Chapter 10 Flashcards
Rating Agency
Who pays rating agencies to provide an opinion of their financial strength
The board/ Themselves. Usually larger insurance companies. Effectively a marketing tool not a compliance requirement.
Rating Agency
Why would you appoint a rating agency to give their opinion on their financial strength
Keep the measure of their ability to pay claims and offers an opinion on their financial strength
Rating Agency
Why would insurance company prefer to have a Financial strength rating
It demonstrates they can meet their financial commitments
It looks good in comparison to different insurers
It’s good that you can charge a higher premium
Brokers are more likely to use you if high
Rating Agency
What nine things will a rating agency look at
- Economic and industry risk
2 competitive position - Management and corporate strategy
- Enterprise risk management
- Operating performance
- Investments
- Capital adequacy
- Liquidity
- Financial flexibility
When A rating agency looks at the economic and industry risk what does that mean
It looks at the sector in which the company operates in/ threats if new entrants etc
When a rating agency looked at the competitive position what does that mean
Looks at the insurance company strategy in comparison to competition
When a rating agency looks at the management and corporate strategy what does that mean
Look at the quality and credibility of the insurance senior management team and strategy it is set
When a rating agency looks at the enterprise risk management what does that mean
It is a method by which a company manages risk. Most large insurers expected have an effective ERM to earn a stronger financial ratings
When A rating agency looks at the operating performance what does that mean
This involves looking at the performance ratios- Can be loss ratio, expense ratio, combined ratio, return on equity etc
When a rating agency looks investments what does that mean
Looks at how an insurance investment strategy fits with its liability profile
When a rating agency looked at capital adequacy what does that mean
Look at the quality and level of capital required to run a business based on a risk appetite
Went a rating agency looked at liquidity what does that mean
The ability to manage cash flows efficiently and easily borrow money required
When a rating agency looks at financial flexibility what does that mean
This looks the insurers potential need for additional capital liquidity in the future
Rating Agency
What is the superior rating for standard and Poor
AAA
Rating Agency
Is C And D a good rating for standard and Poor
No
Rating Agency
What is a typical rating process
The insurer hires the agency-
2 people to spend time with the insurer going through finances, training plans, strategy etc so can understand the business.
Will then send to rating committee to rate
Rating Agency
What does it mean when an AAA rating indicates that a company is overcapitalised
It can mean from an investor perspective that they return on equity is likely to be depressed
Rating Agency
Do the PRA or FCA request you to have a financial rating
No. Its essentially for marketing by insurers
Rating Agency
Is BBB a good rating
Yes
Rating Agency
in insurance the global brokers tend to use what ratings
Usually A+
What would a risk appetite statement typically include
Risks that are acceptable and unacceptable
Probability of failure
The maximum loss that is acceptable from anyone incident
The target level of financial security
The quality and diversity of investments
The PRA requires that the probability of favour should not be what
Higher than one chance in 200 over a month timescale
The risk appetite statement would be used by the insurance company to set wha
The risk acceptance criteria
An investment policy
A reinsurance policy
Other financial and risk policy statements
Solvency Margin
what are solvency margins
What do you have to put aside to survive if bad things happen. Trying to prevent insurers going bust.
Solvency Margin
What are the objectives of solvency II
Two enhance policyholder protection create a safer more resilient insurance sector
Why was solvency II introduced
To replace the previous solvency one requirements - Solvency I was quite low. Solvency II stricter.
What are the four level processes for solvency II
Level one: framework principles
Level two: implementing measures
Level three: guidance
Level four: enforcement
Solvency Margin
What are the three pillars of solvency to- will be in exam
Pillar one: financial requirements
Pillar to: governance and supervision
Pillar three: reporting and disclosure
Solvency Margin
What is pillar 1 of a solvency II requirements- will be in exam
FINANCIAL REQUIREMENTS
The used test!!
The solvency capital requirement. The new higher solvency requirement. One in 200 years or 99.5%- the used test- How can you survive loads of floods or a recession? if you use your own model it has to be signed off.
The requirement to have new solvency margins.
Applies to all firms and considers key quantitative requirements and the solvency capital requirement and mimimum Capital requirement for either an approved full or partial European standard formula approach
Solvency Margin
What is pillar 2 of the solvency II- will be in exam
ORSA!!
These are risk flow charts - ORSA- must flow chart every risk you do. What the risks involved and how do you control them? ORSA is the key. Shows regulator you are under control with what goes on in your business.
Solvency Margin
What is pillar three under the solvency II requirements- will be in exam`
REPORTING AND DISCLOSURE
Solvency and financial condition report!!
Transparent relationship with your regulator.
Insurers are required to publish details of the risks facing them, capital adequacy and risk management. Transparency will help impose greater discipline on industry-
