36. Capital Management

Question 1

Capital management involves …

Answer 1

Ensuring that the provider has sufficient solvency and liquidity to meet existing L and future growth aspirations under all reasonably foreseeable circumstances.

Question 2

Capital needs of providers

Answer 2

1. Start-up capital and development expenses
2. Statutory/solvency requirements
3. Investment freedom
4. Products with guarantees
5. Financial strength
6. Influence published accounts
7. Strategic aims

Question 3

Capital management tools

Answer 3

1. FinRe
2. Securitisation
3. Subordinated debt
4. Banking products
5. Derivatives
6. Equities

Question 4

FinRe

Answer 4

• Exploit some form of regulatory arbitrage to manage capital, solvency/tax position of provider more efficiently.
• E.g contingent loans
• Relies on:
  1. Difference in regulatory, solvency and tax position of reinsurer and insurer
  2. Reinsurer having a strong balance sheet
• Historically used to improve balance sheet of company by crystallising future expected profits …
  … may be reduced/eliminated under regulation like Solvency II which takes credit for future profits.

Question 5

Benefits of securitasion

Answer 5

Converts bundle of assets into structured financial statement which is negotiable
In doing so, it offers:
- Way for company to raise money, that is linked directly to cashflow receipts that it anticipates receiving in the future.
- Alt source of finance to issuing “normal” secured/unsecured bonds
- Way of passing risk in A to 3rd party&raquo_space;> removing them from balance sheet&raquo_space;> reducing capital
- Way of selling exposure to otherwise unmarketable A

Question 6

How banks act as a capital management tool

Answer 6

• Liquidity facility
• Contingent capital
• Senior unsecured financing

Question 7

Internal sources of capital

Answer 7

• Merging funds
• Changing assets
• Weaken valuation basis
• Deferring distribution of surplus
• Retaining capital by not paying dividends to shareholders

Question 8

Capital needed by individuals and companies to

Answer 8

• provide a cushion against future uncertainty

* overcome timing differences between cash inflows and cash outflows.