Chapter 35: Insolvency and Closure

Question 1

Why insurance companies rarely become insolvent:

RIPTC

Answer 1

Regulation requires the company to hold a minimum level of solvency capital

Intervention by regulator when capital falls below a certain threshold of capital (MCR)

Projection of solvency by insurance companies to ensure they make appropriate provisions

Take overs of insurance companies that are in trouble

Compensation schemes

Question 2

When taking over discontinuance business or for a merger/acquisition, consider:
RIEL SyCRETS

Answer 2

Relocation of staff
Integration of system platforms
Effect on unit costs
Location of Business

Synergy of the products
Cost vs Reward of the takeover/merge
Regulatory differences if in different sectors
Employee benefit scheme new members
The effect on the company’s long term goals
Shareholders on both sides

Question 3

Options for benefit provision of discontinued benefit scheme CLiBPr DIGG / CT6

Answer 3

Continue scheme with no benefits accrual
Liabilities transferred to new scheme of the same sponsor
Beneficiary receives funds as lump sum
New Provider of benefits are given the built up assets
Discontinuance fund
Insurer:
- Group benefits
- Guaranteed benefits

Closure to new members

Transfer liabilities to another scheme with the same sponsor

Transfer of the funds to the beneficiary to extinguish the liability

Transfer of the funds to an insurance company to invest and provide a group policy or and individual policy in the beneficiary’s name

Transfer of the liabilities to an insurance company to guarantee the benefits

Transfer of the liabilities to a central discontinuance fund, operated on a national or perhaps industry wide basis

Question 4

Factors affecting the level of benefit paid out in the case of insolvency:
(ARE)

Answer 4

Asset level - surplus or deficit
Rights of beneficiaries – terms of scheme or overriding legislation
Expectations – benefits if did not cease, future, accrued, discretionary.

Question 5

Factors considered when modeling future solvency RECSOF

Answer 5

Redemption of debt - Amount and timing
Estimated future loss/profit net of tax to be paid to shareholders
Current value of surplus assets
Staff - Relationships & employee benefits
Outstanding financial obligations
Future actions - Changes in benefits, business expansions etc.

Question 6

A bank is insolvent when:

Answer 6

It is unable to meet its obligations to its depositors and creditors

A bank’s value of its assets falls below the value of its liabilities

Question 7

Factors affecting benefit paid in discontinuance:

FRACPENTCS

Answer 7

Frequency of change of discontinuance terms - PRE, Cost
Regulation and market practice
Asset share of a policy (retrospective res)
Competitiveness
Practical considerations – cost, calculation ease.
Expectations - PRE, short and long duration
New business disclosure
TCF considerations
Cost of implementing the discontinuance terms
Suitable terms - Lump sum, paid up value

Question 8

Issues arising when regulator intervention takes place CRIMN

Answer 8

Closing down costs
Reinsurance agreement required to change
Investment strategy changes
Maintenance costs of existing infrastructure is held
New business sales closed

Question 9

Considerations when setting the basis for transfer values:

FND

Answer 9

Fair to party’s involved
- Good starting point is best estimate basis and negotiated from there
The basis would need to reflect:
- The relative negotiation strength of the party’s involved
- The desireability to offload liabilities of one party and the other party to accept liabilities