I am a bit confused by what constitutes assets under Solvency II for an insurer and how the investment return assumption is formed.
1. I understand the insurer will invest in shares and corporate bonds issued by other companies for example. This is is in addition to bonds issued by government for example. My understanding is that these investments constitute the insurer's assets?
My understanding is that an asset has two components: an income component and capital component.
2. I understand these investments will be valued at market value. Is market value just the capital value or is there an interest component too?
3. If there is an interest component, then should that be interest earned to date, or interest expected to be earned in the future?
4. How about the investment return assumption used to calculate best estimate liabilities. Presumably that looks at gains made to date. Is that only gain from interest or does it also include gains from capital too?
5. For example, insurer A invests in property issued by company B. This is the only asset insurer A invests in. Company B pays insurer A rent of £10,000 earned to date and has a current property value in the market of £90,000. Last year it had a market value of £85,000. The present value of future rent from the property is £50,000.
i) What is the market value of this asset?
ii) What is investment rate assumption used for projecting the best estimate liability?
iii) Is the investment rate assumption different for each future year or is a single rate used?
6. What about shares, corporate bonds and property issued by the insurer? Is this treated as assets or liabilities?
7. What is meant by paid share capital? What is meant by unpaid share capital? Can you give examples? Is this referring to shares issued by an insurer to its shareholders?
8. What is the opposite of an issuer - what is the term used to describe them?
Last edited by a moderator: Jul 23, 2020