CH34 - Insolvency and closure

Question 1

Insurance companies rarely become insolvent because (2)

Answer 1

1. A regulator typically regularly monitors the financial position of insurance companies
2. Insurance company regulation typically requires companies to hold a minimum level of solvency capital

Question 2

If the insurer’s financial position is serious (e.g. the solvency capital requirement is not met), then the regulator may require the company to (2)

Answer 2

1. close to new business, or

2. establish a recovery plan (with implementation monitored closely by the regulator)

Question 3

It will be important to project the insurer’s solvency position into the future using either a stochastic model or a deterministic model with scenario testing.
The issues that need to be addressed and modelled include (6)

Answer 3

1. Estimation of future post-tax profits available to equity shareholders
2. The current value of all surplus assets
3. The amount, and timing, of any loan or debt redemption
4. Problem relating to industrial relation (including redundancies)
5. Issues relating to any staff benefit schemes - particularly if in deficit.
6. Outstanding financial obligations, minority interests and tax

Question 4

If there is any acquiring company prepared to take over the business, it will be necessary to consider (4)

Answer 4

1. The location of the operation
2. Any integration of the systems platform
3. Relocation of staff or whether there is an adequate labor force available
4. The effect on unit costs

In the extreme event that an insurer cannot meet its liabilities, and a buyer cannot be found to take them on, there may be a statutory scheme from which some or all of the benefit payments are paid. Such a scheme is usually funded by a levy on all other providers.

Question 5

Types of closure of a benefit scheme (2)

Answer 5

1. No new members but benefits continue to accrue for existing members
2. No new members and no further benefit accrual for existing members

Question 6

A benefit scheme may cease due to (2)

Answer 6

1. The insolvency of the sponsor
2. A decision by the sponsor to stop financing benefit provision, e.g. to reduce costs or to follow market trends in benefit provisions

Question 7

If a scheme ceases, the level of benefits that will be paid will be affected by the (3)

Answer 7

1. rights of the beneficiaries
2. expectations of the beneficiaries
3. the level of assets

Question 8

At the time of discontinuance, the scheme may be (2)

Answer 8

1. under-funded, in which case consideration will need to be given to the priority of the different groups of members of the scheme in receiving benefits.
   An allowance should be made for the expenses involved in determining the benefit allocations
2. over-funded, in which case the surplus may pass back to the employer, or may be used to improve the benefits of the scheme members.
   Consideration must be given to ensuring that members’ basic rights are met before seeking to improve the benefits.

The approach to be taken in either case may be dictated by legislation or scheme rules.

Question 9

If a benefit scheme is being discontinued, the following options may exist for the provision of the outstanding benefit payments (6)

Answer 9

1. Continuation of the scheme without any further accrual of benefits
2. Transfer of the liabilities to another scheme with the same sponsor
3. Transfer of the funds to the beneficiary, in cash form if permitted by legislation or as a transfer to an insurance company or to the scheme of any new employer
4. Transfer of the funds to an insurance company to invest in a group or individual pension accrual policy (without guarantees)
5. Transfer of the liabilities to an insurance company to guarantee the benefits
6. Transfer of the liabilities to a central discontinuance fund (national or industry-wide)

For the first two options, the employer remains liable for any shortfall in assets relative to benefits.
For the third and fourth options, the risk of adverse experience falls to the individual.
For the fifth option, the insurer takes the risk and will charge an additional premium for this.
For the sixth option, the discontinuance fund takes the risk and is typically funded through a levy on solvent sponsors.