35. Insolvency and Closure

Question 1

What happens if solvency requirement isn’t met?

Answer 1

1. Try recovery plan
2. If (1) goes bust, look for acquisition, merger and partnership opportunities
3. If (2) goes bust&raquo_space;> compensation schemes

Question 2

Recovery plans

Answer 2

• Increase reinsurance
• Change the investment strategy into less volatile asset classes
• Limit level of new business written

Question 3

Compensation schemes

Answer 3

• Statutory scheme set up from which benefit payments are paid.
• Funded by levy on all provider

Question 4

Projecting insolvency

Answer 4

• Deterministic scenarios/stochastic models

- Important to estimate actions to be taken under various scenarios and incorporate them into the model

Question 5

Issues to be modelled and addressed when projecting insolvency

Answer 5

1. Estimation of future post-tax profits
2. Current value of surplus assets
3. Amount and timing of any loan/debt redemption
4. Problems relating to industrial relations (and redundancies)
5. Issues relating to staff benefit schemes- particularly if schemes are in a deficit
6. Outstanding financial obligations, minority interests and tax

Question 6

Acquisition factors to be considered

Answer 6

1. Location of operation
2. Integration of systems platform
3. Relocation of staff/whether there is adequate labour force available
4. Effect on unit costs

Question 7

Reasons for the discontinuance of a benefit scheme

Answer 7

• The sponsor has become insolvent.
• The sponsor has decided to stop financing benefits
• The costs of providing the benefits are too much and need to be reduced to continue operations
• There may be a change in legislation that has caused the cost of providing benefits to increase significantly
• The sponsor may want to set up a new scheme

Question 8

Types of benefit scheme closure

Answer 8

1. Closed to new members

2. Closed to new members with no future accrual-

Question 9

Benefits payable on discontinuance will depend on

Answer 9

• Rights of beneficiaries
• Beneficiaries’ expectations
• Level of assets

Question 10

Options for provision of outstanding benefits on discontinuance

Answer 10

1. Gradual removal of liabilities by continuation of the scheme without further accrual of benefits
2. Transfer liabilities to another scheme with same sponsor
3. Transfer liabilities to beneficiary
4. Transfer funds to insurance company to invest + provide group/individual policy in beneficiaries’ name
5. Transfer liabilities to insurance company to guarantee benefits
6. Transfer liabilities to central discontinuance fund, operated on national/industry-wide basis

Question 11

Bank solvency requirements

Answer 11

1. Good risk management processes
2. Hold capital buffers for unexpected losses
3. Regular monitoring and reporting to regulators
4. Processes and action plans to resolve unfavourable situations

Question 12

Banks: intervention when insolvent

Answer 12

• Curatorship
• Liquidation
• State deposit schemes