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Reinsurance under SII

Discussion in 'SA2' started by gunnert, Oct 3, 2015.

  1. gunnert

    gunnert Member

    Hi,

    One of the questions in Mock Exam C asks what the impact on the SII BS would be of taking out reinsurance on a block of existing term assurance policies.

    The solutions say that the BEL would be unaffected by the reinsurance.

    Why is it not the case that the BEL would increase to reflect the PV of projected future reinsurance premium outgo?

    Thanks
     
    gunnert, Oct 3, 2015
    #1
  2. Em Francis

    Em Francis ActEd Tutor Staff Member

    Hi

    Under Solvency II, reinsurance recoveries are no longer recognised as a reduction in liabilities and instead recognised as an increase in the assets.

    Such recoveries must be adjusted to allow for the best estimate of expected losses due to the default of the reinsurer. This is calculated as the present value of the expected losses in each future year.

    Therefore the best estimate liability should be calculated gross, without deduction of amounts recoverable from reinsurance contracts. Those amounts should be calculated separately on the asset side of the Solvency II balance sheet.

    Thanks

    Em
     
    Em Francis, Oct 5, 2015
    #2
    oslolso likes this.
  3. gunnert

    gunnert Member

    Thanks for your reply, Em

    As the reinsurance premiums (not the reinsurance cover) are a type of expense, wouldn't they be included in the BEL calculation?

    Thanks
     
    gunnert, Oct 8, 2015
    #3
  4. Em Francis

    Em Francis ActEd Tutor Staff Member

    The BEL is calculated gross of reinsurance and the reinsured portion is shown on the assets side as “recoverables from reinsurance contracts”, corresponding
    to claims on the reinsurer less payments due to the reinsurer (e.g. reinsurance premiums).

    Thanks

    Em
     
    Em Francis, Oct 10, 2015
    #4
  5. MLC

    MLC Member

    Hi Em,

    Just to quickly confirm, would the reinsurance premiums be the PV of all future reinsurance premiums?

    Thanks,

    Max
     
    MLC, Apr 3, 2019
    #5
  6. Em Francis

    Em Francis ActEd Tutor Staff Member

    Yes, it makes sense, if the corresponding reinsurance recoveries were included. However, since reinsurance is often annually renewable it may be subject to contract boundaries, in which case you wouldn't include future reinsurance premiums beyond the boundary.
    Thanks
    Em
     
    Em Francis, Apr 3, 2019
    #6
    MLC likes this.

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