4Market Security Flashcards
Solvency for insurer
Assets > or equal to paid claims + unpaid claims + operating costs
Solvency margin
Amount assets outweigh liabilities
Calculating Reserves
Putting a value on known / unknown unpaid claims
IBNR figure
Incurred but not reported (for reserving for unknown and unpaid claim reserves)
Assets
Tangible and intangible (good will)
Liabilities
Claims (paid and outstanding)
Costs of reinsurance
Liquidity
How easy can you turn assets to cash
Ratios
Loss - premium vs claims (paid & outstanding)
Combined - operating costs + claims against premiums and investment income
Solvency II
Applies?
Aims?
Objectives?
What does uk now do
Pan European regime across eu member states bought in by PRA. EU granted equivalence status by UK, EU hasn’t reciprocated yet
Aims: make sure insurers pay claims
Objectives:
- Better regulation
- Deeper integration of eu insurance market
- Enhanced policyholder protection
- Improved competitiveness of eu insurance
Uk has new legislation post brexit - the solvency II and insurance amendments etc eu exit regulations 2019 so still follows solvency II
Uk has to obtain equivalence status from eu
3 pillars of Solvency II
Quantitative requirements
Insurers have to demonstrate they have adequate financial resources to cover exposure to risks
Must consider business risk as well as insurance related risks
Solvency capital requirements SCR - amount assets must exceed liabilities. If breached will be a warning to regulators.
minimum capital requirement MCR - lower amount. Intervention.
3 pillars of Solvency II
Supervisory review
Requires insurer has effective risk management system (risk management and assessment process) owned and implemented by senior management
Must hold capital against risks
Own risk and solvency assessment ORSA - internal review by insurers. Identifies, monitors, manages short & long term risks and determines necessary capital requirements for solvency
3 pillars of Solvency II
Disclosure
Disclosure of info publically
Who is responsible for implementing solvency ii
Senior management (risk managers, finance personnel actuaries and uw team)
Example of business risk faced by insurer
Credit counterparty risk
Policyholder - premium unpaid
Reinsurer - solvent?
Example of business risk faced by insurer
Operational risk
Uws - writing risks
Claims staff - paying claims outside authority
Operation of business - can everyone access building / work
Systems - are all systems working
Example of business risk faced by insurer
Market risk
Investment s failing
Ex rate losses when working with multiple currencies
Example of business risk faced by insurer
Liquidity risks
Can you realise investments quickly for cash flow
Example of business risk faced by insurer
Group / capital risk
Eg where have a syndicate + company market, not doubling up on risk
If sharing one reinsurance programme, is it enough to cover whole group
Example of business risk faced by insurer
Enterprise risk
Enterprise Risk Management - management of wider ranging risks that impact entire business
Role of regulators
Pra - based in uk. create competitive insurance sector. Protect policyholders by ensuring robustness of firms, support insurers to provide long term capital and growth
European insurance and occupational pensions authority EIOPA supervisory body in for EU on Solvency II - goals:
- protection for consumers, build trust in system
- regulation and supervision
- harmonisation and application of rules
- oversight of cross border groups
- coordination of eu supervision
Solvency ii and Lloyds
Lloyds treated as single entity. Has element of internal regulatory control permitted by regulators
Lloyds chain of security
Lloyds central fund - demonstration of solvency to regulators. Pot of money held centrally by Lloyds.
Final link in Lloyds chain of security
Lloyds chain of security
Link 1 syndicate level assets
Premiums which are held in trust funds. Held in ways that can be liquidated quickly to pay claims
Lloyds chain of security
Link 2. Members Funds at Lloyds (FAL)
If premiums aren’t big enough to pay claims, second line of available funds are deposits at lloyds by members of syndicates as a condition of becoming an investor in lloyds. If exhausted, members are asked for more funds to their limit of liability.
The Corporation reviews each SCR and uplifts it by a % to ensure sufficient capital available. Known as Economic Capital Assessment. Can be LCs, cash, other securities
Lloyds chain of security
Link 3 (final) central assets
Members funds depletion
Last resort - central fund
Fed by a % of all written premium
Controlled by council of Lloyds under central fund byelaws
What does a rating agency consider
Ability to pay claims
Operating performance (incl quality of management , biz and past profits)
Business profile
Four objectivities of solvency ii
Better regulations, deeper integration, enhanced policyholder protection, improved competitiveness
Three pillars of solvency ii
Quantities requirements, supervisory review and disclosure
Business risks are
Market risk
Credit risk
Liquidity risk
Operational risk
Group / capital risk
In volatile classes (aviation, liability (marine and general) how much do you increase premium/claims estimates by
50%
What is the contribution to the fund in 2022
written premium. for insurers who are:
existing - 0.36%
new (2020-22) - 1.4% for 3 years
