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Actuarial F203 - General Insurance > Chapter 15: Portfolio Transfers > Flashcards

Chapter 15: Portfolio Transfers Flashcards

1
Q

Companies can use portfolio transfers to seek to exist from either (3)

A
  • single lines of business
  • a group of different lines of business
  • complete portfolios
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2
Q

5 Possible reasons for companies seeking to exit from business

A
  • the business requires a disproportionate amount of senior management time and/or capital for its size
  • the business was purchased as part of a larger acquisition, but was not the reason for undertaking the transaction
  • the business has been, or is expected to be, loss making or not sufficiently profitable
  • the company may have become insolvent and forced by its regulator to cease writing new business
  • a combination of these
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3
Q

Run-off to exhaustion

A

The company ceases to write any new business or renewals in the lines being exited, but continues to retain responsibility for administering and paying the claims for the historical business.

  • business functions (e.g. claims handling) have to be maintained
  • as the level of underwritten business decreases over time this strategy becomes expensive to administer
  • outsourcing certain administrative functions to specialist run-off providers can reduce these costs
  • this exist strategy is often used as an interim solution while alternative exist strategies are considered.
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4
Q

Reinsurance (as an exist strategy_

A

All future claims that may arise from historical business is reinsured.

  • the insurer can allow the reinsurer to administer and settle all future claims, in which case a binder agreement will be required
  • level of risk transfer achieved depends on the specific terms of reinsurance (lower limits, caps at upper limits, aggregate constraints, etc.)
  • if the reinsurer defaults, the ultimate responsibility of paying claims still lies with the insurer
  • the insurer will still need to include the business in its regulatory reporting
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5
Q

If the business is reinsured, the parties will negotiate the reinsurance premium and it is likely to depend on (8)

A
  • the estimated cost of the liabilities, given the precise structure of the reinsurance
  • the uncertainty around this estimated cost
  • anticipated future investment return
  • cost of ongoing administration
  • the capital required to support the liabilities
  • the financial strength of the reinsurer
  • the required return on capital (or profit loading)
  • the availability of such reinsurance in the market
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6
Q

Scheme for the transfer of insurance business

A

Complete transfer.

Part V of Section 36 of the STIA 1998

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7
Q

A successful substitution requires an agreement between 3 parties

A
  • policyholder
  • new insurer
  • old insurer
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8
Q

4 Steps to initiate a transfer

A
  • Apply for the Registrar’s approval
  • The Registrar determines whether information submitted is sufficient
  • The Registrar indicates whether he is satisfied
  • Within a period of 60 days after the transfer, the public officers fill in Annexure 6 stating that the transfer was done as per the Registrar’s approval.
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9
Q

2 insurers will negotiate the amount payable for the substitutions, considering (5)

A
  • the valuation of the ultimate liabilities
  • the uncertainty surrounding the valuation
  • capital implications
  • reinsurance requirements
  • return on equity required
  • administering costs or savings for each party
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10
Q

Sale of business:

Selling whole comapnies

A
  • Achieves complete finality for the insurer.
  • Not very flexible
  • On some occasions the seller will have to retain certain liabilities, such as claims arising from a historical event with great uncertainty.
  • Buyers may find this strategy appealing as it affords a quick entry to a market (all FSB requirements, etc. will already be in place).
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11
Q

Sale of business:

Selling other assets

A
  • An example of this would be selling reinsurance assets
  • Typically done when reinsurance recoveries are uncertain. As a result, the asset is sold for much less than the expected recovery.
  • The short-term insurer will have to seek the Registrar’s approval before it can allow its assets to be held by another person.
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12
Q

Typical considerations when deciding on methods and bases for valuing the liabilities would be (7)

A
  • negotiating strength
  • the initiator of the deal
  • risk appetite
  • the uncertainty, length of tail, etc.
  • the views of regulators
  • recommendations of oversight persons/bodies e.g. FSB, independent experts, Lloyd’s
  • the opinions of reinsurers (possibly)
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13
Q

4 Possible exist strategies

A
  • run-off to exhaustion
  • reinsurance
  • scheme for the transfer of insurance business (substitution)
  • sale of the business
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14
Q

What are the potential downsides to outsourcing functions of the insurer?

A

QUESTION 1

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15
Q

Why is it important to obtain policyholder consent for a transfer?

A

QUESTION 2

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16
Q

Steps to initiate a transfer:

Apply for the Registrar’s approval

A

Various annexures need to be completed.

  • who requested the transfer and the effective date
  • who the affected policyholders are
  • what the policy conditions are and the details of any differences
  • agree that policyholders have been given information in order to make an informed decision
  • agree that policyholder consent have been or will be sought
  • interim arrangements with respect to benefits while transfer is being completed
  • list of assets and their fair value to be transferred
  • auditor certificate
17
Q

Transfer:
What happens if client consent was not sought or if less than 100% of affected policyholders gave consent for the transfer

A

Then the transfer will be done as per Section 36 (1) which means that the Registrar will decide on behalf of the policyholders.

18
Q

Reasons for effecting a Part V transfer (3)

A
  • Achieving finality
  • Cost savings and capital releases
  • In mergers and acquisitions
19
Q

Reasons for effecting a Part V transfer:

Achieving finality

A

After the transfer has been completed, the transferor has no remaining exposure to the transferred business, while at the same time cover for the policyholder is maintained.

20
Q

Reasons for effecting a Part V transfer:

Cost savings and capital releases

A

Many insurers have a large number of different insurance companies within their group (often as a result of previous mergers and acquisitions or other historical reasons).

By undertaking one, or a number of, Part V transfers these legacy liabilities within the companies can be transferred into a single company.

This can reduce both management time and administration costs. The resultant cost savings can be significant.

21
Q

Reasons for effecting a Part V transfer:

Mergers & Acquisitions

A

This is when a transfer of business is done but simultaneously the shares of the transferor insurer will also be obtained by the transferee or a related company of the transferee.

Part V transfers can be used:

  • prior to an acquisition, where an insurer transfers similar portfolios of business into one entity ready to be sold, or transfers a portfolio out of a company to enable a sale of the remaining business to progress
  • after an acquisition, by combining the new subsidiaries to achieve cost savings or a release of capital as discussed above
  • as an alternative way of acquiring a portfolio (or a combination of portfolios at the same time) rather than purchasing the entire company
22
Q

Main parties involved in any Part V transfer

A
  • the transferor company
  • transferee company that is receiving the business
  • policyholders
  • auditors
  • actuaries
  • FSB
  • any expert the FSB feels is necessary
23
Q

Additional methods of transferring portfolios in the UK notes

A
  • commutations
    (cancellation of the right to make any more claims in respect of either future or past periods of cover)
  • schemes of arrangement
    (effectively group commutations)
  • insurance business transfers
    (transfer without policyholder agreement)
24
Q

Comparing: sale / portfolio transfer / reinsurance

Advantages of a portfolio transfer to the transferring insurer

A
  • A one-off payment will transfer the liability
  • The original insurer will stay operations and future products can still be sold
  • No further policy administration
  • No further capital requirement to service the portfolio
25
Q

Comparing: sale / portfolio transfer / reinsurance

Disadvantages of a portfolio transfer to the transferring insurer

A
  • Policyholder consent needs to be obtained
  • The process is time consuming & admin intensive
  • Approval is required from the registrar
  • The insurer may be left with expensive staff / overheads and one fewer portfolio to manage
  • The cost of the portfolio transfer could be very highe
  • Reputational risk if the other insurer doesn’t pay claims
  • Assets may need to be realized at unfavourable or tax inefficient times
26
Q

Comparing: sale / portfolio transfer / reinsurance

Advantages of reinsurance to the transferring insurer

A
  • The insurer will still be operational and future products can be sold
  • Reinsurance should allow a lower level of capital to be held
  • Lower concentration risk
  • Simplest and easiest method of transferring the liabilities
  • Can still benefit from interest on reserves
  • No policyholder / regulatory consent will be required
27
Q

Comparing: sale / portfolio transfer / reinsurance

Disadvantages of reinsurance to the transferring insurer

A
  • The insurer will still need to run off the underlying policies
  • All court cases and claims will still be brought against and managed by the insurer
  • The insurer is liable in the case of reinsurer default
  • The required reinsurance products may not be available or the cost may be prohibitive
  • The required reinsurance capacity may not be available locally and will have to be placed in the international market.
  • Depending on the reinsurance, there may be gaps in cover
28
Q

Comparing: sale / portfolio transfer / reinsurance

Advantages of SALE to the transferring insurer

A
  • The insurer will have no further liabilities to worry about
  • The admin of managing the product will no longer be required
  • The insurer is no longer required to hold any regulatory capital
29
Q

Comparing: sale / portfolio transfer / reinsurance

Disadvantages of SALE to the transferring insurer

A
  • Complicated
  • Requires both regulatory and competition commission approval
  • Finding a buyer may prove difficult

Actuarial F203 - General Insurance (43 decks)

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