Chapter 46 - Capital management (1) Flashcards
What is meant by ‘capital management’?
- Capital management is ensuring that a company has sufficient solvency and cashflow to enable both existing liabilities and future growth aspirations to be met in all reasonably foreseeable circumstances.
- This includes the maximisation of reported profits.
By what criteria is the quality of capital measured?
- Term of repayment
- Obligation to pay interest
- Ranking upon wind-up.
Why would individuals, the state, companies and providers of financial services products need capital?
Individuals
- Lower future expected income
- Accumulation for a purpose
- Cushion against unexpected future events
- Timing differences between income and outgo
The State
- Fluctuations in the balance of payments and economic cycle
- Cushion against unexpected future events
- Timing differences between income and outgo
Companies
- Finance stock and work in progress
- Accumulation for a purpose
- Cushion against adverse future events
- Start-up capital
Providers of financial services products
- Development costs
- Administration systems
- Management control systems
- New business strain
- Investment expenses
- Investment freedom
- Smooth profits
- Expenses - commission and exceptional expenses
- Strategic aims (demutualisation, new ventures, M&A)
- Adverse experience protection
- Solvency
- Statutory requirements
- Guarantees
- Pricing freedom e.g.loss leaders
- Premium collection
- Payments happen earlier than expected
- Financial strength
- Increase with-profits asset share payouts
- Control risks (Operational, Business etc.)
What would start-up capital be used for?
- Premises
- Appoint staff
- Buy equipment and material
- Pay fees and taxed
- Contingency against risks
- Research fees
- Advertising fees
- Interest
- Professional advice
Mention some development costs.
- IT
- Product development actuary
- Legal team
- Underwriting systems
- Marketing
- Sales force and training
List the capital management tools.
- Merge funds
- Internal sources
- Financial reinsurance
- Securitisation
- Banking products
- Derivatives
- Investment strategies
- Valuation basis
- Equity capital
- Reinsurance
- Subordinate debt
In capital management, what internal sources can be used?
- Merge funds
- Assets
- Admissible assets
- Discount rate linked to them
- Matching
- Defer surplus distribution
- Weaken valuation basis
- Retain profits in stead of paying dividends
Discuss the forms of financial reinsurance.
Financial reinsurance is a capital management tool that depends on the exploitation of regulatory arbitrage in order to better one’s solvency or tax position.
- Contingent loan
- New business financing or Surplus relief
- Paying for reinsurance with inadmissable assets
With financial reinsurance, why is the reinsurer typically overseas?
- Lower tax rates
- Less conservative reserving assumptions
- Lower initial capital requirements
- Fewer investment restrictions
- Less onerous actuarial citification requirements
Explain securitisation in a capital management setting.
- An illiquid assets is converted into a financial security
- The asset that is securitised must have a stable income stream
- There is a Special Purpose Vehicle involved
- Catastrophe bond
- Reflect the PV of profits now as an asset
Name the banking products that can be used in capital management.
- Derivatives
- Liquidity facilities
- Post loss funding or contingent capital
- Senior unsecured financing (like on a group level)
What is meant by embedded value?
- Value to s/h of a company of future profits relating to existing business
- Plus any assets separately attributable to shareholders
What factors influence the capital management strategy that will be followed?
- Timescales of arranging it and implementing it
- Expertise required
- Availability
- Cost of implementing and cost of the actual strategy
- Fit with existing capital management strategies
- Assets held
- Riskiness
- Market conditions
- Strategic objectives
- Regulation
- Tax
