Chapter 35 - Insolvency and closure

Question 1

Why do insurers rarely become insolvent?

Answer 1

The regulator requires that insurers hold a certain amount of solvency capital, as an additional protection against insolvency.

There are regular reporting requirements and checks on the solvency position and the regulator is likely to intervene before the situation reaches crisis point.

For example, the regulator might require the insurer to close to new business, and/or make a recovery plan (e.g. change the assets held so better matched or use reinsurance)

Insolvency may also be avoided through the sale to, or merger with, another provider.

Question 2

Issues to be modelled when projecting solvency

Answer 2

A SCOPE

• AMOUNT and timing of any loan or debt redemption
• issues relating to any STAFF benefit schemes (underfunded)
• CURRENT value of all surplus assets
• OUTSTANDING financial obligations, minority interests and tax
• PROBLEMS relating to industrial relations
• ESTIMATION of future post-tax profits available to equity shareholders

Question 3

If an insurance company facing insolvency is to be acquired by another provider, list things that it is necessary to consider

Answer 3

LUSS

• LOCATION of operation
• effect on UNIT costs
• integration of SYSTEM platforms
• relocation of STAFF or if there is adequate labour force available

Question 4

State:
- The two main types of benefit scheme closure
- The implications of each type for sponsor contributions.
- What the type of closure implemented will depend on

Answer 4

1. Closure to new members only, existing members’ benefits continue to accrue - contributions continue, rate as % salary likely to increase and become more volatile.
2. Closed to new members and no further benefits accrue to existing members - existing members are given reduced benefits on the closure date, if there are limited funds.
   -one-off settlement (possibly spread) may be needed if the scheme is in a deficit, then no further contributions.

The type of closure chosen will depend on:
- whether the sponsor is insolvent or needs to reduce costs
- market trends (and whether the sponsor wishes to follow them)
- any other reason

Question 5

What are the three most important factors for the sponsor to consider when determining the benefits that will be paid to the members of a discontinuance benefit scheme.

Answer 5

1. The rights of the members, which depend on legislation and scheme rules.
2. The expectations of the members, which are likely to be based on the benefits that they would have been paid had the scheme not discontinued.
3. The funding level of the scheme.

Question 6

What might happen if a scheme is in deficit on the discontinuance date?

Answer 6

If the members’ benefits are to be reduced, legislation or scheme rules may dictate which benefits will be reduced or what types of beneficiaries will have their benefits reduced.

RAISED

• Benefits paid to members may be REDUCED.
• The ADMINISTRATION expenses of determining the allocations, informing beneficiaries and securing provisions will further reduce the benefits
• The scheme may have to take out INSURANCE to ensure the sufficiency of assets in the event of insolvency of the sponsor.
• There may be a STATE-sponsored fund to support benefits where the sponsor is insolvent (may be funded by a levy on solvent schemes)
• EXTRA funds may be required by legislation if sponsor is solvent
• legislation may require a DEBT to be placed on an insolvent sponsor, which may rank alongside, above or below other creditors.

Question 7

What might happen if a scheme is in surplus on the discontinuance date?

Answer 7

The surplus might be used to increase the benefits and /or be passed to the sponsor.

Considerations will need to be given to the legislation and scheme rules, which may require funds to be used to increase benefits.

The allocation of surplus to beneficiaries might be done based on length of membership or based on the extent to which members are thought to have contributed to the surplus

Question 8

If a benefit scheme is being discontinued, the following options may exist for the provision of the outstanding benefit payments

Answer 8

BIG SID

• transfer of funds to the BENEFICIARY to extinguish the liability ( legislation may not allow individuals to receive the capital value of their benefits)
• transfer of funds to an INSURANCE company to invest and provide a group policy or individual policy in the beneficiary’s name
• GRADUAL removal of liabilities by the continuation of the scheme without any further accrual of benefits
• Transfer of liabilities:
  – to another SCHEME with the same sponsor
  – to another INSURANCE company to guarantee the benefits
  – to a central DISCONTINUANCE fund, operated on a national or industry-wide basis