Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005)
12Reinsurance
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SECTION 12 Reinsurance
12.1 Outwards reinsurance that meets the definition of a Life Insurance Contract is to be measured as if it were a negative liability, even though the measurement result may be recognised as an asset in the company’s financial statements. For this purpose the Reinsured Policy Liability will therefore consist of both a Reinsured Best Estimate Liability and the Value of Reinsured Profit Margins. For the purpose of this standard, inwards reinsurance is to be treated the same as direct insurance business.
12.2 The principles of this standard apply to both the calculation of the gross Policy Liability and the Reinsured Policy Liability. In particular, where future profits are expected to arise in respect of a reinsurance arrangement (looked at from the reinsurer’s perspective) the present value of those future profits is to be included in the Reinsured Policy Liability as Value of Reinsured Profit Margins. However, where losses are expected, these are to be recognised, except as allowed under paragraph 12.5.
12.3 If the reinsurance relates directly and solely to the direct insurance business of a single Related Product Group then the reinsurance may be included within that same Related Product Group for the purposes of Section 11 of this standard. If the reinsurance does not relate directly and solely to the direct insurance business of a single Related Product Group then the reinsurance must be
appropriately allocated to Related Product Groups for the purposes of Section 11 of this Standard. That allocation must reflect:
- the insurance and financial risks to which the reinsurance relates; and
- an appropriate relationship between those risks and the Related Product Groups.
12.4 In undertaking the allocation described in paragraph 12.3 regard must be had for a diligent assessment of:
- the purpose of the company in entering the reinsurance; and
- the contribution of that reinsurance to the business of the company;
while retaining the integrity of the principles of section 3 of this Standard.
12.5 As a result of the allocation of reinsurance business to Related Product Groups, losses expected in relation to the reinsurance business need only be recognised if they exceed the value of expected future profits in respect of the associated direct insurance business in the Related Product Group, and vice versa. However, the Profit Margins in respect of the reinsurance must continue to be determined separately from the Profit Margins in relation to the associated direct insurance business.