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LM2 > Chapter 4: Market Security > Flashcards

Chapter 4: Market Security Flashcards

1
Q

Solvency

A

Having more assets than liabilities

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2
Q

Solvency Equation

A

Assets >= Paid claims + Unpaid claims + Operating Costs

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3
Q

Solvency Margin

A

Amount by which assets exceed liabilities

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4
Q

Types of unpaid claims

A
  1. Those that are known
  2. Those that are not
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5
Q

Incurred but not reported figure (IBNR)

A

additional amount of funds to be reserved to cover unpaid claims

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6
Q

Assets

A

Items of value/resources that a business owns or controls.

Can be both tangible (building) and intangible (value of goodwill)

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7
Q

Assets in insurance

A

Premiums and Investment income

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8
Q

Capital

A

Level of investment in the business

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9
Q

Working Capital

A

Difference between assets and liabilities in practical terms

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10
Q

Liabilities

A

Any situation where money is owed elsewhere

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11
Q

Primary insurer liabilities

A

Claims (paid and outstanding)

  • Also includes the costs for reinsurance and the costs for running the business
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12
Q

Liquidity

A

Ease with which assets can be converted into cash

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13
Q

iliquid assets

A

Assets which cannot be easily converted into cash

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14
Q

Ratios

A

Relationship between financial factors which can predict profitability

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15
Q

Loss Ratio

A

Relationship between premium and claims (paid and outstanding)

Loss ratio <100% indicates profit on a pure loss ratio basis

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16
Q

Combined Ratio

A

Ratio which compares operating costs as well as claims against premiums and investment income

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17
Q

Solvency II

A

pan-European solvency regime that operates in the EU

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18
Q

Who does Solvency II apply to

A
  • Insurers
  • Reinsurers
  • Captives
  • Mutuals

With their head office in the EU

Compliance does not just fall to compliance officer

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19
Q

Main aims of Solvency II

A
  • Better regulation
  • Deeper integration of the EU market
  • Enhanced policyholder protection
  • Improved competitiveness of EU insurers
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20
Q

3 Pillars of Solvency II

A

Quantitative Requirements
Supervisory Review
Disclosure

21
Q

Quantitative requirements of Solvency II

A

requires insurers to demonstrate they have adequate financial resources to cover exposure level

Solvency II adds more focus on business risk over insurance related risks

Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR)

22
Q

Solvency Capital Requirement (SCR)

A

Insurer must keep a certain amount of assets available in excess of liabilities

failure to meet this is a warning sign for regulators

23
Q

Minimum Capital Requirement

A

Amount of capital where, if breached, regulators are likely to intervene

24
Q

Supervisory Review in Solvency II

A

Every insurer must have a effective risk management system

Internal review process required is OSRA (Own risk and solvency assessment)

Should be carried out on an ongoing basis

25
Q

Own risk and Solvency Assessment (OSRA)

A

Internal review of risk management undertaken by insurers

Covers the entirety of the processes and procedures used to assess risks.

Should be done on an ongoing basis

26
Q

Disclosure in Solvency II

A

Insurers have to disclose publicly more information now

27
Q

Examples of business risks faced by an insurer

A
  • Credit/Counterparty risk
  • Operational Risk
  • Market Risk
  • Liquidity Risk
  • Enterprise risk
  • Group and Capital Risk
28
Q

Credit/Counterparty risk to insurer

A
  • Premiums not being paid
  • Reinsurance claims not being recoverable because the reinsurer is insolvent
29
Q

Operational risk to insurer

A
  • Risks written or claims settled outside of authority
  • Business inoperable due to building damage
  • Market systems not available for use
30
Q

Market risks to insurer

A
  • Investments failing
  • Exchange rate losses
31
Q

Liquidity risk

A
  • Not being able to release investments quick enough
  • Cash flow issues
32
Q

Group and capital risks to Insurers

A

Large organisations (ones that are syndicates and companies) need to monitor the activity of each division

33
Q

Enterprise risks to insurers

A

Enterprise risk management (ERM) covers wider ranging management than impact the entire business

34
Q

The Solvency II and Insurance (Amendments) (EU EXIT) Regulations 2019

A

To ensure provisions of solvency II continue to work in UK since leaving the EU

35
Q

Financial Services and Markets Act 2023

A

Revokes regulations from 2019 and brings control of industry back to the UK

Government continue to set policy framework

No longer mutual recognition of regulatory systems. UK has to obtain equivalence status from the EU

36
Q

Goals of the European Insurance and Occupational Pensions Authority (EIOPA)

A
  • Provide better consumer protection
  • Ensure high level of regulation and supervision
  • Ensure greater harmony across the EU
  • Strengthen oversight of cross-border groups
  • Promote coordinated EU supervision response

Focus on Stability

37
Q

FCA and PRA under the Financial Services and Markets Act

A
  • Now have additional objectives to meet to enhance competitiveness and growth of UK financial services sector
38
Q

Central Fund

A

Pot of money held centrally by Lloyd’s

Operates as the final link in chain of security

39
Q

Links in the Lloyd’s chain of security

A
  • Syndicate level assets
  • Member’s funds at Lloyd’s (FAL)
  • Central Assets
40
Q

Syndicate level assets (First link)

A
  • Premiums received for business written
  • Funds must be held in ways that can be released quickly to pay claims
41
Q

Member’s Funds at Lloyd’s (FAL) (second link)

A
  • If syndicate funds are inadequate
  • Deposited at Lloyd’s by members
  • Members can ask for funds up to their limit of liability
  • SCR is used to calculate how much is required in support
  • Economic Capital Assessment (ECA) uplifts the amount required to ensure sufficient capital
42
Q

Central assets (Last link)

A
  • by this point insurer would be in liquidation
  • last resort
  • Ultimate control is with the Council
  • Basic rate for existing members is 0.35%
43
Q

Big 4 rating agencies

A
  • Fitch
  • Standard and Poor
  • A. M. Best
  • Moody’s
44
Q

Rating agencies

A

Companies which rate insurers (and reinsurers) publishing their results to the public

Provide risk evaluations

45
Q

Function of rating agencies in insurance

A
  • Provide wider financial market intelligence
  • Provide risk evaluations
  • Provide credit ratings
46
Q

How are ratings made

A

Consider:
- Ability to pay claims
- Operating performance (quality of management and past profitability)
- Business profile

Different agencies use different scores

Lloyds is rated as a single market place whilst insurers rated singularly

47
Q

Use of ratings

A

Use ratings to consider best market to use

Used when considering purchasing reinsurance

48
Q

Impact of a decrease in insurer rating

A
  • Could happen if an agency concludes the business is not being run with acceptable standards
  • may find that they are considered unacceptable as a market and will lose business
  • If other market / peers have their ratings reduced at the same time the impact is neutralised

LM2 (10 decks)

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