Integrated insurance

Responses to CP97 “Integrated Prudential Sourcebook” (PSB) have prompted secondary consultation on two aspects of concern to insurers. In the case of credit risk (PRCR10), to disallow reinsurance credit exposures when these exceeded the firm’s capital could, it was felt, prove too demanding and also overlook problem areas; the rules have been clarified and now look at reinsurance concentration at point of purchase and after an exposure has occurs. Reserving for final bonuses on with-profits policies was also questioned (PRIR3). The Financial Services Authority is looking at a “twin-test”; total prudential reserves – a prudent measure of contractual liabilities and solvency margin – would be viewed against the total realistic position that reflects a fair level of discretionary bonuses. Only the surplus of realistic over prudential reserves would have to be held as an extra capital requirement. Three methods are advanced for the realistic valuation: a prospective approach (bonus reserves); a retrospective method (asset share) and a transitional calculation (profit accrual); the latter would only be permitted for two years.