low - interest rate environment and the consequences of the financial crisis. as was the case in japan in the 1990s, low interest rates make it difficult for these institutions to meet future obligations out

any conclusions from such a mixed pie. indeed, our first direct finding was that the uncertainty about the scope, timing and extent of accounting and regulatory changes increases uncertainty which makes it more difficult for insurance companies and pension funds to plan their investment strategies over the longterm. so let me briefly recall the main upcoming accounting and regulatory changes relevant for these investors. i start with the changes in international accounting standards. they should be implemented from 2013 or 2014 onward, though much remains to be decided. alongside the gains in transparency and comparability, one can expect them to produce greater volatility in financial statements : – for pension commitments : modifications to ias 19 ( concerning the measurement and recognition of “ employee benefits ” ) by 2013 will create more valuation changes in defined benefit ( db ) pension plans which will be reflected in their funding status and the profit and loss statement of the sponsoring company. this is mainly attributable to the fact that the revised ias 19 – among other things – eliminates the existing option to defer the recognition of gains and losses, known as the “ corridor method ”. – for insurance contracts : ifrs 4 phase 2 proposes a single accounting model for insurance contracts by 2014 and requires that liability valuation changes are recognised in the p & l. this would also lead to greater accounting volatility, for the following reasons : • going forward all life insurance liabilities and non - life ( property and casualty ) claims liabilities would have to be discounted either via a bottom up approach bis central bankers ’ speeches ( risk free + liquidity premium... ) or a top down approach ( starting from assets return ). the discount rate would have to be adjusted regularly, namely at the end of each reporting period. in the iasb ’ s tentative approach, the effect of changes in the discount rate must to be posted in p & l at each reporting date. as a result, the volatility in interest rates – as currently experienced with sovereign risk rates – will impact the annual results without consideration for the fact that the discounted insurance liability may span over very long term. • on the other side, in response to mounting volatility of their liabilities, insurers may be tempted to – contrary to their current treatment – measure larger portions of their investments in fixed - income securities at fair value, reflecting all fair value changes in profit or loss ( “ net income ” ). with this new approach to classification and measurement of their investment portfolios