Chapter 10 Flashcards
What is the role of credit rating agencies (CRAs) in insurance?
They assess the financial strength and creditworthiness of insurers.
Why is a high credit rating beneficial for an insurance company?
It increases trust among policyholders, investors, and regulators, reducing the cost of capital.
What are the three pillars of Solvency II?
(1) Financial requirements,
(2) Governance & supervision,
(3) Reporting & disclosure.
What is the solvency margin in insurance?
The excess of assets over liabilities, ensuring an insurer can meet obligations.
What does ORSA stand for in Solvency II?
Own Risk and Solvency Assessment.
How does Solvency II differ from IFRS 17 in recognizing profits?
Solvency II allows immediate profit recognition, whereas IFRS 17 spreads profits over time.
What is the purpose of stress testing in insurance?
To assess an insurer’s resilience to financial shocks and extreme scenarios.
What is the risk-free rate used for in Solvency II?
It helps determine the present value of liabilities
How do insurers use internal models under Solvency II?
For capital calculations, pricing, and investment decision-making.
What is the main challenge of aligning Solvency II with IFRS 17?
Differences in risk adjustment, discount rates, and profit recognition.
What role do actuaries play in ensuring financial strength?
They assess risks, calculate reserves, and support capital management.
Why is governance important in Solvency II?
It ensures proper risk management, compliance, and transparency.
What are the key planned reforms in Solvency II?
Adjustments in risk sensitivity, capital requirements, and investment strategies.
How does liquidity premium impact insurance liabilities?
It adjusts the discount rate for illiquid liabilities, affecting solvency calculations.
What is the role of the Prudential Regulation Authority (PRA)?
It oversees insurers’ financial health, solvency, and stress testing.
What do credit rating agencies assess in insurance companies?
a) Customer satisfaction
b) Financial strength and creditworthiness
c) Marketing effectiveness
d) Claims processing speed
b) Financial strength and creditworthiness
Which of the following is NOT a common credit rating category?
a) AAA
b) BB
c) ZZZ
d) BBB
c) ZZZ
Why is a lower credit rating problematic for an insurer?
a) It increases borrowing costs and reduces investor confidence
b) It leads to higher customer satisfaction
c) It allows for better investment opportunities
d) It eliminates the need for regulatory oversight
a) It increases borrowing costs and reduces investor confidence
What is the primary goal of Solvency II?
a) Increase insurer profits
b) Ensure insurers can meet obligations to policyholders
c) Standardize customer service processes
d) Eliminate all risk from insurance operations
b) Ensure insurers can meet obligations to policyholders
Which pillar of Solvency II focuses on governance and risk management?
a) Pillar 1
b) Pillar 2
c) Pillar 3
d) None of the above
b) Pillar 2
What does ORSA stand for?
a) Operational Risk and Solvency Assessment
b) Own Risk and Solvency Assessment
c) Outstanding Risk and Strategy Analysis
d) Official Risk Standards Act
b) Own Risk and Solvency Assessment
What is the key difference between IFRS 17 and Solvency II?
a) IFRS 17 allows for immediate profit recognition
b) Solvency II recognizes profits immediately, while IFRS 17 spreads them over time
c) Solvency II does not account for liabilities
d) IFRS 17 does not apply to insurance companies
b) Solvency II recognizes profits immediately, while IFRS 17 spreads them over time
What is included in Pillar 3 of Solvency II?
a) Capital reserves requirements
b) Governance and supervision rules
c) Disclosure and transparency requirements
d) None of the above
c) Disclosure and transparency requirements
What is a solvency margin?
a) The amount of premiums collected annually
b) The excess of assets over liabilities
c) A measure of policyholder satisfaction
d) A type of insurance fraud detection tool
b) The excess of assets over liabilities
Why do insurers use internal models under Solvency II?
a) To calculate regulatory capital requirements
b) To avoid compliance
c) To eliminate financial risk
d) To outsource risk management
a) To calculate regulatory capital requirements
What is the role of actuaries in financial strength?
a) Designing new insurance marketing campaigns
b) Assessing risk, calculating reserves, and ensuring capital adequacy
c) Selling policies directly to customers
d) None of the above
b) Assessing risk, calculating reserves, and ensuring capital adequacy
Which of the following is NOT a key factor in an insurer’s financial strength?
a) Investment strategy
b) Claims handling efficiency
c) Solvency margin
d) Regulatory compliance
b) Claims handling efficiency
What is one of the planned Solvency II reforms?
a) Eliminating capital requirements
b) Increasing flexibility in investment strategies
c) Removing governance requirements
d) Reducing transparency in financial reporting
b) Increasing flexibility in investment strategies
How does liquidity premium impact insurance calculations?
a) It increases liability values
b) It adjusts discount rates for illiquid liabilities
c) It has no impact on solvency calculations
d) It only applies to short-term insurance contracts
b) It adjusts discount rates for illiquid liabilities
What role does the PRA play in the insurance industry?
a) Ensuring proper financial regulation and solvency compliance
b) Setting customer service guidelines
c) Selling insurance policies directly
d) Managing investment portfolios
a) Ensuring proper financial regulation and solvency compliance
Why is stress testing important for insurers?
a) It increases sales
b) It assesses financial resilience under extreme scenarios
c) It replaces traditional risk management
d) It only applies to small insurance firms
b) It assesses financial resilience under extreme scenarios
What happens if an insurer fails stress testing?
a) They must adjust risk strategies and capital reserves
b) They immediately shut down operations
c) They automatically receive higher credit ratings
d) Nothing, as stress testing is optional
a) They must adjust risk strategies and capital reserves
What is a key challenge of aligning Solvency II with IFRS 17?
a) Differences in risk adjustment and discount rate usage
b) IFRS 17 does not apply to insurers
c) Solvency II ignores liabilities
d) They are identical frameworks
a) Differences in risk adjustment and discount rate usage
Which of the following factors is LEAST likely to influence an insurer’s credit rating?
a) Market perception of the insurance sector
b) The insurer’s claims settlement speed
c) The insurer’s asset liability matching strategy
d) The insurer’s exposure to catastrophe risks
B
What does a downgrade in an insurer’s credit rating typically indicate?
a) Increased regulatory capital requirements
b) Reduced policyholder protection
c) Higher funding costs and reduced market confidence
d) Immediate insolvency
C
What is the primary reason for Solvency II’s risk-based approach to capital requirements?
a) To create a uniform regulatory framework
b) To reflect each insurer’s specific risk exposure
c) To simplify capital calculations for insurers
d) To eliminate the need for internal models
B
How does the Matching Adjustment impact an insurer’s solvency ratio?
a) Increases solvency ratios by reducing liability values
b) Decreases solvency ratios by increasing capital requirements
c) Has no direct impact on solvency calculations
d) Reduces the need for stress testing
A
What is a key difference between Minimum Capital Requirement (MCR) and Solvency Capital Requirement (SCR)?
a) MCR is risk-sensitive, while SCR is a fixed amount
b) SCR is always higher than MCR and reflects risk exposure
c) MCR is a voluntary requirement, while SCR is mandatory
d) SCR only applies to life insurers
B
Under Solvency II, what happens when an insurer’s own funds fall below its SCR but remain above the MCR?
a) The insurer must submit a recovery plan to regulators
b) The insurer is immediately placed under administration
c) The insurer must cease underwriting new business
d) There is no regulatory consequence
A
Why is the Risk Margin necessary in Solvency II?
a) It accounts for the cost of transferring liabilities in case of insurer failure
b) It smooths out market fluctuations in capital requirements
c) It ensures that an insurer’s assets exceed liabilities
d) It reduces capital volatility during financial crises
A
What is a major challenge in aligning Solvency II and IFRS 17?
a) Differences in profit recognition timing
b) IFRS 17 does not consider insurance risk
c) Solvency II does not apply to general insurers
d) IFRS 17 eliminates the need for regulatory capital
A
Why do insurers apply the Volatility Adjustment under Solvency II?
a) To adjust discount rates based on market conditions
b) To reduce required capital buffers
c) To increase reported profits
d) To eliminate the need for stress testing
A
What is the primary objective of the Ultimate Forward Rate (UFR)?
a) To forecast short-term interest rates
b) To establish a long-term equilibrium interest rate
c) To ensure asset-liability matching
d) To eliminate capital volatility
B
Why is asset-liability matching critical in insurance?
a) It minimizes liquidity risks and capital requirements
b) It maximizes insurer profitability
c) It eliminates market risks
d) It is only relevant for life insurers
A
What factor can trigger an increase in an insurer’s capital requirements under Solvency II?
a) Decreased exposure to market risk
b) Improved asset diversification
c) Rising interest rates reducing liability values
d) Higher claims volatility
D
