chap 10 security Flashcards
solvency - to make sure all iabilities are recognised also known as - solvency margin, policyholders surplus, policyholders capital or networth
old margin = 18% of gwp
solvency 1 rules v solvency ii
solvency i rules v solvency ii rules
- solvency 1 - not permitted to fall below the mcr and
- ecr (enhanced capital requirement) charges based on asset categories and ri debts, its a more risk sensitive calc.
- individual capital assessments
- business risk factors
- control risk factors,
also the pra have given a process for individual capital guidance (icg), takes account the work done by the firm to follow the rules
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solvency ii
-framework for adequate ph protection in all member states, taking into account developments in insurance, risk mngmt, financial techniques, international reporting & prudential standards, it is better intended to reflect the true range of risks
(includes mcr)- enhanced version of that in solvency 1
scr - solvency capital requirement (compares to the enhanced capital requirement)
orsa- compares to the individual capital assessment
MCR absolute floor;
of;
- eur 2.2m for non life undertakings inc captives, except for certain classes where it should not be any less than 3.2.m
- 3.2m for life undertakings inc captives
- 3.2m for r/i excl r/i for captives where the mcr shall not be less than 1m
- scr to be calculated once yearly
- every firm requires an orsa
expected benefits of solvency ii
1/ consumers- reduce risk of failure, consistent framework, as more soph insurers no longer need to hold excess capital
2/ insurers- greater focus on rsk mngmt, transparancy, forces firms participation in orsa’s and establising the true financial position
3/ regulators- understand firm and its risks better,
estimated 500m spent on sol ii to date
liability of brokers for insurer failure
- owe a general duty of care
- have to abide by the fca’s principles for business
- must assess the willingness and ability for insurers to pay claims
- osman v ralph moss 1970 - liable for negligence of the failure, status of comp was well known poor, unusual case.
- rsa- wen through downgrades but still held adequate approval etc so brokers would unlikely be found liable in that case
monitoring the security of insurers
signs of insurer weakness;
- s&p rating below bbb+ or equivalent
- foreign base with no uk operation
- rapid expansion contrary to mrket trends
- petty delays in settling claims and rp’s
- unusual claims reserving practices
- unreasonable stance on large claims
- constant pressure on broker to increase volume
- unconventional claims conditions
- style- pride comes before a fall
- very attractive brokerage
- lavish entertainment
- overbearing ceo
large broking firms maintain their own security divisions for the following reasons;
- client demand
- large brokng firms place business in many jurisdictions around the world
- broker needs its own method of assessment- many insurers have failed despite apparatnly being adequately regulated
- prof security section can obtain more detailed info from insuers
- cost effectiveness of a focussed central team
corporate governance of broker security committees
- the committee must operate truly independently and not be swayed by many commercial pressures faced by brokers, these rules are likely to include;
- the constituition on the committee - procedures for selecting the chairman and other members to obtain a balance of experience
- min criteria eg bbb+ rating plus 50m min capital
- the independence of function to ensure decisions cannot be overruled by the senior teams
- procedures to avoid conflict of interest
analysis of information by a security comm invloves;
classification of insurers
security comm rely on public, private and own info to decide whether the story adds up
rating agencies cant do anything about fraud
cultural differences between uk usa etc
- info within the public domain
- conf info from insurers such as strategies, reserving, treatment for asbestos, how the ri prog works, how insurers system of controls work, detailed analysis of capital strcture
- info gathered internally from brokers, eg willingness to pay claims- speed of payment, service levels and flexibility
- the financial and strategic position of an insurer- eg ability to raise capital from additional sources
- classification of insurers;
eg restricted, unrestricted basis based on geography, type of business, ratings, requirement that insuers can only be used upon explicit instruction from insurers
the role of rating agencies
- agencies have a wide range of good and excellent rating categories- bbb is investment range
- ratings do not reprensent a stately progression in terms of finacial strength
- once downgraded the agencies will expect exceptional performance before they will restore the orig rating
- ratings are about proability not certainty
- higher ratings do not make insurers better - just a bet
- ratings are all about the ability to pay claims (as opposed to willingness)
- ratings are not all about fin strenth
- ratings can be interactive or based on public info
ratings of brokers and mgas important too, main considerations for brokers
- is an mga arranged on a risk tranfer basis, so once money is paid it becomes property of insurer
- does the mga have the full authority of the insuer to act
- what is the underlying security backing in the mga- would it be acceptable to the broker if the risk were being placed direct?
