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LM2 > Chapter 4 - Market Security > Flashcards

Chapter 4 - Market Security Flashcards

1
Q

How is solvency defined?

A

Amount that assets exceed liabilities

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2
Q

What are unpaid claims used to calculate?

A

Reserves

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3
Q

What is IBNR

A

Amount required to pay for unknown, unpaid claims

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4
Q

What percentage are claims and premiums increased by in IBNR calculations for volatile classes of business?

A

50

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5
Q

What is an asset?

A

Tangible and intangible resources of value

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6
Q

What is capital and working capital

A

Capital is amount of investment. Working capital is your solvency margin

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7
Q

What is a liability?

A

Situations where money is owed to another person or organisation

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8
Q

What is liquidity

A

The ease of which assets can be turned into cash

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9
Q

Define combined ratio

A

Incurred Claims + Costs / Premium

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10
Q

Define loss ratio

A

Claims / Premium

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11
Q

What are the 4 objectives of Solvency 2

A

Better regulation
Deeper integration
Better policyholder protection
Competition

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12
Q

Define and summarise the 3 pillars of solvency 2

A

Quantitative Requirements - adequate financial resources available to cover exposure. Business risk is more important than insurance related risk. Must adhere to SCR and MCR

Supervisory review - internal risk management overseen by seniors. Hold ORSA in an ongoing basis

Disclosure - More information made public

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13
Q

What are the 6 types of risk to consider

A

Counterparty - no premiums paid
Operational - settling claims without authorisation
Market - investments failing
Liquidity - Cash flow issues
Group - reinsurance coverage
Enterprise - whole group

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14
Q

What is the financial services and markets act 2023

A

Replaces EU S2, government will set overall policy network. Requires EU equivalence

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15
Q

Who are EIOPA and what are their objectives?

A

EU S2 regulatory body. Aims to
- Better protection for policy holders
- Market integration
- Supervising

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16
Q

What is Lloyd’s chain of security

A

L1 - Syndicate assets, premiums held in trust funds. Money can be released to pay claims

L2 - FAL - Member’s funds per syndicate. Depends on SCR and ECA

L3 - Central fund - Controlled by Council of Lloyds, required 0.35% from all members and 1.4% for new members (21 - 23) - applies to written premiums

17
Q

What is the FAL and what does it depend on?

A

Member’s funds at Lloyds, depends on solvency capital requirements (SCR) and Economic Capital Assessment (ECA). This is the uplift on the SCR

18
Q

What is the difference between SCR and MCR

A

SCR - recommended solvency margin levels, where no financial intervention is required if above

MCR - minimum solvency margin levels, if below this - firm is no longer authorised

19
Q

How is the central fund at lloyds paid for and how is it paid

A

Levy on written premiums per syndicate. Paid by managing agent

20
Q

What are the factors which are used to decide an company’s rating?

A

Ability to pay claims
Operating performance (profitability etc)
Business profile

21
Q

What could happen to a broker if they use a poorly rated insurer? Who decides this in a company

A

Subject to professional negligence claims
Security committees

22
Q

What is the impact of a singular company having its rating decreased versus market wide?

A

Single company = loss in business
Whole market = no effect

23
Q

What is the most difficult section to quantify about a company’s solvency?

A

Unpaid claims

24
Q

How are Lloyd’s syndicates rated by agencies? Individually or whole?

A

As a whole

25
Q

What are the 3 volatile classes of business which require 50% IBNR

A

Marine, general and marine liability

26
Q

What is an example of a credit risk?

A

Company not being able to pay claims

27
Q

Which governing body reviews a company’s risk management policy?

A

PRA

28
Q

Who is responsible for enhancing UK’s competitiveness + growth under FS Act 2023?

A

FCA + PRA

29
Q

What is an example of a market risk?

A

FX rate losses / Investment failing

30
Q

True of false: Liabilities in solvency calculations include: claims (paid + unpaid) + costs?

A

True

31
Q
A

LM2 (10 decks)

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