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October 2015 - Q1 iii

V

Viki2010

Member
Hi, the ASET solution mentions the:

1. Regulatory arbitrage and
2. Deposit back

as topics that should be discussed in the reinsurance context. Is this covered in the Core reading somewhere? I am just not clear on both of these.
 
Hi - these concepts are both covered in ST2 and so would be assumed knowledge at SA2 level. If you aren't able to track this content down in whatever version you have of the ST2 notes, let me know.
 
Hi Lindsay, on the reinsurance in s2 world, can I please check

Reinsurance recoveries valued at fair value principle as per cmp is the net reinsurance result = pv claims -pv premiums discounted at the same rate as BEL? Or would discount rate be alwas based on eiopa rate and ma or va would never apply to reinsurance?
 
Hi - sorry but I don't know the answer to this one definitively - and actually the Examiners wouldn't expect you to know this either, as it isn't covered in the Core Reading.

My understanding is that the value of reinsurance recoveries can either be calculated directly (ie as the present value of probability weighted future cashflows) or indirectly (ie as the difference between gross (before reinsurance) and net (after reinsurance) best estimate liability positions). Hence I suppose that if the reinsurance is done on a product where the MA is applicable, such as immediate annuity business, then the indirect approach would implicitly be done at a discount rate which includes the MA. So maybe the direct approach should also allow for the MA, provided relevant to the underlying business.

Let's see whether anyone else visiting the forums can confirm (or otherwise) this hunch?
 
I've been thinking about this a little more, and have convinced myself further that there should be allowance made for the MA/VA in a direct calculation of the value of reinsurance recoveries if the MA/VA is used for the corresponding BEL for that line of business. If not, then this would seem to create value out of nowhere.

In extremis, consider a situation where a particular line of business is 100% reinsured. Ignoring things like reinsurer profit margin, if the BEL for that business is discounted by a higher rate (including MA/VA) than the discount rate used for the reinsurance recovery assets (excluding MA/VA) then this would generate a surplus from nowhere - an "arbitrage profit", which shouldn't exist.

Interesting to think about this - thanks for the good question!
 
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