Chapter 35: Solvency and closure

Question 1

What regulatory framework is in place to minimise the risk of insolvency for insurers/banks

Answer 1

1. Require a certain level of solvency capital to be held
2. The assessment of the solvency capital is made on a prudent or cautious basis
3. Prove solvency on a regular basis
4. Intervene when the solvency limit is breached

Question 2

What intervention can the regulator do if the solvency limit is breached for insurers

Answer 2

1. Regulator should put in place a recovery plan, which can include:
   - Reducing the level of new business written
   - Moving to a more conservative, better-matched investment strategy
   - Increasing the amount of reinsurance in place
2. Close to new business, free up capital used to write new and more risk
3. Close, sold or merger

Question 3

What happens when an insurer closes?

Answer 3

Partly benefits from the statutory compensation scheme

Question 4

When the insurer’s solvency position is in doubt, what should be considered for future projections of solvency?

Answer 4

1. Expected future profit for shareholders, net of tax
2. Current value of surplus assets
3. Amount and timing of loans and debt repayment
4. Staff relationships and redundancies
5. Funding position of the staff benefit scheme
6. Any outstanding financial obligations, e.g., tax

Question 5

What intervention can the regulator do if the solvency limit is breached for benefit schemes

Answer 5

1. Close to new entrants
   - Diseconomies of scale in long run
2. Close to any future accrual
3. Discontinuance
   - Dependent on members’ rights (scheme rules and legislation)
   - Expectation
   - Significant cost, determining benefits, communicating with members

Question 6

What will happen to a benefits scheme if it is discontinued but has insufficient assets to cover benefits

Answer 6

1. Benefits may have to be reduced, scheme rules and legislation might dictate what benefits will be reduced. Current pension benefits might be given preference to be paid in full
2. Make more funds available, e.g., legislation might dictate that debt be placed on the sponsor

Question 7

What will happen to a benefits scheme if it is discontinued but has sufficient assets to cover benefits

Answer 7

1. Ensure basic rights are met in full
2. Benefit enhancements might be dictated by scheme rules or legislation
3. Returned to sponsor

Question 8

What are the six approaches to discontinuance of benefit schemes

Answer 8

1. Continue as a closed fund
2. Transfer liabilities to another scheme with the same sponsor
3. Transfer the funds to beneficiaries (legislation)
4. Transfer to the insurance company, to invest
5. Transfer the funds to an insurance company to guarantee benefits
6. Transfer funds to the central discontinuance fund