Chapter 4 - Market Security

Question 1

What is solvency?

Answer 1

Maintaining the balance between assets and liabilities

Question 2

What are assets?

Answer 2

Can include cash - but any item of value that can be converted into cash e.g., buildings (tangible) or investments (intangible)

Question 3

What is Solvency II?

Answer 3

Pan-European solvency regime which operates across all 27 Member States of the EU

Question 4

What are liabilities?

Answer 4

Any situation where money is owed to another person or organisation
Include claims (paid and unpaid) together with operating costs e.g., reinsurance or staff costs

Question 5

Had the UK incorporated Solvency II in UK law before and after leaving the EU?

Answer 5

Yes when it was first introduced - via the Prudential Regulation Authority rule book
Created new legislation since leaving the EU
Revoked by Financial Services and Markets Act 2023
Government is working with the EU to obtain ‘equivalence’ status for the UK regulatory regime

Question 6

What are the 4 main objectives of Solvency II?

Answer 6

Better regulation
Deeper integration
Enhanced policyholder protection
Improved competitiveness

Question 7

What are the 3 pillars of Solvency II?

Answer 7

Quantitative requirements
Supervisory review
Disclosure

Question 8

What are risks that businesses face?

Answer 8

Market risk - investments failing, ROE
Credit risk - premium not being paid, reinsurers insolvent
Liquidity risk - cash flow issues, not being able to release investments quickly enough
Operational risk - writing/settling risks outside authority, damage to building, market systems downtime
Group/capital risk - writing lines on same risks across diff divisions

Question 9

What does EIOPA stand for?

Answer 9

The European Insurance and Occupational Pensions Authority

Question 10

What does EIOPA do?

Answer 10

Overarching EU supervisory body of Solvency II

Question 11

What are EIOPA’s core responsibilities?

Answer 11

Increase stability of the financial system
Transparency of markets and financial products
Protection of policyholders

Question 12

What did the FSMA 2023 do?

Answer 12

Created new objectives for the UK regulators about improving the competitiveness and growth opportunities for the UK financial
services sector

Question 13

What is the Lloyd’s 3-part chain of security?

Answer 13

Premium funds from syndicates
Member’s Funds at Lloyd’s (FAL) - permit them to participate in market and funds to limit their liability
Central Fund - topped up with a contribution from every premium written in the market. 0.35% for 2023

Question 14

What do rating agencies do?

Answer 14

Provide published gradings for insurers and reinsurers

Question 15

How do rating agencies create their ratings?

Answer 15

Based on a number of factors e.g., operational management and business profile

Question 16

Can an insurer/reinsurer rating rise/fall?

Answer 16

Yes - impact insurer’s business

Question 17

Does the Lloyd’s marketplace have a market rating?

Answer 17

Yes

Question 18

What does IBNR stand for? And what does it mean?

Answer 18

‘incurred but not reported’
ensure that enough funds are put aside for the unknown, unpaid claims - reserves

Question 19

What is working capital?

Answer 19

The difference between assets and liabilities in practical terms is assets are

Question 20

What is liquidity?

Answer 20

The ease with which assets held by a business can be converted into cash

Question 21

Can a business have significant assets (solvent) but be illiquid?

Answer 21

Yes - cannot be easily converted into cash

Question 22

What are ratios?

Answer 22

The relationship between various financial factors which can be used to indicate profitability

Question 23

What are loss ratios?

Answer 23

The relationship between premium and claims (both paid and outstanding).
<100% indicates profit on a pure loss ratio basis

Question 24

What is a combined ratio?

Answer 24

Compares operating costs and claims against premiums and investment income

Question 25

What does the Solvency II pillar quantitative requirements mean in practice for insurers?

Answer 25

Insurers demonstrate they have adequate financial resources available to cover exposure to risks

Consideration of business risk over and
above the insurance-related risks

Question 26

What does SCR stand for? And what does it mean?

Answer 26

The insurer must keep a certain amount (SCR)
of assets available in excess of its liabilities;

solvency capital requirement (SCR)

Question 27

What happens if the solvency capital requirement (SCR) is breached?

Answer 27

Early warning to the regulators of potential problems

Question 28

Is there a lower amount for SCR? What is it called? What happens if it is breached?

Answer 28

Yes, minimum capital requirement (MCR).

Regulatory intervention if breached

Question 29

What does the supervisory review Solvency II pillar look like to insurers?

Answer 29

every insurer has an effective risk management system that considers all risks to which it is exposed

Question 30

What is ORSA and what does it mean? Who is responsible in the business?

Answer 30

Own risk and solvency assessment (ORSA)

internal review undertaken by insurers

Senior management

Question 31

What does the disclosure pillar in Solvency II look like to insurers?

Answer 31

Insurers have to disclose publicly more
information than they have generally done previously.

Question 32

What are the 4 main rating agencies?

Answer 32

Standard & Poor’s;
Fitch;
A. M. Best; and
Moody’s