Reserving, capital and solvency for health and care business
This domain tests whether you can build technical provisions and capital for health and care business under Solvency UK, report the result under IFRS 17, and explain the difference between the two.
Solvency UK building blocks
- Best estimate liability = PV(expected benefits + expenses) − PV(future premiums), discounted on the risk-free curve, with matching adjustment or volatility adjustment where eligible.
- Risk margin = cost of capital rate (4% under the Solvency UK reforms, down from 6%) applied to the run-off SCR and discounted. It is capital for non-hedgeable risk, not a prudence margin on the best estimate.
- SCR standard formula health modules: mortality, longevity, disability-morbidity (including income protection and trend/catastrophe sub-modules), lapse, expenses; plus health catastrophe (mass accident, concentration, pandemic).
- TMTP for firms transitioning from Solvency I; internal models and undertaking-specific parameters for unusual risks.
IFRS 17 in one line
Short-duration PMI normally uses the premium allocation approach with a liability for incurred claims; longer or more uncertain business uses the general model with a contractual service margin and a risk adjustment for non-financial risk.
Worked example
Payments £100m, £80m and £60m at years 1–3, expenses £10m in year 1, future premiums £90m in year 1, discount 3%. BEL = (100 + 10 − 90)/1.03 + 80/1.0609 + 60/1.092727 = 19.42 + 75.41 + 54.91 = £149.74m. Risk margin with run-off SCRs of £60m, £40m, £20m at 4%: 0.04 × (60/1.03 + 40/1.0609 + 20/1.092727) = 0.04 × 114.25 = £4.57m. Technical provisions = £154.31m.
Traps
Adding a separate prudence margin to a best estimate; applying the matching adjustment where assets fail the highly predictable cash flow test; double counting expense risk in both BEL and risk margin; treating 100% SCR coverage as a target; using the premium allocation approach where coverage exceeds a year with variable cash flows.