April 2016 Q1 - ASET solution

[Viki2010]

"In many jurisdictions, regulatory capital requirements have been increasingly similar to economic capital requirement calculations, eg Solvency II Pillar 2"

Is the above solution implying the the Economic Capital requirement calculations = ORSA because it takes into account NB plan similarly to EC calcs?

 

[Viki2010]

One more question on Q1 part iii - the ASET solution states:

"Traditional reinsurance is unlikely to be effective since it may be difficult to implement for WP business"

Why would traditional reinsurance be particularly difficult to implement for WP business?

"......and the risks typically re-insured (ie mortality risk) are unlikely to be material for WP business"

Isn't WP business covering e.g. Endowment type products, for which mortality risk is material? Or am I not right/ missing something?

 

[Mark Willder]

One more question on Q1 part iii - the ASET solution states:

"Traditional reinsurance is unlikely to be effective since it may be difficult to implement for WP business"

Why would traditional reinsurance be particularly difficult to implement for WP business?

"......and the risks typically re-insured (ie mortality risk) are unlikely to be material for WP business"

Isn't WP business covering e.g. Endowment type products, for which mortality risk is material? Or am I not right/ missing something?

The key feature of with-profits here is the bonuses and these impact both of your questions.

The benefit on death is made up of the guarantees plus any terminal bonus. This makes it difficult to reinsure as the insurer determines the terminal bonus and the reinsurer will not want to be exposed to the risk that a high terminal bonus is declared. The payout is largely determined by the investment performance of the insurer's assets, and the reinsurer won't want to have to track this either.

Yes, you're right that with-profits endowments have some mortality risk. If a policyholder dies early on then they receive much more than the asset share. However, there will be relatively few deaths as the contract is primarily a savings contract. Also the insurer could reduce bonuses if mortality experience was bad. So they don't have as much need for reinsurance as for a without-profits term assurance say.

Best wishes

Mark

 

[Viki2010]

The key feature of with-profits here is the bonuses and these impact both of your questions.

The benefit on death is made up of the guarantees plus any terminal bonus. This makes it difficult to reinsure as the insurer determines the terminal bonus and the reinsurer will not want to be exposed to the risk that a high terminal bonus is declared. The payout is largely determined by the investment performance of the insurer's assets, and the reinsurer won't want to have to track this either.

Yes, you're right that with-profits endowments have some mortality risk. If a policyholder dies early on then they receive much more than the asset share. However, there will be relatively few deaths as the contract is primarily a savings contract. Also the insurer could reduce bonuses if mortality experience was bad. So they don't have as much need for reinsurance as for a without-profits term assurance say.

Best wishes

Mark

Thank you Mark. This makes sense.

I now see the issue with reinsurance for WP business. However, these type of contracts are still reinsured in practice, right?

 

[Mark Willder]

I now see the issue with reinsurance for WP business. However, these type of contracts are still reinsured in practice, right?

Yes, we can still reinsure with-profits. For example, the reinsurer can deposit back some of its reserves to the insurer to remove some of the investment issues. We might reinsure just the guaranteed benefits (sum assured plus past bonuses). So there are ways around some of the problems, but certainly with-profits is more difficult to reinsure.

Best wishes

Mark