Chapter 36: Capital Management Flashcards
1
Q
Benefits of securitisation
A
1.Converts bundle of assets into a structured financial instrument which is then negotiable
- Offers way for company to raise money, that is linked directly to the cashflow receipts that it anticipated in
the future - Offers alternative source of finance to issuing ‘normal’ secured / unsecured bonds
- Offers a way of passing the risk in the assets to a third-party, removing them from the balance sheet and
reducing required capital - Offers way of effectively selling exposure to what may be an otherwise unmarketable pool of assets
2
Q
Explain why two general insurance companies established in the same country, writing similar levels of gross written
premium, might have different capital requirements. [5]
A
- Classes of business may be quite different - different classes of business have different capital requirements because of the uncertainty & variability of the risks
- Different reinsurance arrangements - net positions may differ
- Alternatively, even if similar reinsurance arrangements exist, it may be with different reinsurers therefore the credit risk charge will be different
- One may write a single line of business & the other writing different classes giving the latter a benefit from
diversification - Investment strategies of the companies may be different leading to different market risk charges
- One of the companies may be part of a larger conglomerate & be subject to additional group risk
- Different future premium growth prospects
- Current reserves may be at different levels of sufficiency
- One of the companies may write policies that is subject to lapse risk whilst the other is not
- The companies may have different premium debtors leading to different capital charges
- The companies’ expected future profits & how this is allowed for in the capital requirement may be different
3
Q
Describe the main differences between risk-based regulatory capital requirement & economic capital
A
see page 163 of summary
