Chapter 4 - Market Security Flashcards
What is solvency?
When assets are greater than or equal to (paid claims + unpaid claims + operating costs)
What is solvency II?
pan-european solvency regime which operates across all 27 EU states, with the UK also adopting it
What is the difference between a loss and combined ratio?
Loss - relationship between premium and claims (both paid and outstanding). A ratio less than 100% indicates profit
Combined - compares operating costs as well as claims, as against premiums and investment income
What are the four objectives of Solvency II?
Better regulation
Deeper integration of EU insurance market
Enhanced policyholder protection
Improved competitiveness of EU insurers
What are Solvency II’s 3 pillars?
Quantitative requirements - SCR and MCR
Supervisory Review - internal review (known as own risk and solvency assessment or ORSA)
Disclosure
What are business risks faced by an insurer?
Credit/counterparty risk - Premiums not paid/reinsurance not recoverable
Operational risk - UW writing risks outside their authority etc
Market risk - investments failing, ER losses
Liquidity risk - cash flow issues
Group and capital risk - Large organisations need to monitor the activity of lots of divisions
Enterprise risk - Risks which affect the whole business
What is the supervisory body of Solvency II and what are its main goals?
European Insurance and Occupational Pensions Authority (EIOPA)
Goals:
- Provide better consumer protection and rebuild trust of the financial system
- Ensure a high effective and consistent level of regulation and superivison
- Strengthen oversight of cross-border groups
- Promote a coordinated EU supervisory response
What are the links in the Lloyd’s chain of security?
Syndicate level assets - premiums received are held in funds for claims payouts
Members funds at Lloyd’s (FAL) - second line of available funds should the first fail
Central assets - basic rate of contribution for all members is 0.35% and is the last resort if all other funds fail
What are the 4 ratings agencies and what do they consider when deciding the ratings?
S&P, AM Best, Fitch and Moody’s
Looks at:
-insurers ability to pay claims
- Operating performance
- Business profile
Ratings can be a determining factor for deciding who to place insurance with
What does Incurred but no reported (IBNR) mean?
Claims that are not yet known about but need to be factored into overall reserve
