2
General considerations
2.1
The PRA recognises that reinsurance can be an important part of risk management. As firms decide on appropriate reinsurance to place, the PRA expects boards to:
- understand the risk transfer taking place;
- ensure that the economic impact is adequately reflected in business planning, capital setting and reserving; and
- appreciate the wider associated risks to which reinsurance placements can give rise.
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2.2
The PRA is aware that complex reinsurance arrangements exist in the market. For these, as for all reinsurance contracts, the PRA expects appropriate treatment, both in terms of: (a) whether there is an effective transfer of risk; and (b) the appropriate solvency capital requirement (SCR) treatment, recognising the scope of the risk transfer and the counterparty credit risk. Boards should satisfy themselves that the methodology chosen to calculate the SCR, whether that be the standard formula or an internal model, continues to remain appropriate for the firm’s risk profile.
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2.3
Additionally, the PRA expects firms’ risk management systems to be sufficiently robust to 2.3 ensure that the level of risk transfer arising is reflected appropriately within their SCR requirements, and that the total uncertainty and risk over the time horizon of the run-off of the obligations of both life and non-life firms has been considered within the own risk and solvency assessment (ORSA).[3]
Footnotes
- 3. See Supervisory Statement 26/15 ‘Solvency II: ORSA and the ultimate time horizon – non-life firms’, June 2015; www.bankofengland.co.uk/pra/Pages/publications/ss/2015/ss2615.aspx.
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