• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Impact of reinsurance on required capital

E

Edward chong

Member
Hi,

1. I would like to ask that, for a reinsurance treaty that transfers genuine insurance risk (such as mortality risk, longevity risk and so on), whether the following items are computed net or gross of reinsurance in Solvency II balance sheet:
  • Best estimate liabilities (BEL)
  • Risk margin (RM)
  • Solvency capital requirement (SCR)
  • Minimum capital requirement (MCR)?
2. How is the computation of SCR for counterparty credit risk different if the cedant & reinsurer are subsidiaries of an insurance group?

Thank you.
 
1. I would like to ask that, for a reinsurance treaty that transfers genuine insurance risk (such as mortality risk, longevity risk and so on), whether the following items are computed net or gross of reinsurance in Solvency II balance sheet:
In short, BEL is presented as gross, and the others net. More details on each point below...
  • Best estimate liabilities (BEL)
BEL is shown without reinsurance on liability side of SII balance sheet. The reinsurance asset is shown separately on the asset side of SII balance sheet.
  • Risk margin (RM)
The risk margin is cost of holding a notional SCR. The notional SCR takes account of existing reinsurance arrangements. More on this after the next bullet-point.
  • Solvency capital requirement (SCR)
The SCR takes account of reinsurance arrangement in two ways. It will be assessed in counterparty default risk module. Furthermore, the change in the value of the reinsurance asset is allowed for when calculating the impact of various risks on basic on funds (e.g. mortality shock).
  • Minimum capital requirement (MCR)?
The starting point of MCR calculation is a linear formula based on technical provisions. The technical provisions exclude risk margin, but include the benefit of reinsurance. The MCR is then subject to upper and lower bounds based on SCR (discussed above) and an absolute floor.
2. How is the computation of SCR for counterparty credit risk different if the cedant & reinsurer are subsidiaries of an insurance group?
Sorry - I don't know the answer to this one off the top of my head!
 
Dear ActuaryLad,

Thanks for your reply.

For my last question, maybe we should wait patiently for Acted tutors to reply.
 
2. How is the computation of SCR for counterparty credit risk different if the cedant & reinsurer are subsidiaries of an insurance group?

Hi

The fact that the Core Reading doesn't address this question should reassure us that the details are beyond what we're required to know. My (limited!) understanding is that having reinsurance with reinsurers who are part of the same group results in not being able to take credit for diversification between them in the counterparty risk module.

Best wishes
Lynn
 
Back
Top