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Actuarial: insurance accounting > Insurance investment > Flashcards

Insurance investment Flashcards

1
Q

Why do insurers invest?

A

To ensure funds received are available to pay claims, insurers can a. re-insure the risk b. invest funds during time lag (between receiving premium and paying a claim)

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2
Q

Sources for investment

A

Examples include:

  1. Premiums
  2. Outstanding claims
  3. Shareholders’ capital
  4. Retained earnings
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3
Q

Outstanding claims

A

Claims which have been made, or which are expected to be made, but not yet been paid

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4
Q

Sources for retained earnings

A
  1. Premium over claims

2. Investment returns

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5
Q

Basic structure of an insurer

A

Assets: Investments, Fixed Assets, Receivables
Liability: Outstanding Claims, Unearned Premiums
Equity: Share Capital and Retained Earnings

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6
Q

Investment vs. liability

A

Match investments to the size and type of liabilities

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7
Q

Investment vs. premium

A

Timing of premiums influences investments

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8
Q

Roles of stakeholders in insurance investment

A
  1. Provide funds for investment
  2. Decide how funds will be invested
  3. Account for funds invested and accrued
  4. Depend upon investment earnings
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9
Q

Stakeholders in insurance investment

A

Shareholders, Policyholders, Regulators, Staff, Creditors, Fund manager

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10
Q

Example of investors

A
  1. General insurance companies
  2. Life insurance companies
  3. Investment Trusts (e.g. equity trusts, bond trusts, cash management trusts etc.)
  4. Overseas institutions
  5. Individuals and other organizations
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11
Q

How are objectives determined?

A
  1. How much to invest
  2. Terms for which investment funds are available
  3. Need to liquidate investments
  4. Need for a secure investment
  5. Opportunity for a high return on investments
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12
Q

investment in GI and LI

A

GI: does not invest in higher risk ventures where it risks losing premiums
LI: Invest funds over relatively long period of time

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13
Q

Three most distinguishing characteristics of investment

A

Return, Risk, Liquidity

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14
Q

Why do insurers always need some proportion of very liquid assets?

A
  1. Normal day-to-day running expenses
  2. Commissions
  3. Claims
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15
Q

Types of investments

A
  1. Money market investments
  2. Fixed interest investments
  3. Equity investments
  4. Property investments
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16
Q

Nature and types of Money Market investment

A

short-term (with tenure of 6 months or less)

Deposits, Discounted Security

17
Q

Discounted Security (DS)

A

a piece of paper on which the borrower (or issuer) undertakes to pay an amount (the face value ) to whoever owns the piece of paper (the lender) on a given date in the future

18
Q

11am

A

The time of day by which the intermediary must be informed if the loan is to be repaid that same day

19
Q

Types of DS

A
  1. Bank Accepted Bills
  2. Negotiable Certificates of Deposit
  3. Promissory Notes
  4. Treasury Notes
20
Q

Bank Accepted Bills

A

Bank guarantees to pay the face value on maturity regardless of whether the issuer is able to pay the Bank (90, 120 or 180 days, highly liquid)

21
Q

Negotiable Certificate of Deposit

A

Special form of Bank Accepted Bills - Bank itself is the borrower

22
Q

Promissory Notes

A

No bank involved, buyer is relying on the creditworthiness and good faith of the issuer

23
Q

Treasury Notes

A

Special form of Promissory Notes - Commonwealth Government is the borrower

24
Q

Years of maturity of Fixed Interest Securities (FIS)

A

3, 5, 10 Yrs are most popular, Less than 15 Years

25
Q

(Fixed Income Securities) FIS vs. (Money Market Securities) MMS

A

Like DS: fixed face value and maturity date, traded in $5 or $10 mil face value
Unlike DS: Regular payment of coupon (paid half-yearly)

26
Q

How many dates between transacting and settling Fixed Interest Securities

A

3

27
Q

Forms of equity returns

A

Capital appreciation, dividends

28
Q

cum-dividend

A

When a company has declared the amount of its dividend but has not yet distributed it, the share is known as “cum-dividend”. Else it is called “ex-dividend”

29
Q

How many days between transaction and settlement of the equity

A

5

30
Q

Dividend Imputation

A

Introduced in 1987 by Federal Government. Benefit of the income tax paid by companies was passed through to their shareholders. These tax-advantaged dividends are called “franked dividends”

31
Q

Costs involved in equity transaction

A
  1. State Government Stamp Duty of 0.15% of the share’s value levied on both buyer and seller
  2. Brokerage or commission paid to the stockbroker
32
Q

Two main ways insurers invest in property

A
  1. Property Trusts

2. Physical Property

33
Q

Other types of investments

A
  1. Indexed bonds 2. Floating Rate Notes 3. Convertible notes 4. Mortgages 5. Overseas investments
34
Q

AASB1023

A

Asset backing GI liabilities shall be measured on a basis that is consistent with the measurement of the GI liabilities

35
Q

Fair Value defined in AASB 139

A

The amount of which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction

36
Q

Fair value on stock exchange market

A

Closing bid price, not the closing last sale price

37
Q

Does fair value take into account selling costs?

A

No

38
Q

AOI

A

All Ordinaries Index, a price index which share market returns are often compared to.
Calculated by taking the prices of several hundred of the major companies listed on the ASE, weighted according to the size of each company

39
Q

Shortcoming of AOI

A

Presume that any dividends paid will be used to buy more shares in the same company, which overlook impact dividends have on the total return achieved from shares

Actuarial: insurance accounting (3 decks)

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