S
Studystuff
Member
Hi,
I was hoping someone may able to clear up some confusion I’ve ran into.
In CP1/SP2 we learned about pricing/profit tests in which we projected cash flows associated with a contract. Within this we included the need to establish supervisory reserves (not accounting reserves) and SCR. This makes sense to me as it is a proper cash flow associated with a contract and hence will delay profit emergence.
However, studying the taxation chapters of SA2 got me thinking about how we determine our reported profit figures for published accounts and for how we calculation of tax. Ive picked up in SA2 that aloud accounting profit is calculated using the accounting basis which will not have relevance to SCRs. So profit is just change in assets - liabilities (which don’t include scrs). Does this mean that there is an inconsistency between the accounting profits an insurance company reports and the actual profits an insurer makes in a period ?
for example. Imagine at time zero a company has Assets = 100 (on both SII and accounting basis)
Liabs/technical provisions = 50 (on both SII and accounting basis)
SCR = 50
at time 1
Assets = 100
Liabs = 30
SCR = 70 (imagine this increased cause of changes in standard formula)
This company would have generated 20 in “profit” in its published accounts.. however this needs to be held against solvency capital. Could this put pressure on insurers to give dividends even though it’s not possible as they need to be held against the SCR ?
This has been causing me great confusion so I would really appreciate some help! Thank you
I was hoping someone may able to clear up some confusion I’ve ran into.
In CP1/SP2 we learned about pricing/profit tests in which we projected cash flows associated with a contract. Within this we included the need to establish supervisory reserves (not accounting reserves) and SCR. This makes sense to me as it is a proper cash flow associated with a contract and hence will delay profit emergence.
However, studying the taxation chapters of SA2 got me thinking about how we determine our reported profit figures for published accounts and for how we calculation of tax. Ive picked up in SA2 that aloud accounting profit is calculated using the accounting basis which will not have relevance to SCRs. So profit is just change in assets - liabilities (which don’t include scrs). Does this mean that there is an inconsistency between the accounting profits an insurance company reports and the actual profits an insurer makes in a period ?
for example. Imagine at time zero a company has Assets = 100 (on both SII and accounting basis)
Liabs/technical provisions = 50 (on both SII and accounting basis)
SCR = 50
at time 1
Assets = 100
Liabs = 30
SCR = 70 (imagine this increased cause of changes in standard formula)
This company would have generated 20 in “profit” in its published accounts.. however this needs to be held against solvency capital. Could this put pressure on insurers to give dividends even though it’s not possible as they need to be held against the SCR ?
This has been causing me great confusion so I would really appreciate some help! Thank you