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Contract Boundaries and related topics

Discussion in 'SA2' started by Arush, Nov 10, 2021.

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  1. Arush

    Arush Very Active Member

    We can consider Sol ll here, but any significant differences with IFRS17 or IFRS4 would be helpful as well.

    1. Could someone please explain the concept of cotract boundaries, from an insurer as well as a reinsurer point of view?

    2. Can contract boundaries differ for an insurer and the same business being ceded to a reinsurer, say due to different termination / repricing rights of the assuming party?

    3. For a reinsurer point of view, I am confused how the recapture rights affect the contract boundaries? My understanding is that the recapture itself doesn't define the contract boundary but rather a probabilty gets associated to the recapture when projecting cashflows. The main aspects the define a contract boundary are the termination and repricing rights of the party accepting the risk?
     
    Arush, Nov 10, 2021
    #1
  2. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Hi - apologies there haven't been any responses yet to this. The tutors have been hoping that a reinsurance reporting expert would step in to answer, as much of this does go beyond the SA2 Core Reading (and so you shouldn't be expected to know it for the exams).

    However, FWIW my own thoughts are:

    1. See previous thread on contract boundaries under Solvency II: https://www.acted.co.uk/forums/index.php?threads/contract-boundaries.14307/

    2. The contract boundaries for the underlying contract are assessed independently from those for the reinsurance contract. So yes: these could differ, depending on the terms of the insurance contract (between insurer & p/holder) vs the terms of the reinsurance contract (between reinsurer & insurer).

    3. This is probably where we need that expert! What you suggest here makes sense, particularly under the Solvency II definition. Having said that, I believe that under IFRS for cashflows to fall within a contract boundary there is also a requirement that the insurer has 'the substantive obligation to pay premiums' to the reinsurer. So if the insurer can recapture the coverage, this could fail - and so cause a contract boundary. However, the word 'substantive' is important: if there is a recapture fee which is effectively commercially equivalent to being compelled to pay the future reinsurance premiums, then the recapture right may then not trigger a contract boundary. This seems to be a potentially complex area of interpretation, so would need further careful investigation before taking any actions in this area.

    Therefore: for the purposes of SA2 I would say don't worry too much about details like this - just make sure that you understand the basics of contract boundaries under Solvency II, as they are described in the Core Reading. On the other hand, if your question is based on something you need to know for work: find an expert!
     
    Lindsay Smitherman, Dec 6, 2021
    #2

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