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I'd like to try responding to the other questions, even though I prefer
having the papers to check with.
FASB: the ordinary situation on retro is the opposite. Liabilities are
transferred with a value greater than the consideration, since reserves
are carried at undiscounted value, but the consideration reflects the
discount. If the consideration exceeds the liabilities, it is probably
because buyer & seller acknowledge a reserve deficiency. I believe FASB
requires that the reserves be grossed up to reflect this. Otherwise why
would an insurer pay $100M to a reinsurer which might only have to pay
out $80M? If I were an reinsurer, I'd do that deal all day long if I
could.
Miccolis #1: the purpose of the cost of capital is to reflect the yield
differential if one invested freely elsewhere. Since the insurer can
invest in risk free's, the investor can expect a yield differential
above the risk free rate on assets other than those supporting the
surplus
#2: Makes perfect sense. There is no cost of capital, no differential
above the risk free rate, if one assumes significantly greater risk by
investing in that asset. Ex: If insurer is investing in junk bonds, one
would not include anything for the cost of capital
#3: Because you can incorporate it explicitly or implicitly (as
discussed in #5)
#4: I've touched on the essence of this in my earlier response.
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