Reinsurance subsequent adjustments
Hi, I'm trying to piece together how these statements align, but I'm not 100% clear. We have that:
1) changes on underlying (UL) contract issued FCF that do not adjust UL CSM will also not adjust the CSM of reinsurance held
2) after loss recovery component (loss RC) is established, it's adjusted in subsequent periods for changes in the UL onerous contracts
I think for 1), this means while we may adjust the FCF of the reinsurance held, we don't adjust the CSM (just like on UL contracts we'd adjust the LRC but it has no CSM to adjust because it's onerous)
However, if we have changes to the LC on the UL contract, then point 2 sounds like there would changes in the loss RC. If the loss RC is part of the CSM if GMA is used, how does 1) also hold??
Comments
For 1) That is correct. An example will be a large claim payout in the current period, but no changes in actuarial assumptions which means your CSM remains the same.
For 2) you are also right. The difference is that loss RC component is not part of the CSM but instead offsets the CSM.
ARC = PVFCF + Loss RC + CSM
what if we have assumption changes in the underlying FCF in subsequent periods, which affects the loss component, will the CSM in the reinsurance held change?
No because of statement 1). It will affect the Loss RC.
but loss recovery component is an adjustment to the CSM, so I thought it should affect CSM?
this is a snapshot I got from SOA website that's why I thought Loss RC adjusts CSM.
Normally when there are changes to the underlying LC, you will adjust the the FCF and Loss RC. CSM is derived from taking the difference. CSM = ARC - FCF - Loss RC and so it doesn't directly affect the CSM. I wouldn't worry too much about Loss RC since it is a more niche And the source isn't clear on this. I have a presentation which explains this more concisely, but unfortunately I cannot share since it is proprietary
CSM = ARC - FCF - Loss RC
Where can I find the source of this formula? I'm not fully seeing it from the SOA's website referred to above
Also, is there a PAA version of the formula for ARC? (Aside from backing out ARC from MCT's formula for Unexpired Coverage, 4.2.2.2)
It is implied from the above. CSM = ARC - FCF and then the Loss RC adjusts the CSM. ARC formula is the same as LRC, just swap the signs. One person's asset is another person's liability