LM2 - chapter 4 Flashcards
solvency
assets > paid claims + unpaid claims + operating costs
assets
These are items of value or resources that a business owns or controls and can be both
tangible (a thing such as a building) or intangible (such as the value of goodwill in the
business). To an insurer, the premiums and investment income are assets
Capital
What is the level of investment in the business? Working capital is the difference between
assets and liabilities in practical terms
Liabilities
Any situation where money is owed to another person or organisation. Therefore, the
primary liabilities for an insurer are its claims, paid and outstanding. Liabilities also include
costs for reinsurance and the costs of running the business
Liquidity
This refers to the ease with which assets held by a business can be converted into cash. A
business can have significant assets (so they are solvent) but be illiquid, which means that
they cannot be easily converted into cash.
Loss ratio
the relationship between premium and claims (both paid and outstanding). A
loss ratio of less than 100% indicates profit on a pure loss ratio basis.
Combined ratio
a ratio which compares operating costs as well as claims, as against
premiums and investment income
Solvency ii
Solvency II is a pan-European solvency regime which operates across all EU Member
States. When it was first introduced it was brought into UK law by specific legislation and via
the Prudential Regulation Authority rule book.
Solvency ii aims
The main aim of Solvency II is simply to ensure that insurers are there to pay their
policyholders’ claims when needed. The stated objectives of Solvency II are:
* better regulation;
* deeper integration of the EU insurance market;
* enhanced policyholder protection; and
* improved competitiveness of EU insurers.
Solvency ii - quantitative requirements
As with previous solvency rules, this requires insurers to demonstrate that they
have adequate financial resources available to cover exposure to risks.
The key difference with Solvency II is the consideration of business risk over and above the insurance-related risks.
Insurers now have to engage in a far more wide-ranging analysis of business risk
In terms of the financial requirements, the insurer must keep a certain amount
of assets available in excess of its liabilities; this amount is referred to as the solvency capital requirement (SCR). If it is breached (i.e. the insurer does not have enough assets to balance its liabilities), this will be an early warning to the
regulators of potential problems.
There is also a lower amount known as the minimum capital
requirement (MCR). If this level of capital is breached, regulatory intervention
is likely.
solvency ii - supervisory review
requires that every insurer has an
effective risk management system that considers all risks to which it is exposed.
The risk management and risk assessment process must be owned and
implemented by the senior management even though other personnel may in fact
carry out their day-to-day operation.
Having worked out the levels of various risks and measured the financial
requirements in accordance with the calculations set out in the Solvency II rules,
the insurer must ensure that it holds sufficient capital against those risks.
The own risk and solvency assessment (ORSA) is the name given to the internal review undertaken by insurers. This covers the entirety of the processes and procedures employed by an insurer to identify, assess, monitor, manage and report the short- and long-term risks it faces or may face, and to determine the capital necessary for its overall solvency needs to be met at all times. Insurers should carry out this review on an ongoing basis as the risks can change, both
through improvements and deteriorations.
solvency ii - disclosure
The EU is aiming for harmonised supervisory reporting and disclosure across all
EU Member States. As a general note, insurers have to disclose publicly more
information than they have generally done previously.
Financial Services and Markets Act 2023
revokes the regulations mentioned
above and brings the responsibility for the control of the UK financial services industry back
‘in house’ to the UK, rather than following EU requirements.
