Hi, I am confusing myself trying to explain why, if the regulatory "already allows future profits to be included as an admissible asset....then the regulatory solvency position will not be improved by using a contingent loan". But if its allowed, then it would/should improve because you can say its improved your solvency position? Sorry, but I think it has confused me. I have also looked at assignment X5.9, it talks about similar things, including crystallising future profits, but its in general confusing, in particular the regulators involvement and allowing for it would not improve with a contingent loan. Can you please help me?
Hi studyboy321 In isolation, and if future profits are not allowed for on the balance sheet, these loans that are contingent on future profits will always improve the solvency position as get an immediate increase in assets, but we won't need to allow for the liability of needing to pay the loan back. We only need to hold a liability on the solvency balance sheet where it ranks ahead of policyholder liabilities or to the extent assets shown on the balance sheet will be expected meet it. However, if the regulatory regime already allows for future profits to be held as an asset and an insurer takes advantage of this and holds an asset in respect of these, then taking out one of these contingent loans would only improve its solvency position if the loan amount exceeds the value of future profits recognised as at asset. Otherwise, there would be no change in the solvency position for the company. This is because the value of future profits recognised as an asset would be reduced by the value of the loan (or to zero if they are less in value than the loan) as future profit is the value of future income net of the value of future outgo that must be paid from this, including all loans as they fall due. (The insurer has chosen to recognise assets that won't all be used to meet policyholder benefits so it also has to be consistent and allow for liabilities that rank below policyholders in terms of payment priority that will be met from assets allowed for.) Hopefully this helps.
