Hi there Could someone please help me understand where operational capital/ start-up capital comes from? Does it form part of free capital, regulatory capital or in the technical provisons amounts?
If there are not enough premium/contributions to cover the capital for a new start-up (maybe a new class of business), then the provider will need to meet these costs. This would most likely come from free capital. Chapter 35, Section 1.3 has more info on what these start-up costs could be.
Perfect thank you! Then I just have another question. I just want some clarity on my understanding of the provisions. So provisions are just calculated amounts of what the insurers hold to meet future liabilities. Now I am just a bit confused with the asset side. Would the assets held against these provisions just be any investment like equities, bonds, property, cash, etc (subject to regulation on the types of assets held)? And then secondly when they speak about setting up reserves/provisions. Does this mean that a part of the premium gets set aside and invested as a provision or is it more that some of our assets are set aside against the liability? Is this priced into the premium and if so what part does it form of the premium?
Correct Once the premium comes in, and a risk is taken on, then some of that premium would be held to one side as a a 'reserve'. This could be invested into various assets, or even kept as 'cash'. Either way, it would be a reserve. Once the insurer is comfortable there won't be a claim, then this can be 'released', maybe as profits, or used to invest in a new project.
Okay perfect that makes sense. But the bit of premium they set aside to form the reserve do they price that into the premium or what does it form part of when constructing the premium?
The premium would be the expected cost of claims, and then margins added to cover expenses, commissions, and profit. The 'reserve' would be money set aside to cover claims, so in theory, the reserve would be the expected cost of claims. This is a basic theoretical approach, especially given as in reality, premiums would depend on market conditions, competition etc.
That makes sense thank you. Then I just have a follow-up question to that. Would reserves and provisions be the same? Because I am struggling to understand the difference when it comes to determining the surplus due to relating or increasing reserves. Are these reserves the same as the provisions that we set up as our liabilities? Or what part of liabilities do the reserves form part of?
