Securitisation under Solvency II

[chloe3705]

Notes Chapter 4 Section 4.1 (Page 29): the introduction of Solvency II has reduced the effectiveness of such methods (raise capital through securitisation, financial reinsurance and subordinated debt) in terms of improving the regulatory balance sheet.

Can someone please help explain why is that?

 

[Maxit]

As per my understanding, SII doesn't have a VIF component because of the contract boundaries restriction. i.e: no future profits beyond contract boundaries to securitise/recognise in the SII balance sheet, which is why those methods mentioned in the core reading are not effective under SII.

This is also discussed, albeit briefly in chapter 14 capital management.

Hope this helps.

 

[Em Francis]

As per my understanding, SII doesn't have a VIF component because of the contract boundaries restriction. i.e: no future profits beyond contract boundaries to securitise/recognise in the SII balance sheet, which is why those methods mentioned in the core reading are not effective under SII.

This is also discussed, albeit briefly in chapter 14 capital management.

Hope this helps.

Not quite.

Chapter 14 states that:
Securitisation can be particularly useful in regimes where the regulatory balance sheet does not fully allow for the future profits expected from a block of business.

However, under Solvency II, the regulatory balance sheet does allow for future profits expected (up until the contract boundaries) in the BEL. As the future profits are included in BEL, the insurer would also need to reserve for the fact that they would need to pay back the loan if the future profits emerged. So there would be no regulatory advantage in entering such an arrangement as your reserves would increase as well as your assets. It is also likely to be expensive.
However, where it could be effective is where the regulatory balance sheet does not allow for the expected future profits, ie past any contract boundaries.
Hope this helps.
Thanks
Em

 

[Maxit]

Not quite.

Chapter 14 states that:
Securitisation can be particularly useful in regimes where the regulatory balance sheet does not fully allow for the future profits expected from a block of business.

However, under Solvency II, the regulatory balance sheet does allow for future profits expected (up until the contract boundaries) in the BEL. As the future profits are included in BEL, the insurer would also need to reserve for the fact that they would need to pay back the loan if the future profits emerged. So there would be no regulatory advantage in entering such an arrangement as your reserves would increase as well as your assets. It is also likely to be expensive.
However, where it could be effective is where the regulatory balance sheet does not allow for the expected future profits, ie past any contract boundaries.
Hope this helps.
Thanks
Em

Thanks Em. I had picked up my understanding from this earlier thread, but rereading that post with your explanation makes more sense.
https://www.acted.co.uk/forums/inde...-management-section-6-3-securitisation.14446/

 

[phoenix2019]

Not quite.

Chapter 14 states that:
Securitisation can be particularly useful in regimes where the regulatory balance sheet does not fully allow for the future profits expected from a block of business.

However, under Solvency II, the regulatory balance sheet does allow for future profits expected (up until the contract boundaries) in the BEL. As the future profits are included in BEL, the insurer would also need to reserve for the fact that they would need to pay back the loan if the future profits emerged. So there would be no regulatory advantage in entering such an arrangement as your reserves would increase as well as your assets. It is also likely to be expensive.
However, where it could be effective is where the regulatory balance sheet does not allow for the expected future profits, ie past any contract boundaries.
Hope this helps.
Thanks
Em

However, where it could be effective is where the regulatory balance sheet does not allow for the expected future profits, ie past any contract boundaries. This is true for Solvency 2 right? Since we cannot include future premiums that would be received after the contract boundaries.

That in effect means,
Under solvency 2 we can securitise any stream of future profits arising after the contract boundaries (CB). Since, these profits (post CB) have not been allowed for in the Market consistent valuation of BEL. Our assets would increase, but our liabilities won't, as the payouts from the securitised asset would be contingent on that future stream of CF's actually arising. And the investor has ideally taken on that risk, in lieu of a higher return.

 

[Em Francis]

However, where it could be effective is where the regulatory balance sheet does not allow for the expected future profits, ie past any contract boundaries. This is true for Solvency 2 right? Since we cannot include future premiums that would be received after the contract boundaries.

That in effect means,
Under solvency 2 we can securitise any stream of future profits arising after the contract boundaries (CB). Since, these profits (post CB) have not been allowed for in the Market consistent valuation of BEL. Our assets would increase, but our liabilities won't, as the payouts from the securitised asset would be contingent on that future stream of CF's actually arising. And the investor has ideally taken on that risk, in lieu of a higher return.

Agreed