Would it be possible for somebody to please show me in terms of numbers the actual balance sheet effect of the different types of FinRe? Eg: Balance Sheet (before Fin Re) Assets: A, B, C etc.. Liabilities: D,E,F etc.. Balance Sheet (after FinRe) Assets: X, Y, Z Liabilities: G, H, I Thanks.
Hi Hope these help (they're not full numerical examples but hopefully help clarify how things work!).... Asset enhancing FinRe Asset enhancing FinRe involves the reinsurer giving a loan to the insurance company. The insurance company will repay the loan out of future profits if they emerge. The effect on the statutory balance sheet is therefore: Assets after financial reinsurance = Assets before financial reinsurance + Loan Liabilities after financial reinsurance = Liabilities before financial reinsurance (The repayments don't have to be shown in the liabilities as they are contingent on future profits.) As time goes on, hopefully the future profits will actually emerge. When there's no FinRe, these profits will increase the amount of assets. But with FinRe they are paid to the reinsurer and so aren't available to increase the assets in future. We could summarise this by saying that asset-enhancing FinRe lets the insurance company take the credit for future expected profits in its assets at time 0. Liability reducing FinRe Liability reducing FinRe achieves the same net effect, but does it by reducing the liabilities rather than increasing the assets. To do this, rather than the reinsurer providing a loan, a reinsurance treaty is set up. Because some of the liabilities have been reinsured, the amount shown for liabilities in the insurance company's balance sheet is lower. The effect on the statutory balance sheet is therefore: Assets after financial reinsurance = Assets before financial reinsurance Liabilities after financial reinsurance = Liabilities before financial reinsurance - Reinsured liabilities Now, this is an "unusual" reinsurance treaty where no reinsurance claims are expected to be paid from the reinurance company to the insurance company. The plan is that the amount of reinsurance will be gradually reduced each year and that the amount of reinsurance will have been reduced to zero before any reinsurance claims have to be paid. The amount by which the reinsurance is reduced each year will be broadly the amount of profit that emerges each year. As time goes on, hopefully these future profits will actually emerge. When there's no FinRe, these profits will increase the amount of assets. But with FinRe the amount of reinsurance is also reduced and so the future liabilities increase as well as the future assets. We could summarise this by saying that liability-reducing FinRe lets the insurance company take the credit for future expected profits by reducing its liabilities at time 0. Sorry that turned out to be so long! If any particular bit is causing confusion, happily post to say so and can focus on clarifying that bit
Lynn, Thank you very much for replying and thanks for your explanation. I guess where I am confused (not just in name!) is that on a balance sheet assets have to equal liabilities. In both of these cases we are making adjustments to just one side (i.e. either increasing assets or reducing liabilities). My problem is that I don't then see how assets can continue to equal liabilities? Many thanks.
Hi Confused OK, I think I see the issue that's causing the confusion then.... Remember that the balance sheet "assets = liabilities" is really "asset = liabilities + capital and reserves". For a life insurance company, the "capital and reserves" will include any free assets, ie assets in excess of liabilities, so our balance sheet continues to balance Hope this helps Cheers Lynn
