SCR

[Viki2010]

SCR for each individual risk is determined as the difference between the net asset value (NAV) in the unstressed balance sheet and the NAV in the stressed balance sheet.

The actuarial models in insurance companies calculate SCR based on stressed and unstressed BEL. Is the NAV equivalent to net BEL? In this context, it would be net of reinsurance BEL = Net Asset Value?

 

[Lindsay Smitherman]

No: net asset value is assets minus BEL (as defined at the top of page 20 in Chapter 12). Just stressing the BEL on its own won't give you the SCR: you have to consider the impact of the stress on asset values as well as on liabilities.

Also note that reinsurance does not reduce the BEL on the balance sheet. As described in Section 1.1 of Chapter 12, reinsurance recoveries are treated as an increase in assets in the Solvency II balance sheet, not as a reduction in liabilities.

 

[Mbotha]

Also note that reinsurance does not reduce the BEL on the balance sheet. As described in Section 1.1 of Chapter 12, reinsurance recoveries are treated as an increase in assets in the Solvency II balance sheet, not as a reduction in liabilities.

Does this include outward reinsurance premiums? I.e. These are netted off against reinsurance recoveries in the balance sheet (assets)?

 

[Viki2010]

No: net asset value is assets minus BEL (as defined at the top of page 20 in Chapter 12). Just stressing the BEL on its own won't give you the SCR: you have to consider the impact of the stress on asset values as well as on liabilities.

Also note that reinsurance does not reduce the BEL on the balance sheet. As described in Section 1.1 of Chapter 12, reinsurance recoveries are treated as an increase in assets in the Solvency II balance sheet, not as a reduction in liabilities.

Thanks Lindsay.

I am trying to figure out how are asset calculations incorporated into the derivation of capital value of each SCR module.....

 

[Lindsay Smitherman]

Does this include outward reinsurance premiums? I.e. These are netted off against reinsurance recoveries in the balance sheet (assets)?

Yes - if there are regular reinsurance premiums payable (as opposed to a single reinsurance premium, which will already have been paid)

 

[Lindsay Smitherman]

Thanks Lindsay.

I am trying to figure out how are asset calculations incorporated into the derivation of capital value of each SCR module.....

As per the course notes, the SCR for risk i is calculated as:

SCRi = NAV in the unstressed (ie best estimate) balance sheet – NAV in the stress scenario for risk i

So the company needs to calculate the new value of assets under the stress scenario that involves risk i and the new value of the BEL under the stress scenario that involves risk i, and thus will obtain the NAV under that stressed scenario (= the difference). This can then be deducted from the NAV in the base balance sheet (assets minus BEL) to give the SCR for risk i.

 

[Viki2010]

Thank you Lindsay. Your answers are brilliant

 

[Lindsay Smitherman]

Glad to be of help!

 

[Mbotha]

Yes - if there are regular reinsurance premiums payable (as opposed to a single reinsurance premium, which will already have been paid)

Hi Lindsay

Just to clarify - so the BEL is calculated using full office premium (not net-of-reinsurance premium)? This would make sense given that recoveries are ignored in the calculation as well. Is that right?

 

[Viki2010]

BEL is always calculated as gross of reinsurance and shown as a liability on the balance sheet.
The reinsurance is accounted for under assets in SII. Reinsurance recoveries also fall under assets (increase in assets).