Chapter 3 - Business Planning and Capital Setting

Question 1

What do the PRA say about risk appetitite?

Answer 1

Maintain overall financial resources in amount and quality so there is no significant risk that its liabilities can not be met

Question 2

What may a risk appetite statement include?

Answer 2

• 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

Question 3

What is the PRA limit for probability of failure?

Answer 3

No higher than 1 in 200 years

Question 4

What is enterprise risk management?

Answer 4

Framework that allows risks to be assessed for frequency and severity, as well as mitigation, monitoring and reporting

Question 5

How does enterprise risk management work?

Answer 5

1. review and report risks
2. identify risks
3. assess risks
4. address risks
   repeat

Question 6

What is a black swan event?

Answer 6

• unpredictable
• massive financial impact
• shock effect (no one could conceive the event happening before)

Question 7

Define an own risk solvence assessement

Answer 7

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

Question 8

What should strategy and risk appetite cover?

Answer 8

• target areas of business
• areas of business not being written
• new markets being targeted or not targeted
• changes in distribution models

Question 9

What is important in the plan for an insurer?

Answer 9

Should be flexible so can change to meet new opportunities, should not sit at the bottom of a drawer

Question 10

What is the expectations of a business plan from regulators?

Answer 10

Scarry out stress tests on business plan and scenario analysis that tests plan to failure

Question 11

What does the syndicate business forecast allow Lloyd’s to do?

Answer 11

Allows Lloyd’s to set targets / guidlines, monitror London Market for the next year

Question 12

What are Lloyd’s looking for in a business plan?

Answer 12

• logical
• realistic
• achievable

Question 13

What if Lloyd’s deem a plan more risky than standard?

Answer 13

Loading applied to the capital of the syndicate for increased risk, to which all counterparts are expected to comply

Question 14

What might go into a business plan?

Answer 14

• 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

Question 15

Which reports on the business plan are sent to Lloyd’s and at what frequency?

Answer 15

• perfomance management data, monthly
• monitoring class of business performance, quarterly
• gross quarterly data
• realisitic disaster scenarios, annually
• syndicate reinsurance programme, quarterly

Question 16

Why is accurate data important?

Answer 16

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

Question 17

What are Lloyd’s three minimum standards concerning data capture and recording?

Answer 17

1. managing agents must ensure appropriate data governance structures and procedures are in place
2. managing agents to complete all returns to Lloyd’s and PRA and ensure data is accurate, complete and timely
3. managing agents shall have systems and processes in place to record relevant data and output for reporting

Question 18

How is the solvency capital requirement set?

Answer 18

Capital required to provide protection against a 1:200 year event

Question 19

What affect with inadequate regulatory capital have on the business?

Answer 19

needs to:

• raise regulatory capital by issuing shares on long-term debt that satifies PRA requirements
• reduce business written, or buy more reinsurance

Question 20

What are the key financial aspects stakeholders are looking for?

Answer 20

• profitability
• liquidity
• turnover
• expenditure
• organisational wealth
• working capital
• solvency

Question 21

What are the three main documents used in financial accounts?

Answer 21

• balance sheet
• income statement
• cashflow statement

Question 22

What does the blaance sheet show?

Answer 22

Financial position at a single point in time

Question 23

What does the income statement show?

Answer 23

Performance of the business

Question 24

How can long term debt be considered an asset?

Answer 24

Meets the PRA’s standards

Question 25

What are the two types of asset?

Answer 25

tangible (cash or buildings)

intanglible (goodwill, copywrites)

Question 26

What is the equation to find equity of a company?

Answer 26

Equity = assets - liabilities

Question 27

What would be in an insurer’s income statment?

Answer 27

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

Question 28

What would be in an insurer’s balance sheet?

Answer 28

• 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

Question 29

What are the activities informing a business’s cashflow?

Answer 29

• operating
• investment
• financing

Question 30

What are the five categories of ratio?

Answer 30

• profitability
• productivity
• liquidity
• turnover
• gearing

Question 31

What profits are investors in insurance generally looking for?

Answer 31

Twice the bank account rate

Question 32

How can productivity be measured for insurers?

Answer 32

How efficient premium monitoring and debt chasing are over time

Question 33

What are the two ways to measure liquidity, and how are insurers measured on liquidity?

Answer 33

assets / liabilities, assets excluding stock / liabilities

liabilities / cash + investments

Question 34

How can activity be measured in an insurer?

Answer 34

policies sold / policies with premium due

Question 35

What is gearing?

Answer 35

Borrowing compared to amount of investor equity

Question 36

How is the combined ratio calculated?

Answer 36

total incurred + expenses / earned premium

Question 37

How is combined ratio interpreted?

Answer 37

Below 100% means profitable