Dibra.Fail

Question 1

Define Insolvency

Answer 1

An involuntary market exit due to winding-up order being issued by a supervisory authority

winding up order will be given if MCT<100%

Question 2

2 risks causing of winding up

Answer 2

• Insovency risk
  
  • risk that insurer’s assets become insufficent to meet PH & other obligations
• Liquity risk
  
  • risk that a company can’t meet short-term financial demands
  • usually from an inability to convert assets to cash without loss of capital

Question 3

External Causes of insurer insolvency

Answer 3

Hint: UW.cats.ect.IX

• UW cycle and profitability
  
  • soft market, prices and profits are lower, so insurers are less able to absorb unexpected losses
• Catastrophes
  
  • Canadian exposure to severe weather events is modest
• Economic cycles & financail market volatility
  
  • volatility of economic indicators correlates with increased insolvency risk
  • eg. interest rate volatility is a contributor, but not the only contributor
  • insurers are often operate with UW loss and compensate by inversting premium
    
    • riskier strategy, when interest rate & investment rate of reture are volatile
  • Equity prices not highly correlated in CA, since Canadian companyies invest mainly in fixed income securities
• International Exposure
  
  • 2/3 of Canadian P&C are foreign - owned
    
    • beneficial: increase competition, premits greater risk diversification
    • drawback: Canadian operations depends on foreign partent’s solvency
  • Multinational insurer is arguably more likely to exit to pursue opportunities elsewhere

Question 4

Internal Cause

OR

4 company characteristics that play a role in most inslovent insurer

Answer 4

Hint: GoNGS

Governance & internal controls

• poor startegic decisionas & UW due to inadequate internal controls on data integrity

New entrant (<10yr)

• subject to competition & inexprienced management

Growth

• too rapid & loss ratio tend to be higher for new business
• growth into areas with lack of expertise
• deteriorating loss reserves
• incentive to grow rapidly during rising of short term interest rate, hoping investment income offset UW losses

Size (<10M in capital)

• too small - less divresified, less access to capital
• small firm less able to absorb unexpected financial stress

Question 5

Main/Proximate causes of insurer insolvency in the Canadian P&C industry

Answer 5

1. indadquate pricing or deficient loss reserve (DLR)
2. foregin parent - other cause
3. rapid growth
4. alleged fraud
5. foregin parent - DLR
6. overstated assets
7. reinsurance affilliate
8. catestrophe losses

Question 6

Characteristics of insolvency companies

Answer 6

• size - small, most had <10M in capital
• Goverance & internal control - weak
• Age - new, <10yrs
• Growth - majority experienced usual perm growth
• UW - majority occured in H&A lines
• Ownership - many were subisdiaries or branches of failed parent
• type of license - majority were federally supervised

Question 7

PACICC’s purpose & source of funding

Answer 7

• PACICC is a national guarantee fund
• Purpose:
  
  • protect PH from undue financial loss in an insolvency
• source of funding
  
  • assessment of solvent member companies
  • in an insolvency, PACICC assesses memeber companies for the resources required ot pay loss claims and unearend prem on eligible policies

Question 8

Compare the treatment of liquidated dividends PACICC vs US/UK guarantee fund

Answer 8

PACICC: Liquiated dividends returned to solvent members

US/UK: Liquiated dividends reduce current or future assessment

Question 9

Important aspect of insolvency cost

Answer 9

treatment of dividends paid to a guarantee fund as a creditor of the estate