CH:35 Insolvency and closure

Question 1

Why do insurance companies rarely become insolvent

Answer 1

• regulators monitor financial position
• regulation required to hold minimum level of solvency capital

Question 2

What are the steps a regulator will take if an insurer’s position is serious

Answer 2

• close to new business
• establish a recovery plan

Question 3

If there is an acquiring company prepared to take over the business, what needs to be considered?

Answer 3

• location of the operation
• integration of the systems platform
• relocation of staff or whether there is adequate labour force available
• effect on uni costs

Question 4

When projecting solvency (using a deterministic model) what issues need to be addressed and modelled

Answer 4

• estimate of future post-tax profits available to equity shareholders
• current valuation of all surplus assets
• amount and timing of any loan or debt redemption
• problems relating to industrial relations
• issues relating to any staff benefit schemes - especially if scheme is in a deficit
• outstanding financial obligations, minority interests and tax

Question 5

What are the 2 types of of closure of benefit schemes?

Answer 5

• no new members but benefits continue to accrue for existing members
• no new members and no further benefit accrual for existing members

Question 6

A benefit scheme may cease due to?

Answer 6

• insolvency of the sponsor
• decision by the sponsor to stop financing benefit provision, eg. to reduce costs or follow market trends in benefit provision

Question 7

What are the options if a benefit scheme is being discontinued with regards to outstanding benefit payments

Answer 7

• continuation of the scheme without any further accrual of benefits
• transfer of the liabilities to another scheme with the same sponsor
• transfer of the fund to the beneficiary
• transfer of funds to an insurance company to invest
• transfer of liabilities to insurance company to guarantee the benefits
• transfer of the liabilities to a central discontinuance fund

Question 8

When does a bank become insolvent?

Answer 8

• a bank is unable to meet its obligations to its depositors and creditors
• a bank’s value of its assets fall below the value of its liabilities