B - Dibra and Leadbetter Flashcards
DIBRA AND LEADBETTER
2 leading causes of PC insurer insolvency
1) inadequate pricing
2) deficient loss reserves
DIBRA AND LEADBETTER
kind of insurers being the most likely to fail
new insurers, but it tends to stabilize after 1 decade of operation
DIBRA AND LEADBETTER
2 consequences of an insurer insolvency
1) expose policyholders to unexpected economic loss
a) from claims not paid at full
b) from unearned premium lost
2) reduced confidence in financial institutions
DIBRA AND LEADBETTER
Define insolvency
involuntary exit of the market because of winding-up order issued by supervisory authority.
DIBRA AND LEADBETTER
2 risks that could lead to the wind-up of an insurer
insolvency risk
liquidity risk
DIBRA AND LEADBETTER
Contrast INSOLVENCY RISK and LIQUIDITY RISK
kind of companies being the more at risk of LIQUIDITY RISK
Insolvency Risk
WHEN ASSETS ARE NOT SUFFICIENT TO MEET OBLIGATONS
Liquidity Risk
WHEN IT HAS SUFFICIENT ASSETS TO MEET OBLIGATIONS BUT THERE IS A HIGH LEVEL OF RISK THAT THOSE ASSETS COULD DISAPPEAR
branch companies where foreign parent fails are more at risk of liquidity risk
DIBRA AND LEADBETTER
4 company characteristics playing a role in most insolvencies
1) SIZE
smaller insurers have less capital and less diversified (concentration of risk)
2) AGE
new firms lack experienced management and face strong competition
3) RAPID GROWTH
usually associated with loss reserve deterioration and under-pricing
4) POOR GOVERNANCE AND CONTROLS
unable to identify and act on threats
DIBRA AND LEADBETTER
Define proximate cause
5 proximate causes of involuntary exits
primary factor that led to the winding-up order
- foreign parent (home office)
- inadequate pricing
- deficient loss reserves
- rapid growth
- reinsurance unable to fulfill obligations to insurer
- alleged fraud
- affiliates
- overstated assets
- cat losses
DIBRA AND LEADBETTER
difference in paying the costs of an insolvency between Canada and US/UK
In US/UK, liquidation dividends are used to reduce assessment needs
In Canada, PACICC must return liquidation dividends to solvent members of the industry
DIBRA AND LEADBETTER
2 advantages and 2 disadvantages of foreign participation in Canadian insurance industry
A
- More competition leads to more availability and better affordability
- Increase innovation as new ideas are brought to better serve customer
- Allow access to international sources of capital
D
- Foreign parent insolvency can lead to Canadian branch failure
- Domestic fund and profit being transferred to foreign countries
- Take market share from domestic insurer
DIBRA AND LEADBETTER
why it is difficult to measure the full costs of an involuntary exit of an insurer
they do not only include CLAIM COST and UNEARNED PREMIUM, but also
- costs from regulatory authorities, agents, accountants, reinsurers.
- costs from lost wages, commissions, taxes, expenses.
DIBRA AND LEADBETTER
4 external factors that may exacerbate vulnerability to insolvency
1) UW CYCLE
In cycle of poor profitability, decreased capital may increase the risk of insolvency
2) CAT LOSSES
such as severe whether and industrial disaster
3) VOLATILITY IN FINANCIAL MARKETS
interest rate risk contributes to failure
4) INTERNATIONAL EXPOSURE
multinational more likely to exit
DIBRA AND LEADBETTER
4 strategies an insurer can take to reduce the likelihood of insolvency
1) experienced senior management in place
2) strong internal controls and financial reporting
3) diversification in related LoB (avoid geographic and product concentration)
4) have risk-based supervision
5) purchase reinsurance
