Chapter 4 - Market Security Flashcards
What is solvency?
Maintaining the balance between assets and liabilities
What are assets?
Can include cash - but any item of value that can be converted into cash e.g., buildings (tangible) or investments (intangible)
What is Solvency II?
Pan-European solvency regime which operates across all 27 Member States of the EU
What are liabilities?
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
Had the UK incorporated Solvency II in UK law before and after leaving the EU?
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
What are the 4 main objectives of Solvency II?
Better regulation
Deeper integration
Enhanced policyholder protection
Improved competitiveness
What are the 3 pillars of Solvency II?
Quantitative requirements
Supervisory review
Disclosure
What are risks that businesses face?
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
What does EIOPA stand for?
The European Insurance and Occupational Pensions Authority
What does EIOPA do?
Overarching EU supervisory body of Solvency II
What are EIOPA’s core responsibilities?
Increase stability of the financial system
Transparency of markets and financial products
Protection of policyholders
What did the FSMA 2023 do?
Created new objectives for the UK regulators about improving the competitiveness and growth opportunities for the UK financial
services sector
What is the Lloyd’s 3-part chain of security?
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
What do rating agencies do?
Provide published gradings for insurers and reinsurers
How do rating agencies create their ratings?
Based on a number of factors e.g., operational management and business profile
Can an insurer/reinsurer rating rise/fall?
Yes - impact insurer’s business
Does the Lloyd’s marketplace have a market rating?
Yes
What does IBNR stand for? And what does it mean?
‘incurred but not reported’
ensure that enough funds are put aside for the unknown, unpaid claims - reserves
What is working capital?
The difference between assets and liabilities in practical terms is assets are
What is liquidity?
The ease with which assets held by a business can be converted into cash
Can a business have significant assets (solvent) but be illiquid?
Yes - cannot be easily converted into cash
What are ratios?
The relationship between various financial factors which can be used to indicate profitability
What are loss ratios?
The relationship between premium and claims (both paid and outstanding).
<100% indicates profit on a pure loss ratio basis
What is a combined ratio?
Compares operating costs and claims against premiums and investment income
What does the Solvency II pillar quantitative requirements mean in practice for insurers?
Insurers demonstrate they have adequate financial resources available to cover exposure to risks
Consideration of business risk over and
above the insurance-related risks
What does SCR stand for? And what does it mean?
The insurer must keep a certain amount (SCR)
of assets available in excess of its liabilities;
solvency capital requirement (SCR)
What happens if the solvency capital requirement (SCR) is breached?
Early warning to the regulators of potential problems
Is there a lower amount for SCR? What is it called? What happens if it is breached?
Yes, minimum capital requirement (MCR).
Regulatory intervention if breached
What does the supervisory review Solvency II pillar look like to insurers?
every insurer has an effective risk management system that considers all risks to which it is exposed
What is ORSA and what does it mean? Who is responsible in the business?
Own risk and solvency assessment (ORSA)
internal review undertaken by insurers
Senior management
What does the disclosure pillar in Solvency II look like to insurers?
Insurers have to disclose publicly more
information than they have generally done previously.
What are the 4 main rating agencies?
Standard & Poor’s;
Fitch;
A. M. Best; and
Moody’s
