A311 Flashcards
Objective of this deck is to create a level 1 thinking system for the subject A311. This is to aid memorisation in preparation for the exams.
Define anti-selection.
Anti-selection occurs when individuals have more information about their own risk levels than the insurer does.
Define underwriting.
Underwriting assesses the risk of applicants through medical exams, questionnaires, and other information to set appropriate premiums or deny coverage.
Define excess.
Excess refers to the amount the policyholder must pay out the pocket before the insurer pays for a claim.
Define new business strain.
New business strain refers to the initial financial strain a life insurance company experiences when it writes new policies, due to the upfront costs exceeding the initial premiums received.
Describe the roles which banks play within the financial services industry.
Provide liquidity to the financial system (have funds to lend)
Play a role as financial intermediaries (facilitate transfer between depositors and borrowers)
Provider of economic and business information (barometer for global financial health and business trends)
Have responsibility for monetary policy, exchange controls, printing money and as a lender of last resort
Reasons for monitoring the experience.
update method and assumptions so that they are more relevant to future experience
monitor any trends in experience, particularly adverse trends, so as to take corrective action
provide management (key-stakeholders) information
Reasons for analysing surplus. (DIVERGENCE)
Divergence of the actual verses expected (financial effect / significance of)
Information for management and for accounts
Variance of whole is equal to the sum of the variance from the individual sources
Experience monitoring to feedback into ACC
Reconcile values for successive years
Group into one-off / recurring sources of surplus
Executive remuneration schemes (data for)
New business strain (show effects of)
Check on valuation assumptions and calculations
Extra check on valuation data and processes
Why financial providers need capital. (REG CUSHION)
Regulatory requirement to demonstrate solvency
Expenses of launching a new product / starting a new operation
Guarantees can be offered
Cashflow timing management
Unexpected events cushion, e.g. adverse experience
Smooth profit
Help to demonstrate financial strength
Investment freedom to mismatch in pursuit of higher returns
Opportunities e.g. mergers and acquisitions
New business strain financing
Reasons why disclosure is important in a benefit scheme. (SIMMERS)
Sponsor is aware of the financial significance of the benefits
Informed decisions can be made
Mis-selling is avoided
Manages the expectations of members
Encourages take-up
Regulatory requirement
Security of scheme improved as sponsor / trustee made more accountable
Common aims of accounting standards (in relation to benefit scheme disclosures). (CARD)
Consistency in accounting treatment from year to year
Avoiding distortions resulting from contribution fluctuations
Recognising the realistic costs of accruing benefits
Disclosure of important information
Benefit scheme information to be disclosed in accounts. (DIM CLAIMS)
Directors’ benefit costs
Investment return over the year
Membership movements
Change in surplus / deficit over the year
Liabilities accruing over year
Assumptions
Increase in past service liabilities
Method
Surplus / deficit
When should information be disclosed to benefit scheme members? (PRICE)
Payment commencement
Request
Intervals
Combination
Entry
What information should be disclosed to benefit scheme members? (SCRIBE)
Strategy for investment
Contribution obligations
Risks involved
Insolvency entitlement
Benefit entitlements
Expense charges
What additional reports generally accompany accounts? (BRISK)
Board independence & governance
Risk appetite, exposure & management
Investment strategy & performance
Strategic objectives (progress towards)
Key objectives (performance against)
Remuneration report
Chairperson & CEO statement
What are some of the reasons for calculating provisions, for a benefit scheme? (BAD MEDICS)
Benefit improvements for a benefit scheme
Accounts and reports - published / internal
Discontinuance / surrender benefits
Mergers and acquisitions
Excess of assets over liabilities and so whether discretionary benefits can be awarded
Disclosure information for beneficiaries
Investment strategy
Contribution / premium setting
Supervisory solvency reports
Give a brief outline of the stages a monitoring investigation typically follows. (Exam Question - DIU)
Monitoring investigations typically involve the following stages:
The division of data into suitable groups that are homogeneous by risk, one needs to consider:
- the volume of data in each cell (its credibility)
- the risk factors for the investigation (age, gender)
- occurred changes that will reduce the relevance of old data
Identification of any past trends, cycles and anomalies and random variation in the past data
Using the results to revise models and assumptions used, one needs to consider:
- the purpose
- need for accuracy and margins for prudence
- allowance for future trends
- likely differences in future experience from past experience
For what reasons would a financial provider conduct an expense analysis? (DAA FUC)
Determining expense loadings and calculating provisions
Analysing sources of surplus (A/E)
Analysing areas of inefficiency within an organisation
Financial planning (expense budgeting)
Understanding the profitability of a particular product
Cashflow management (ensure liquid funds are available)
Provide a definition for capital management.
Capital management involves ensuring that a provider has sufficient solvency and liquidity to enable both its existing liabilities and future growth aspirations to be met in all reasonably foreseeable circumstances. It often involves maximising the reported profits of a provider.
Describe financial reinsurance.
Financial reinsurance involves transferring risk to a reinsurer in a way that is primarily motivated by financial management objectives, such as improving the ceding company’s financial ratios or solvency position, rather than purely for risk transfer.
Generally the main aim of financial reinsurance is to exploit some form of regulatory arbitrage in order to manage the capital, solvency or tax position of a provider more efficiently. It frequently relies on the regulatory, solvency or tax position of a reinsurer, which may be based in a overseas state, being different from that of the provider. This is done in the form of a reinsurance contract between the reinsured and the reinsurer.
Define securitisation.
Securitisation involves converting an illiquid asset into tradeable instruments. In our context the primary motivations are often to achieve regulatory or accounting (off balance sheet) treatment.
Define subordinated debt.
The main aim of subordinated debt is to generate additional capital that improves the free capital position of the provider, as the debt does not need to be included as a liability in the assessment of solvency.
Repayment of the subordinate debt can only be made if solvency capital requirements continue to be met.
Define a derivative.
Derivative is a financial instrument with a value dependent on the value of some underlying asset.
An example of when a derivative contract may be useful is when a provider may be concerned about the impact of a value in its equity portfolio. One could enter into a contract to prevent the portfolio from falling below a certain level.
What are liquidity facilities?
Liquidity facilities are typically provided by banks and can be used to provide short-term financing for companies facing rapid growth (new business strain)
What is contingent capital?
Contingent capital is generally provided by a bank, whose aim is of protecting the base of an insurance company. Under such an arrangement capital will be provided as it was required following a deterioration of experience.
What is senior unsecured financing?
Senior unsecured financing directly for an insurance company would not have capital benefits as the loan would be treated as a liability on the company’s balance sheet. Though at a group level this may be viable (capital can be moved around within a group of companies).
How could equity capital be financed for a company. (PIE)
Parent company
Issuing new shares the market
Existing shareholders via a rights issue
How could an organisation improve their capital position using internal sources of capital.
Retain capital
Change Assets
Merge funds
Weaken the valuation basis
Defer the distribution of surplus
Why do individuals need capital? (CS)
Cushion against unexpected events
Save for the future
Why do companies need capital? (FFF FS)
Financial consequences of adverse events
Financial expansion
Finance stock and work in progress
Fluctuating trade volumes
Start-up capital to hire staff, obtain premises, purchase equipment
Define economic capital
Economic capital is the amount of capital that a provider determines is appropriate to hold given its assets, its liabilities, and its business objectives.
It is an internal, rather than a regulatory capital assessment and is usually measured given a degree of confidence and over a given time horizon.
Define MCR.
Minimum Capital Requirement, which is the threshold at which a company will no longer be permitted to trade.
Define SCR.
Solvency Capital Requirement, which is target level of capital below which companies may need to discuss remedies with their regulators.
SCR is the total assets required to be held in excess of the provisions calculated on a best estimate basis.
What are the three pillars of Solvency II
Quantification of risk exposures and capital requirements
Supervisory regime
Disclosure requirements
What factors are economic capital in an ORSA assessment typically determined on (CBD R)?
Correlation of risks
Business objectives of the provider
Desired level of overall credit deterioration that it wishes to be able to withstand
Risk profile of the individual assets and liabilities in its portfolio
What is the difference between trading profit and investment profit?
Trading profit is the total of the premiums and investment income on the provisions for future liabilities, less claims, expenses, tax and the net increase in any provisions for future liabilities.
Investment profit is the investment return, less tax and investment expenses, earned on the part of the assets not required for the provisions for future liabilities.
List some of the possible sources of surplus for a life insurance company.
Mortality
Morbidity
Claim frequency
Claim amounts
Withdrawal / Lapses
Investment income
Expenses
Commission
Salary growth
Inflation
Taxation
Premium
New business levels
Strategic events (counterparty failure, business restructure)
Change in valuation method or assumption
List the factors which will affect the amount of surplus to distribute for a life insurance company.
Provision of capital
Margins for future adverse experience
Business objectives of the company
Policyholder expectations
Shareholder expectations
Stakeholder expectations
List the ways which a benefit scheme can reduce its surplus.
increase the value of the benefits and hence the value of the liabilities
Reduce future contributions for a period of time, so that the surplus decreases gradually as additional liabilities accrue
Transfer all or part of the excess assets from the scheme (to beneficiaries or the sponsor)
List the factors influencing the decision about the application of surplus or deficit for a benefit scheme. (LSD TRISS)
Legislation
Scheme rules
Discretion of the sponsor or fund managers
Tax treatment
Risk of exposure of the various parties
Industrial relations
Speed of corrective action
Source of surplus
List the factors affecting the choice of basis and valuation method chosen.
Reason for (or purpose of) the valuation
Needs of the client
Regulation and legislation
Nature of the assets
