CHAPTER 4 - A

Question 1

Solvency DEFINITION

Answer 1

Solvency means having more assets than liabilities

This means that for a solvent firm, assets are greater or equal to the sum of paid claims,
unpaid claims and operating costs.

Question 2

Solvency margin

Answer 2

A solvency margin is the amount by which assets exceed liabilities

Question 3

Basic accounting concepts

Answer 3

• Assets
• capital
• liabilities
• liquidity
• ratios

Question 4

ASSETS

Answer 4

These are items of value or resources that a business owns or controls and can be both
tangible (a thing such as a building) or intangible (such as the value of goodwill in the
business).

To an insurer, the premiums and investment income are assets.

Question 5

Capital

Answer 5

What is the level of investment in the business?

Working capital is the difference between assets and liabilities in practical terms.

Question 6

Liabilities

Answer 6

Any situation where money is owed to another person or organisation.

Therefore, the primary liabilities for an insurer are its claims, paid and outstanding.

Liabilities also include
costs for reinsurance and the costs of running the business.

Question 7

Liquidity

Answer 7

This refers to the ease with which assets held by a business can be converted into cash.

A business can have significant assets (so they are solvent) but be illiquid, which means that they cannot be easily converted into cash.

Question 8

Ratios

Answer 8

• Loss ratio: the relationship between premium and claims (both paid and outstanding). A
  loss ratio of less than 100% indicates profit on a pure loss ratio basis.
• Combined ratio: a ratio which compares operating costs as well as claims, as against
  premiums and investment income.