In the solution of que 24.5, Contingent loan It is written that future loan repayment will not be included in the liability value shown in the balance sheet. Risk premium reinsurance The liabilities may not need to increase to cover the additional reinsurance premium. I am not sure that why do regulator do not want this to be included in the liabilities side. Could anyone please confirm.
Hi Mahima Hi Mahima One reason might be the desire to keep the reserving process as simple as possible. The notes do say that financial reinsurance might not be effective in some regimes - these regimes tend to have more sophisticated rules. Another reason is that solvency reserves do not need to cover all liabilities, eg future shareholder dividends wouldn't be reserved for. Solvency reserves are there to protect policyholders. So the reserves need only cover any liabilities that rank equal to or above the policyholders. If the loan is repaid through future profits, then these will only occur if the insurer has been able to pay the policyholders, and so the loan repayments rank behind policyholders. Best wishes Mark
