1) In this arrangement the insurer pays a reinsurance premium that is equal to the reserves. This would reduce assets. This is the usually deposited back. This would then increases assets back up by the same amount. 2) Then the reinsurer pays a capital sum in return for a call on future surpluses on that block of business. Reinsurer may also charge a fee/margin in assessing capitalised value of surpluses. So insurer can increase statutory assets and liabs remain the same. FAR improves on statutory basis. Why would it do part 1 at all?? Part 2 seems to be the driver of the relief!?
Hi I'll give this a go but all comments\queries welcome. In short, 'yes' point 2 is the driver for the improved free asset ratio. In order to be able to transact a financial reinsurance agreement, the regulators will need assurance that there has been a genuine transfer of risk. Transacting an arrangement such as 1 involves a transfer of risk. Although there is no change to net assets, the reinsurer is on risk should the PVIF not be realised. If this wasnt done the amount received by the cedant would be like a conventional loan, which would have to be reserved for. There would therefore be no improvement to FAR (further FAR could actually worsen by the size of the lender's profit margin).
