Why ‘expected future profits’ must be treated as tier 1 capital

The role of ‘expected future profits’ in determining a firm’s own funds is attracting much discussion, with suggestions that they should be excluded from tier 1 capital. We believe this is at least in part due to a misunderstanding of their nature – even the term ‘expected future profits’ is misleading and we prefer to refer to them as in-force cashflows.This paper discusses how in-force cashflows from existing business should be treated in the calculation of own funds.[spacer size=”10″]

We argue that in-force cashflows should be treated as tier 1 capital under Solvency II and this paper goes on to substantiate these arguments.