Chapter 24 - Supervisory reserves and capital requirements (2) Flashcards
How can the supervisory authority’s primary concern be to ensure that insurance companies have sufficient assets to cover liabilities with a high degree of certainty
- Requiring insurance companies to hold reserves calculated on a prudent basis
- Requiring a minimum level of solvency capital to be held
- Requiring a combination of prudent reserves and solvency capital to be held
What is market-consistent value of a liability
It is the price that someone would charge for taking responsibility for ( the ownership) of the liability, in a market in which such liabilities are freely traded
What rates of return are used in the market-consistent valuation
The risk-free rates
What is the illiquidity premium
It is the part of the yield that represents the illiquidity of the asset
What is the purpose of solvency capital requirements
It is seen as providing an additional level of protection to policyholders
What is an example of a risk-based solvency capital requirement
The VaR measure, normally expressed at a minimum required confidence level
What is the formula for the aggregated capital requirement
SQRT(SUM(Corr ij x Cap i x Cap j))
What is a passive valuation approach
It is an approach that uses a valuation methodology which is relatively insensitive to changes in market conditions and a valuation basis which is updated relatively infrequently
- The assumptions for mortality and expense inflation would rarely change
What is the advantages of using a passive valuation approach?
- More straightforward to implement
- Involves less subjectivity
- Result in relatively stable profit emergence ( to the extent they are used for accounting purposes)
What are the disadvantages of passive valuation approach
- Becoming out of date
- Insensitive to changes in market conditions and has a valuation basis that is updated relatively infrequently
What is active valuation approach
It is based more closely on market conditions, with assumptions being updated frequently
What are the advantages of using an active valuation approach
- More informative in terms of understanding the impact of market conditions on the ability of the company to meet its obligations, particularly in relation to financial guarantees and options
What are the disadvantages of active valuation approach
- Results are more volatile
- More complex than passive valuation