35. Insolvency and closure Flashcards
Why do insurers and banks rarely become insolvent?
- Regulator=>Requirement to hold solvency capital-protect against insolvency
- Regular reporting requirements+ checks on solvency position
- Regulator intervene before crisis point by:
- Regulator may require company to produce and follow a recovery plan
- E.g. Regulator require business to close new business
- Changing assets held to be better matched
- Raising new capital
- Using reinsurance
- Sale or merger with another provider
What issues should be addressed and modelled for an insurance company facing insolvency?
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- Estimation of future post tax profits=> available to shareholders
- CV(A) of all asset surplus
- Amount+ timing=> loan or debt redemption
- Problems relating to industrial relations-(and redundancies)
- Issues relating to any staff benefit scheme
- Outstanding financial obligations, minority interest and tax
List 4 things to consider when an insurer facing insolvency is to be acquired by another.
- Location
- Integration of computer systems
- Relocation of staff or whether there is an adequate labour force available
- Effect on unit costs
How can policy holders still receive their benefits if an insurance company becomes insolvent?
- Industry compensation scheme=> funded by a levy on all other providers
What are the two main types of benefit scheme closures and the implications of each type on the sponsor?
- 1.Closed to new members BUT existing members benefits continue to accrue
- Contribution continue, rate as % of salary likely to inc
- and become more volatile
- 2.Close to new members AND existing members
- Once off settlement may be needed if the scheme is in deficit
What will the type of closure depend on?
- Whether the sponsor is insolvent or needs to reduce costs
- Market trends
What are the most important factors for a sponsor to consider when determining the benefits that will be paid to members of a discontinued benefit scheme?
- Legislation+ scheme rules=> rights of the members
- Expectations of members=> benefits that would have been paid if not disc
- Funding level of the scheme
What might happen if a scheme is in deficit on the discontinuance date?
- Reduced benefits
- Sponsors=> make good the deficit
- Legislation=> debt placed on the insolvent sponsor o Rank above, below or in line other creditors
- Insurance=> Ensure sufficiency of assets on insolvency of sponsor
- State supported fund=> support benefits on insolvency of the sponsor
- Funded on levy of solvent schemes
- Scheme rules=> which type of members and/or benefits to be reduced => Admin expenses may further reduce benefits because of:
- Allocations o Informing beneficiaries o Securing provisions
What might happen if a scheme is in surplus on discontinuous date?
- Surplus might be used to inc benefit payment to members o Scheme rules and legislation
- Length of time of membership or contribution factored to surplus
- Passed on to sponsor o If takes on risk to make good any shortfall
What are the options for providing outstanding benefits if a scheme is discontinued?
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- Pay accrued benefits as the fall due from existing (closed) fund o Without any further accrual of benefits
- Transfer liabilities to another scheme
- Transfer of funds to beneficiaries:
- As cash o Placed with an insurance company o Scheme of new employer
- Transfer funds to an insurance company to invest
- Transfer liabilities to a insurance company to guarantee payments
- Transfer liabilities to a central discontinuance fund, operated on a national/industry wide basis
What factors should be considered when comparing the options for providing outstanding benefits on a discontinuing scheme?
- Who takes on risk of experience not being as expected
- Expenses/costs
- Does the method give members a choice?
- Members need expertise to excercise the option?
- Investments need to be realised - generating associated costs
- Security + guarantees does the method offer?
- How any scheme surplus or deficit will be handled
