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Sept 2015 Q-1 iii)

A

Actuary@22

Very Active Member
Hi
Please explain how would the impact of the transaction be under Solvency 2 regime.As the answer in the examiner's report is based on Solvency 1 framework and is no longer relevant. I have gone through the ASET's as well which have comments asuming solvency 2 but I am not very clear.

I am a bit confused with the overall impact and with the impact on Free Surplus as well.

  • As per my understanding I could just gather the folowing, mortality risk would be reduced and hence SCR will be lower and as a consequence Risk margin would also be lower.
  • Impact on PVIF would be negligible as there is no release of future margins and profits beyond contract boundaries also would be 0 under annuities.
  • Impact on FS-Assets would increase by 1 billion as reinsurance is treated as an asset under solvency 2 after deductions for allowance for expected loses are made.Not sure of other impacts (including the reinsurance premium paid P etc ).
 
Assets will go down by the reinsurance premium P.
But assets will increase by the expected reinsurance recoveries (net of best estimate of default losses).
So the impact on assets will depend on the relationship between the reinsurance premium P and the expected recoveries. Since the reinsurer would expect to make a profit, P could well be higher than expected recoveries, which would mean a net reduction in assets (and hence in free surplus).

BEL will be unchanged, as under Solvency II the liabilities are shown gross of reinsurance.
However, because of the transfer of mortality risk to the reinsurer, the risk margin would likely reduce a little.
So this would offset some of the free surplus reduction mentioned above.
 
Hi, regarding your last line "
However, because of the transfer of mortality risk to the reinsurer, the risk margin would likely reduce a little.
So this would offset some of the free surplus reduction mentioned above."
Since RM is reducing, required capital is reduced (assuming its part of Req cap and not counted as release of PIVF in SII), then it will further reduce net assets (Free surplus + req cap- cost of holding cap), so how does it offsets the reduction in net assets mentioned initially?
 
Risk margin is part of the technical provisions and not the required capital. Reduction in risk margin will increase net assets.
 
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