Chapter 3 - Business Planning and Capital Setting Flashcards
What do the PRA say about risk appetitite?
Maintain overall financial resources in amount and quality so there is no significant risk that its liabilities can not be met
What may a risk appetite statement include?
- risks which are acceptable for a company to bear
- risks that are not acceptable
- probability of failure deemed to be acceptable
- maximum loss acceptable from any one loss
What is the PRA limit for probability of failure?
No higher than 1 in 200 years
What is enterprise risk management?
Framework that allows risks to be assessed for frequency and severity, as well as mitigation, monitoring and reporting
How does enterprise risk management work?
- review and report risks
- identify risks
- assess risks
- address risks
repeat
What is a black swan event?
- unpredictable
- massive financial impact
- shock effect (no one could conceive the event happening before)
Define an own risk solvence assessement
Identify, asssess, monitor, manage and report the short and long term risks facing a (re)insurance comapny faces or may face to determine own funds necessary to ensure solvency
What should strategy and risk appetite cover?
- target areas of business
- areas of business not being written
- new markets being targeted or not targeted
- changes in distribution models
What is important in the plan for an insurer?
Should be flexible so can change to meet new opportunities, should not sit at the bottom of a drawer
What is the expectations of a business plan from regulators?
Scarry out stress tests on business plan and scenario analysis that tests plan to failure
What does the syndicate business forecast allow Lloyd’s to do?
Allows Lloyd’s to set targets / guidlines, monitror London Market for the next year
What are Lloyd’s looking for in a business plan?
- logical
- realistic
- achievable
What if Lloyd’s deem a plan more risky than standard?
Loading applied to the capital of the syndicate for increased risk, to which all counterparts are expected to comply
What might go into a business plan?
- classes of business
- gross written premiums
- planned loss ratios
- premium phasing
- geographical spread
- acquisition costs
- operating costs
- sources of business
- investment strategy and likely returns
- reinsurance strategy
Which reports on the business plan are sent to Lloyd’s and at what frequency?
- perfomance management data, monthly
- monitoring class of business performance, quarterly
- gross quarterly data
- realisitic disaster scenarios, annually
- syndicate reinsurance programme, quarterly
Why is accurate data important?
FCA’s SYSC has rule stating:
A firm must keep orderly records of businss and internal organisation which must be sufficient for appropriate regulator to monitor compliance with regulatory system
What are Lloyd’s three minimum standards concerning data capture and recording?
- managing agents must ensure appropriate data governance structures and procedures are in place
- managing agents to complete all returns to Lloyd’s and PRA and ensure data is accurate, complete and timely
- managing agents shall have systems and processes in place to record relevant data and output for reporting
How is the solvency capital requirement set?
Capital required to provide protection against a 1:200 year event
What affect with inadequate regulatory capital have on the business?
needs to:
- raise regulatory capital by issuing shares on long-term debt that satifies PRA requirements
- reduce business written, or buy more reinsurance
What are the key financial aspects stakeholders are looking for?
- profitability
- liquidity
- turnover
- expenditure
- organisational wealth
- working capital
- solvency
What are the three main documents used in financial accounts?
- balance sheet
- income statement
- cashflow statement
What does the blaance sheet show?
Financial position at a single point in time
What does the income statement show?
Performance of the business
How can long term debt be considered an asset?
Meets the PRA’s standards
What are the two types of asset?
tangible (cash or buildings)
intanglible (goodwill, copywrites)
What is the equation to find equity of a company?
Equity = assets - liabilities
What would be in an insurer’s income statment?
Income:
- gross written premium
- premium earned (split evenly over policy year)
- investment income
Expenses:
- claims
- costs of running the business
- acquisition costs
- reinsurance costs
- taxes
What would be in an insurer’s balance sheet?
- provisions for unearned premium (same as polocy year for income statement, liability if not earned)
- provisions for losses and loss adjustment expenses (liability)
- reinsurance (costs are liabs, recoveries assets)
- investments
What are the activities informing a business’s cashflow?
- operating
- investment
- financing
What are the five categories of ratio?
- profitability
- productivity
- liquidity
- turnover
- gearing
What profits are investors in insurance generally looking for?
Twice the bank account rate
How can productivity be measured for insurers?
How efficient premium monitoring and debt chasing are over time
What are the two ways to measure liquidity, and how are insurers measured on liquidity?
assets / liabilities, assets excluding stock / liabilities
liabilities / cash + investments
How can activity be measured in an insurer?
policies sold / policies with premium due
What is gearing?
Borrowing compared to amount of investor equity
How is the combined ratio calculated?
total incurred + expenses / earned premium
How is combined ratio interpreted?
Below 100% means profitable
