Solvency 2

[SABeauty]

Hi

Are PV of future profits on all business allowed for in the Pillar 1 of solvency 2?

What about assets backing the Without profits business?

Thanks

 

[Mike Lewry]

Level 2 Draft Advice says that PVIF should be incorporated in technical provisions. I'm not aware of restrictions for any particular types of business.

Investments (including assets backing NP business) should be included on the assets side of the balance sheet.

 

[SABeauty]

Level 2 Draft Advice says that PVIF should be incorporated in technical provisions.

Why is this incorporated in the technical provisions? Is it not incorporated into assets?

 

[SABeauty]

Am I completely mis understanding. For Solvency 1 realistic pillar. On assets side you include PV future profits on Without profits business written in WP fund.

For Pillar 2 ICA for assets you include PV of future profits on all in force business.

Is the above correct?

Thereafter how are these dealt with in Solvency 2?

Thanks

 

[Mike Lewry]

Why is this incorporated in the technical provisions? Is it not incorporated into assets?

In the Level 2 advice, CEIOPS considered that the treatment of PVIF must be undertaken when valuing technical provisions. Any PVIF not incorporated in the valuation of technical provisions should be valued at nil.

If we think of PVIF as coming from future inflows less future outflows, we can see that this is closely related to BEL, which also looks at the present value of future expected cashflows. So, essentially BEL is already taking into account PVIF to reduce the technical provisions. Adding it onto assets as well would be double counting.

 

[Mike Lewry]

Am I completely mis understanding. For Solvency 1 realistic pillar. On assets side you include PV future profits on Without profits business written in WP fund.

For Pillar 2 ICA for assets you include PV of future profits on all in force business.

Is the above correct?

Thanks

Pillar 1, Peak 2: Yes, you include NP PVIF instead of assets backing NP bus

Pillar 2: Yes, you're free to take credit for PVIF. How this is done isn't specified.

S II, Pillar 1: Assets and BEL shown on opposite sides of the balance sheet. The difference is essentially PVIF (ignoring frictional costs etc), so net effect is conceptually similar to RBS, ignoring discount rates, contract boundaries and such like.

 

[SABeauty]

In the Level 2 advice, CEIOPS considered that the treatment of PVIF must be undertaken when valuing technical provisions. Any PVIF not incorporated in the valuation of technical provisions should be valued at nil.

If we think of PVIF as coming from future inflows less future outflows, we can see that this is closely related to BEL, which also looks at the present value of future expected cashflows. So, essentially BEL is already taking into account PVIF to reduce the technical provisions. Adding it onto assets as well would be double counting.

Ok thanks - and for the premiums side of the cash flows, we can only allow for premiums up to the contract boundary. But if we were under pillar 1 with profit benefit reserve on a prospective method - do we also only allow premiums to contract boundary?

 

[Mike Lewry]

Ok thanks - and for the premiums side of the cash flows, we can only allow for premiums up to the contract boundary. But if we were under pillar 1 with profit benefit reserve on a prospective method - do we also only allow premiums to contract boundary?

"Contract boundary" is a SII concept, so not relevant for WPBR under SI Pillar 1, Peak 2.