10-10 rule, no risk transfer
If there is no risk transfer, would the recoverable from the no risk transfer reinsurance contract go into one of the RBC components? I guess it doesn't go into R3 or R4 per an exam question, does it go in any of the other ones?
Comments
I'm taking a little bit of guess here:
The main consequence of having "no risk transfer" is that the reserves on the balance cannot be reported net of that "reinsurance". In other words, you must use "deposit accounting" instead of "reinsurance accounting". That means the net reserves on the balance sheet are higher than if the risk transfer test had been successful. It stands to reason that the reinsurance recoverables would then be lower to make things balance out. Any amount due to the insurer from the "reinsurer" might instead be reported as a general receivable (rather than a reinsurance receivable.)
Now, since the R4 charge is based on these higher net reserves, the R4 charge would also be higher. This would all happen "automatically" though because the net reserves would have already been adjusted before the RBC calcs are done.
But I'm not actually sure how R3 would be affected. The specific charge for credit-worthiness of the reinsurer would be lower but the reinsurer still (possibly) would have to pay the insurer something in the event of a claim so there should still be a charge somewhere within R3 for this general receivable due from this reinsurer.
This situation shouldn't have anything to do with R5 (NWP charge). And I can't see it being considered an investment so it wouldn't affect R1 or R2. Not sure about R0. I doubt it would help a company's overall position to buy reinsurance with a subsidiary.
Anyway, those are my thoughts.
That would make sense, thanks