13.1 Ongoing solvency Flashcards
Protection against adverse experience
Fund new business
Support riskier investment strategy
Fund overheads and developmental costs, e.g.
Upgrading/ purchasing computer hardware and software
Product development
Refurbishment and/or building head office and branch premises
Regional and international expansion initiative
Acquiring other companies/blocks of business
Meet solvency valuation requirements
Support w/profits bonuses and smoothing
Prove day to day working capital
Assess impact of key business strategic decisions, esp NBS and volume of NB that available capital can support»_space; make funding plans if needed
Preparing run-off plans for w/profits closed or declining
Estimate sh capital release patterns to assess cost of capital when calculating EV**
Useful for successful risk measurement and management. Part of SAM’s ORSA process.
Depends on type of company
Sources
Initial sh capital
Subsequent amounts subscribed for
Retained earning
Relected in capital position:
Under-transfers of surplus to sh and retained in ph funds
Capital depletions over years
Under-transfers arise due to:
If gave lower proportion of distributed surplus to sh than permitted in co’s constitution
Consistent under-distribution of surplus wrt past generations of ph
Capital depletions arise due to:
Given proportion of distributed surplus to w/profits ph not contractually entitled to it
Consistent over-distribution of surplus wrt past generations of ph
Dividend payouts- actuary must be satisfied company will satisfy statutory solvency requirement of LTIA
Can find approaches to managing capital in Frank Redington’s 1981 JIA paper, The flock, the sheep and other essays
Ordinary share issue
Preference share or loan stock issue, but requires approval PA
Hybrid debt subordinate to ph (only some insurers have PA approval)
Preference share and hybrid debt tiered depending on:
Quality of instrument
Duration
Ability to absorb losses
Economic capital
Rating agency capital
Regulatory capita
Defn: internal asmt, allowing for company’s ongoing business strat, of value of A required in excess of L, s.t after allowing for all risks, claims can be met with high degree of certainty when they fall due
Risk scope
Acceptable ruin probability
Time horizon- depends on purpose and type of risks
Current in-force book/ view as going concern»_space; new business
Required EC- amt of capital need to support business with certain default prob
Available EC- excess of A over L on realistic market consistent basis
Stochastic models
Market and interest rate risks
Project A+L over large number of investment scenarios
Other risks
If distribution of possible outcomes available
E.g. stochastic mortality to model longevity risk for annuities
Stress tests
If distribution not clearly understood
Must also assess impact of inter-dependencies between risks
Time horizon
1 year (like for SAM)/ full run off for in force
If can manage risks using capital markets»_space; can use shorter terms since can hedge risks
If risks illiquid, may consider longer term
Agencies set own capital adequacy
May want to meet to get certain rating
Purpose 1- satisfy regulator that co has enough resources to fulfil ph obligations
Calc quantifies minimum A over L that will provide enough cushion against extreme negative fluctuations in experience in the variables used in prudential supervision reporting valuation
Set by regulator s.t. in most cases, negative experience variation»_space; lower level of cushion and not a deficit
Typically set wrt same confidence interval for all companies
Purpose 2- Regulatory warning system
Further investigation or remedial action following breach/near breach
