Chapter 13 (Ongoing Solvency) Flashcards
Which sources of capital need to be approved by the PA before they can be issued?
Preference shares, loan stocks, hubrid debt that is subordinate to policyholder interests.
What is economic capital?
Internal assessment, allowing for a company’s ongoing business strategy, of value of assets required in excess of liabilities so that, allowing for all risks, claims can be met with a high degree of certainty when they fall due.
Formal definition of economic capital would need to consider
-scope of risks
-probability of ruin accepted
-time period over which probability of ruin is assessed.
-whether insurer should only consider existing business or whether it should do the analysis based on going concern basis
How is economic capital determined
Stochastic modelling
-assess market and interest rate risk by projecting assets and liabilities over various scenarios
Stress tests
-where distribution is less well understood
-inter-dependencies between various risks will need to be assessed in order to develop overall economic capital requirement
What is the definition of regulatory capital
The minimum level of excess assets in excess of liabilities that will provide a cushion against extreme negative fluctuations in experience in any variables used in prudential supervision reporting valuation
How are assets valued
Main requirement is market consistency.
Minor deviations from IFRS with main intention of bringing treatment of A and L closer to economic valuation approach including
-goodwill = 0
-other tangible assets are only included to extent that FV can be placed on them
-financial assets valued at FV
-Participation must be valued at
-MV if listed
-Adjusted NAV, if unlisted and possible
-IFRS value, if possible
What is the definition of balance of own funds
Excess of assets over liabilities less any regulatory adjustments
What is the definition of ancilliary own funds
Off balance sheet capital resources that can be called upon to absorb any losses
What types of companies can the standardised formula be used for
Companies with typical risk exposures, a stable book and standard risk management techniques
What is done if you apply to not use the standardised formula
Iterative calculation with projections of elements of the SCR using risk drivers under different scenarios
What is the final formula for SCR
BSCR + Cap requirements for insurance participations in the same sector + operational risk - LACDT
What does the use of a full or partial internal model allow?
Broader understanding of a range of risks a company faces, the opportunity to take risks where it is likely to be advantageous and avoid/manage danger areas.
What is the minimum of MCR
R15 million or 25% of gross annualised operational expenses
To what extent can the SCR be reduced due to LACDT
SCR may be reduced to the extent that a 1-in-200 year loss event will result in a decrease of deferred tax on the PSR basis
To what extent can you use LACTP
It depends on whether the shock was industry wise or company specific.
An adjustment is made to the market risk modeul to ensure that the LACTP is not double counted.
Changes in PH behaviour also need to be allowed for
