Chapter 10 - part 4 Flashcards
What does Capital acts as a buffer for?
Absorbing unexpected losses
Having enough capital of sufficiently high quality reduces what?
the risk of a firm becoming unable to meet the claims of its creditors.
What is a solvency margin?
the amount by which assets must exceed liabilities
Solvency I required a general insurer to calculate its solvency on two different bases. What were they?
to apply a scale of percentages to premiums
to apply a different scale to claims
What did the design of Solvency I lack?
risk sensitivity and did not capture key risks, including market, credit and operational risk
What does ECR stand for?
enhanced capital requirement
The ECR was calculated by a non-life insurer by adding together what?
• an asset-related requirement: a prescribed percentage determined by each type of admissible asset an insurer has, such as loans and shares; and
• an insurance-related requirement: a prescribed percentage determined by each class of business and calculated separately for net written premiums (total debited premiums less reinsurance costs) and technical reserves (these include elements such as current outstanding claims and unearned premium reserves).
What was the ECR designed for?
to minimise the risk of an insurance company having insufficient funds to meet present and future claims
What does MCRs stand for?
minimum capital requirements
Where the minimum capital requirements (MCRs) prescribed are not maintained by a company, the regulator can do what?
Intervene
Solvency II sets out a new, stronger EU-wide requirement on capital adequacy and risk management for insurers with what aim?
increasing protection for policyholders
Solvency II has the following three pillars, what are they?
• Pillar 1 – capital adequacy.
• Pillar 2 – systems of governance.
• Pillar 3 – supervisory reporting.
What does Pillar 1 ensure??
that a firm is adequately capitalised to deliver policyholder protection.
What does SCR and MCR stand for? and what do they mean?
• Solvency capital requirement (SCR): the level of capital required to give 99.5% confidence that assets will be sufficient to cover liabilities over the following twelve months.
• Minimum capital requirement (MCR): the level of capital required to give the national supervisor 85% confidence that assets will be sufficient to cover liabilities over the following twelve months.
What happens to firms that fall below the SCR?
It triggers the “ladder of intervention”
What does the “ladder of intervention” consist of?
common European intervention tools aimed at recovering firms’ solvency position within a
set period of time
What happens to firms that fall below the MCR?
They will have a shorter period of time to recover their position, with the ultimate supervisory action being closure if the solvency position is not recovered
Firms can calculate their capital requirements using one of the three methods which are?
Standard Formula - capture the standard risks a firm may face and calculate the capital requirements to these risks.
Undertaking specific parameters - hange the parameters on the standard formula to ones more appropriate to their business
Internal Models - For complex firms, a full or partial internal model allows a more bespoke assessment of a particular business and its risk profile.
What does a firm wishing to use an internal model or partial model have to do?
obtain prior approval of their model from the PRA.