Chapter 10 Flashcards
Major Insurance Rating Agencies
Standard & Poor’s
AM Best
Moody’s
Fitch
Rating Methodology
- economic & industry risk
- competitive position
- management & corporate strategy
- enterprise risk management
- operating performance
- investments
- capital adequacy
- liquidity
- financial flexibility
Rating Process
- Company meets the agency & signs a contract
- Analysts spends a day with senior execs
- Detailed analysis over weeks
- Lead analyst recommends a rating to an agency
- Committee debates & votes on the rating
- Insurance company is informed and can agree/appeal
- Final rating is announced via press release
GENPRU 1.2.26
Insurers must maintain sufficient financial resources to ensure liabilities can be met
Covers capital & liquidity resources to reduce risk of insolvency
Risk Appetite Statement
- acceptable risks & unacceptable risks
- probability of failure deemed acceptable
- maximum loss acceptable from a single incident
- target financial security level
- quality & diversity
Regulatory Minimum - probability of failure less or equal to 1 in 200 over 12 months (PRA)
Solvency II Directive
Introduced January 1st 2016 to create EU-wide capital & risk management rules
- enhance policyholder protection
- create a safe & more resilient insurance sector
Solvency II Pillar 1
Financial Requirements
Insurer Balance Sheet under Solvency II
Assets include:
- market-valued investments
- reinsurance assets (cover future liabilities)
- surplus capital
Liabilities include:
- best estimate liabilities
- risk margin
- regulatory capital
Solvency II Capital Tiers
Tier 1 - highest quality (common equity, retained earnings)
Tier 2 - medium quality (subordinated debt, absorbs losses only in insolvency)
Tier 3 - lowest quality (limited loss absorption)
Solvency Capital Requirement (SCR)
Covers severe risks (1 in 200-year event)
Minimum Capital Requirement (MCR)
Ensures policyholder protection (85% adequacy)
If Capital falls below Required Levels
Breaching SCR - must restore capital & reduce risk exposure
Breaching MCR - regulatory intervention, may lose authorisation if not resolved within 3 months
Solvency II Pillar 2
Governance and Supervision
Governance & Supervision
- insurers must have strong risk management to avoid failure
- senior managers are held accountable under SM&CR regulations
- own risk and solvency assessment (ORSA) helps insurers assess risks beyond capital needs
- investment rules are flexible but must follow the “prudent person principle”
Solvency II Pillar 3
Reporting and Disclosure
Reporting & Disclosure
- insurers must publish financial reports (SFCR) yearly for transparency
- reports help investors & regulators understand a company’s risks
- firms must disclose solvency issues & corrective actions
Stress & Scenario Testing
Stress testing helps insurers prepare for financial shocks
Reverse stress testing identifies scenarios where a firm’s business model becomes unviable
The PRA runs periodic stress tests on insurers to check resilience
Actuary Responsibilities
- insurers must have an actuarial function to support financial stability
- actuaries don’t need formal qualifications but must have strong expertise in financial and actuarial mathematics
- they help design, calibrate and refine internal risk models
How Actuaries Contribute
risk management -> improve models to manage financial risks
reserve volatility analysis -> use model outputs to assess financial stability
technical provisions assessment -> ensure insurers have enough funds for future claims
