Chapter 4 - Market Security Flashcards
Solvency
More assets than liabilities
Assets > Paid claims + Unpaid claims + Operating costs
Operating costs = reinsurance costs, staff salaries etc
Assets = ownership of value or cash. Premium, investment income, buildings
Solvency margin - amount by which assets exceed liabilities
Insurers use statistics tools to identify amount to be reserved (incurred but not reported IBNR figure)
In volatile classes premium and claims figures increased by 50% in starting calculation
Solvency 2
01/01/16 Solvency regime operates across all 28 EU member states and replaces solvency 1.
Lloyd’s treated as single entity
Stated objectives of Solvency 2:
- better regulation
- deeper integration of EU insurance market
- enhanced policyholder protection
- improved competitiveness of EU insurers
Three pillars of Solvency 2
Quantitative requirements:
- prove adequate financial resources
- consider business risk over insurance risk
- keep assets available in excess of liabilities (Solvency Capital Requirement)
- Minimum Capital Requirement)
Supervisory review:
- effective risk management system owned and implemented by senior management
- Own Risk and Solvency Assessment
for short and long term risks it faces and determines capital necessary for overall solvency
Disclosure:
- EU aiming for harmonised supervisory reporting and disclosure across all EU member states
Business risks faced by insurer
Credit/counterparty risk
- premium not being paid
- reinsurance claims not recoverable
Operational risk
- UW writing risks outside their authority
- Building damaged
- market systems not available
Market risk
- investments failing
- exchange rate losses
Liquidity risk
- cash flow issues
Group/capital risk
- no cover left due to claims
- syndicate has used up all available reinsurance cover
Enterprise risk
- ERM is wider ranging management of risks that can impact entire business
Role of regulators in Solvency 2
European Insurance and Occupational Pensions Authority (EIOPA) is EU supervisory body of Solvency 2.
- better protection for consumers and rebuild trust in financial system
- high, effective, consistent level of regulation and supervision
- greater harmonisation and coherent application of rules for financial institutions
- strengthen oversight of cross-border groups
- promote coordinated EU supervisory response
PRA carries out day to day supervision of Solvency 2.
How is Lloyd’s treated for solvency?
As a single entity
- solvency measurements applied under Solvency 2 apply to Lloyd’s Market as a whole
Lloyd’s Chain of Security
- Syndicate level assets (premiums received held in trust funds)
- Members Funds at Lloyd’s (deposited by members of the syndicate)
- central assets (the Central Fund)
How does a buyer decide which insurers are the most stable?
Use Rating Agency which indicates insurers ratings with scores such as A, A+, AAA
They consider:
- ability to pay claims
- operating performance
- business profile
Lloyd’s rated as single marketplace
Use of ratings
Buyers of insurance/reinsurance should use ratings to consider best market to use.
Broker considers rating alongside other commercial considerations eg terms and conditions
If broker does not consider if an insurer can pay claims broker could suffer professional negligence claim
Insurers do same with reinsurers
Impact of a decrease in an insurers rating
Decrease in rating could occur if business not being run in accordance with standards (eg solvency 2)
If rating falls, insurer might be considered unacceptable as a market and lose business
If general downgrading across market then reduced rating is neutralised.
