37. Capital requirements TODO Flashcards
What are the two types of assessment capital?
- Regulatory Cap
- Economic Cap
What is regulatory Cap?
- Cap required by regulators
- Protect against risk of insolvency
- List the different types of liabilities covered by provisions
- Liabilities accrued
- ORC
- UPR
What is the solvency capital requirement?
- Total assets required to be held
- In excess of provisions
- Which are calculated on the best estimate basis
- Comprises of excess provisions
- Additional capital requirement in excess of the provisions.
What is the relationship between additional capital requirement and provisions?
- Prudent provision basis=> Lower additional capital requirement
- Best estimate provision basis=> Substantial additional capital requirement
- Disadvantages of a prudent provision basis + SCR based on simple formulae
- Level of prudence vary=> difficult to compare
- SCR not risk based=> difficult to ensure sufficient security to policyholders
What is Solvency II and what are the pillars?
- Solvency regime for insurance companies
- Regulatory requirement for all EU states.
- Quantification of risk exposure and capital requirements
- Supervisory regime
- Disclosure requirements
What are the two levels of capital requirements under solvency II?
- MCR- CANNOT TRADE IF BELOW
- SCR- DISCUSS REMIDIES with regulators
How can the SCR be calculated?
- Standard formula prescribed by regulation
- Internal model=> expensive
- Benchmarked against standard formula
- Large companies
How does the standard formula determine the amount of capital to be held?
- Stress tests
- Scenarios
- Factor-based capital changes
What type of risks does the standard formula allow for?
- Underwriting risks
- Market risks
- Credit/default
- Operational
- Allows for risk mitigation as well as diversification of risk
What the merits of the standard formula?
- Calc less time consuming and less complex
- —Aimed to capture risk profile of the average company=> not appropriate
What are the other uses of the internal models?
- Economic capital using different risk measures
- Confidence levels in the level of Economic capital calculated
- Different time horizons to the assessment of solvency and risk
- Include other risk classes not covered in the standard formula
What is the purpose of Basel accounts?
- Set Cap requirements for banks
- Must reflect the level of risk
- In the business they write+ manage
What is economic capital?
- Provider determines
- Sufficient to hold
- Given it’s A L+ business objectives
- Risk profile of individual A+L in the port
- Correlation of risks
- Level of deterioration that the provider wishes to be able to withstand
What is the starting point in an economic Cap assessment?
- Available Cap compared with economic Cap requirement
- Assessed using risk-based approach
How can providers determine MV(A) and MV(L)?
- MV(A)-Financial markets
- MV(L)- E(unpaid liabilities BE)+risk margin-judgement!
How is profit made from a financial profit split?
What is cost of capital?
- Loading factor or allowance
- In the premium
- To allow for the loss of return on Cap
- Tied up in the contract
What is the aim of a product provider?
- Shareholders should earn same return on available Cap
- Whether used to support new business=>investment restrict-Cost of Cap! • Or invested freely
- Chapter 38- Surplus and surplus arising
