Chapter 4 - Market Security Flashcards
How is solvency defined?
Amount that assets exceed liabilities
What are unpaid claims used to calculate?
Reserves
What is IBNR
Amount required to pay for unknown, unpaid claims
What percentage are claims and premiums increased by in IBNR calculations for volatile classes of business?
50
What is an asset?
Tangible and intangible resources of value
What is capital and working capital
Capital is amount of investment. Working capital is your solvency margin
What is a liability?
Situations where money is owed to another person or organisation
What is liquidity
The ease of which assets can be turned into cash
Define combined ratio
Incurred Claims + Costs / Premium
Define loss ratio
Claims / Premium
What are the 4 objectives of Solvency 2
Better regulation
Deeper integration
Better policyholder protection
Competition
Define and summarise the 3 pillars of solvency 2
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
What are the 6 types of risk to consider
Counterparty - no premiums paid
Operational - settling claims without authorisation
Market - investments failing
Liquidity - Cash flow issues
Group - reinsurance coverage
Enterprise - whole group
What is the financial services and markets act 2023
Replaces EU S2, government will set overall policy network. Requires EU equivalence
Who are EIOPA and what are their objectives?
EU S2 regulatory body. Aims to
- Better protection for policy holders
- Market integration
- Supervising
What is Lloyd’s chain of security
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
What is the FAL and what does it depend on?
Member’s funds at Lloyds, depends on solvency capital requirements (SCR) and Economic Capital Assessment (ECA). This is the uplift on the SCR
What is the difference between SCR and MCR
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
How is the central fund at lloyds paid for and how is it paid
Levy on written premiums per syndicate. Paid by managing agent
What are the factors which are used to decide an company’s rating?
Ability to pay claims
Operating performance (profitability etc)
Business profile
What could happen to a broker if they use a poorly rated insurer? Who decides this in a company
Subject to professional negligence claims
Security committees
What is the impact of a singular company having its rating decreased versus market wide?
Single company = loss in business
Whole market = no effect
What is the most difficult section to quantify about a company’s solvency?
Unpaid claims
How are Lloyd’s syndicates rated by agencies? Individually or whole?
As a whole
What are the 3 volatile classes of business which require 50% IBNR
Marine, general and marine liability
What is an example of a credit risk?
Company not being able to pay claims
Which governing body reviews a company’s risk management policy?
PRA
Who is responsible for enhancing UK’s competitiveness + growth under FS Act 2023?
FCA + PRA
What is an example of a market risk?
FX rate losses / Investment failing
True of false: Liabilities in solvency calculations include: claims (paid + unpaid) + costs?
True
