B - Dibra and Leadbetter

Question 1

DIBRA AND LEADBETTER

kind of insurers being the most likely to fail

Answer 1

new insurers, but it tends to stabilize after 1 decade of operation

Question 2

DIBRA AND LEADBETTER

2 consequences of an insurer insolvency

Answer 2

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

Question 3

DIBRA AND LEADBETTER

Define insolvency

Answer 3

involuntary exit of the market because of winding-up order issued by supervisory authority.

Question 4

DIBRA AND LEADBETTER

Contrast INSOLVENCY RISK and LIQUIDITY RISK

kind of companies being the more at risk of LIQUIDITY RISK

Answer 4

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

Question 5

DIBRA AND LEADBETTER

4 company characteristics playing a role in most insolvencies

Answer 5

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

Question 6

DIBRA AND LEADBETTER

Define proximate cause

5 proximate causes of involuntary exits

Answer 6

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

Question 7

DIBRA AND LEADBETTER

difference in paying the costs of an insolvency between Canada and US/UK

Answer 7

In US/UK, liquidation dividends are used to reduce assessment needs

In Canada, PACICC must return liquidation dividends to solvent members of the industry

Question 8

DIBRA AND LEADBETTER

2 advantages and 2 disadvantages of foreign participation in Canadian insurance industry

Answer 8

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

Question 9

DIBRA AND LEADBETTER

why it is difficult to measure the full costs of an involuntary exit of an insurer

Answer 9

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.

Question 10

DIBRA AND LEADBETTER

4 external factors that may exacerbate vulnerability to insolvency

Answer 10

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

Question 11

DIBRA AND LEADBETTER

4 strategies an insurer can take to reduce the likelihood of insolvency

Answer 11

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