With-profits - Solvency II

[mss2114]

Hi,

I had a few questions regarding with-profits funds and Solvency II.

A with-profits fund would have a Solvency II balance sheet as Assets = BEL guaranteed benefits (1) + BEL future discretionary benefits (2) + Undistributed Surplus (3) + Value of Shareholder transfers (4)

From Ch 11, Section 6 - Quality of Capital Resources - "For with-profits funds, own funds are adjusted for consolidation purposes so that they comprise only the value of shareholder transfers. This ensures that only those own funds that have been identified as being expected to be paid out to shareholders can be used to support solvency within a shareholder-owned fund." So for a with-profits fund only the Value of Shareholder transfers can be considered as Own Funds and used to back the capital requirements? This then leaves the question, that the undistributed surplus also has a certain loss absorbency capability - so can this be considered as available capital?

I'm a bit confused about the Adjustment (Adj) component of the Overall SCR. The core reading states - "The loss absorbing capacity of technical provisions could include the ability to reduce discretionary benefits under the stressed conditions". I'm thinking under a stressed condition, I can do a considerable amount of smoothing of bonus rates by reducing my undistributed surplus. So how does this relate to items (2) and (3) in my above equation?

So basically for a with-profits fund which components can be considered as available capital? Also the undistributed surplus can't be used to absorb losses on any business outside the with-profits fund, so it would make sense for solvency purposes on an entity level to consolidate Own Funds.

Thanks for your help as always

 

[km389]

On the first point, I think it's saying that you can't use the policyholder-owned part of OF in a WPF to support the separate shareholder fund. You can only use the value of the shareholder transfers because in theory they can be transferred from the WPF to the shareholder fund. That's my understanding of it.

On the Adjustment. It better to rearrange the equation as:
(3) + (4) = Assets - [ (1) + (2) + Risk Margin ]
The LHS is your OF and that changes under a stress scenario because the components RHS changes.

 

[Em Francis]

Hi,

I had a few questions regarding with-profits funds and Solvency II.

A with-profits fund would have a Solvency II balance sheet as Assets = BEL guaranteed benefits (1) + BEL future discretionary benefits (2) + Undistributed Surplus (3) + Value of Shareholder transfers (4)

From Ch 11, Section 6 - Quality of Capital Resources - "For with-profits funds, own funds are adjusted for consolidation purposes so that they comprise only the value of shareholder transfers. This ensures that only those own funds that have been identified as being expected to be paid out to shareholders can be used to support solvency within a shareholder-owned fund." So for a with-profits fund only the Value of Shareholder transfers can be considered as Own Funds and used to back the capital requirements
This then leaves the question, that the undistributed surplus also has a certain loss absorbency capability - so can this be considered as available capital?

For the Group regulatory balance sheet, only the undistributed surplus which is earmarked for shareholders is 'available capital' for any shareholder owned fund's required capital. However at an individual fund level, all this undistributed surplus should be available to cover the with-profit's fund's required capital if it is from the with-profits fund.

I'm a bit confused about the Adjustment (Adj) component of the Overall SCR. The core reading states - "The loss absorbing capacity of technical provisions could include the ability to reduce discretionary benefits under the stressed conditions". I'm thinking under a stressed condition, I can do a considerable amount of smoothing of bonus rates by reducing my undistributed surplus. So how does this relate to items (2) and (3) in my above equation?

Agree with km39, reducing (1) and (2) will then increase the undistributed surplus under a stressed condition, resulting in a fall in the SCR.