Solvency 2 future profits

[TanishaS]

Hi,
Is my understanding correct that Solvency 2 takes account of the future profits using the risk margin? However, if the risk margin is calculated only for non-hedgeable risks, how is the profit from hedge able risks included in the calculation?

Adding to the above, how is securitisation shown on the balance sheet (is the increase in assets offset by a repayment liability?) under Solvency 2?

Thanks

 

[Lindsay Smitherman]

Hi,
Is my understanding correct that Solvency 2 takes account of the future profits using the risk margin? However, if the risk margin is calculated only for non-hedgeable risks, how is the profit from hedge able risks included in the calculation?

You seem to be very confused about the purpose and calculation of the risk margin, so would suggest reviewing the course content on this (Chapter 10, Section 2.2).

Solvency II capitalises future profits (up to the contract boundaries) through the use of a 'best estimate' liability (the BEL).

The risk margin (which ensures that the technical provisions are 'market-consistent') counteracts this (ie works against it): the higher the risk margin, the more deferred the 'future profit emergence' would be (although of course Solvency II is about reporting the solvency position of the insurer, not reporting profits).

 

[Lindsay Smitherman]

Adding to the above, how is securitisation shown on the balance sheet (is the increase in assets offset by a repayment liability?) under Solvency 2?

Fundamentally, yes (unless the arrangement is securitising profits that are not recognised on the Solvency II balance sheet, such as those arising beyond contract boundaries).