M92 Flashcards

Question

Benefits of organic growth?

Answer 1

Organic growth also: * involves less risk than external growth (e.g. through mergers and takeovers); * can be financed through internal funds (e.g. retained profits). * builds on a business’ existing strengths (e.g. brands, customers). * allows the business to grow at a more sensible rate in the long run; and * can be more economic compared with acquisitions.

Answer 2

* With the organic growth route a business usually needs more time to grow as it requires employees who can handle the growth process along with other actions that are needed to move the business forward. This can mean an enormous commitment of time and resources as personnel may need to be found, recruited and trained, premises and equipment acquired, sales conduits established with extensive marketing to get products known in their new field. * Building a business organically will take longer to achieve than a purchase of an existing book of business, which may not meet investors’ expectations.

Answer 3

A merger only happens if two companies agree to join forces on a strategic basis, while an acquisition is where a company gains control of another company by purchasing a majority shareholding.

Answer 4

* As duplication is removed, efficiency and improved performance can be gained through synergy of processes or economies of scale by lowering unit costs. * Overcoming the cost of IT by being large enough, through the sharing of resources, which are becoming ever more expensive if the latest IT platforms are to be used. * Provides investment opportunities if an insurance company has spare capital. * Two companies joining together to spread risk. For example, if one is based in the USA and one is based in Europe, and the two books of business are uncorrelated, this will give the new company greater diversification and therefore they are likely to have a lower solvency capital requirement than if they remained as separate companies.

Answer 5

* Reduced customer choice through the reduction in the number of organisations offering products to customers. This means there can be a reduction in competition. * Impact on staff affected and cost of redundancies. Staff morale can be impacted considerably, especially if the whole change process is not managed effectively. Often the cost of redundancies and/or staff redeployment is high with a significant loss of valuable staff experience, skills and knowledge. * Clash of corporate cultures. If these are very different from one another it may be difficult to agree on a cultural approach that will enable the organisations to work together effectively and move forward. * 'Eye off the ball’ while change is taking place. Often a merger or acquisition will consume a large amount of senior management time. As a result, the organisation’s energies may be directed towards the change process instead of growing the business and delivering an effective service to customers. * Reduced customer service while changes are being implemented. Any number of factors may impact on customer service, such as reduced staff morale, lack of communications, staff not knowing what is going on or what products they are to sell or what they are to say to customers with a consequent increase in complaints and loss of business. * Expected M&A savings not actually being realised. Whenever a merger or acquisition is announced, forecasts are made by the directors as to the costs that can be saved and how shareholder value will be improved. Often these savings do not come to full fruition or are not properly measured so the real value of the change is not clearly evident.

Answer 6

* Where a business change process is to be set in operation, for example in establishing a new accounts system or building an actuarial pricing model for underwriting, the firm can use external specialists to assist with the task and only incur the costs for the work completed. * The business is guaranteed a certain level of service as set out within the contract. * The business can budget for a pre-agreed fixed cost for the agreed service. * Outsourced companies are typically specialists within their area and will bring new skills and working methods to a company. * Many outsourcing contracts lead to new partnership opportunities between the business and the outsourced company, as they learn new ways of doing business processes. * The business may increase its capability to develop new products and their speed to the market. * The businesses that do outsource have more time to focus on their core business areas.

Answer 7

* Any form of contract that allows the business to outsource processes will mean that a certain control and direction will be lost. * In the event of poor service, the business will lose customers and the firm’s reputation will suffer. Customers will either not be interested or aware that the diminished services are caused by a poor supplier of services. * Extreme care should be taken with customers’ confidential information and data should be protected equally well at outsourced suppliers as it is within the firm. Care needs to be exercised when engaging an outsourced service provider located overseas, as data protection law restricts the transfer of personal data overseas in certain circumstances. * If the business is too dependent on a limited number of suppliers then it will be open to higher costs where competition may be lacking. * If the outsourced company gets into financial problems the business will be faced with problems of finding an alternative provider, possibly at short notice. * Full understanding of customer behaviour and satisfaction can be lost if communication between the business and outsourced company is inadequate. This is an increasing concern when firms desire to be close to their customers and create a loyal customer base.

Answer 8

* there is no undue additional operational risk in outsourcing an activity as opposed to retaining the function in-house; * the quality of internal control is not impaired; * the ability of the regulators to monitor the firm’s regulatory compliance is not hampered by any outsourced arrangements.

Answer 9

These include the requirements for the terms of an outsourced contract to cover the: * clearly-stated duties and responsibilities of both parties; * service provider’s commitment to comply with all applicable laws, regulatory requirements and to cooperate with the firm’s appropriate regulator; * disclosure of any development which may have a material impact on the service provider’s ability to carry out the outsourced functions and activities; * notice period for termination by the service provider, which must be sufficient to allow the firm to make alternative arrangements; * access the firm, its external auditors and regulators will have to all information related to the outsourced function; and * firm’s need to ensure the outsourced provider has effective risk management and internal controls.

Answer 10

A form of malicious software that can install itself in your systems via phishing scams and by exploiting software vulnerabilities. Once installed, the attacker can spy on online activities and steal private data

Answer 11

A form of malware that attacks your computer system and encrypts data. The attacker will then demand a ransom payment in exchange for the return of the data.

Answer 12

A term used for the partial or complete acquisition of a computer system or certain functions within it.

Answer 13

Lloyd's Product Launchpad encourages and supports product innovation for non-standard risks that might not fit the traditional market such as risks relating to intangible assets, new technologies and others.

Answer 14

An important duty of the chair is to ensure that meetings are run in an orderly and efficient manner. In addition, the chair is often the organisation’s representative to the outside world.

Answer 15

* Work full time in the company. * Given management responsibility for running parts of the business. * One is usually appointed by the board to be accountable for the running of the company on a day-to-day basis – known as either the chief executive officer (CEO) or managing director. * CEO/managing director appoints the company management.

Answer 16

* Work part time in the company. * Chosen for their particular area of expertise. * Do not perform an executive management role in the company. * Attend board meetings and may be members of subcommittees in order to provide independent views on matters such as audit, management remuneration and risk management

Answer 17

1. Regulation of the executive directors and other members of the senior management team to ensure they uphold the shareholder interests and the laws governing the conduct of the business. 2. Approve the report and accounts, annual budgets, strategy and other important plans. 3. Selecting, appraising and rewarding the CEO and ensuring succession planning is actively addressed. 4. Overseeing the risk management process and ensuring the necessary actions are adopted to mitigate against identified risks. 5. Ensuring that the company’s integrity and principles are upheld on critical matters such as financial reporting accuracy, legal and regulatory compliance, as well as adherence to the company’s stated ethical standards.

Answer 18

A document setting the corporate governance standards for the UK. It sets out standards of good practice in relation to issues such as: * board composition and development; * remuneration; * accountability and audit; and * relations with shareholders.

Answer 19

The managing director, as well as being a director, is responsible for the business’s functions and day-to-day activities of the company. Directors help to formulate the company objectives and policy and they organise resources in order to translate the board policy into operational activities. They will also lead in the organisation’s culture and management style.

Answer 20

The FD would typically have responsibility for, or at least significant influence over, the following: * The economic capital model to assist in the determination of the appropriate level of capital for the company to hold. * Stress and scenario testing to assist in the determination of the amount of extreme risk the company may be subject to. * Proposals to the board on the form of capital to hold in addition to equity capital, such as subordinated debt. * Preparation of papers for the board to assist in the determination of the appropriate level of dividend to pay to shareholders. * Making recommendations to the board on the appropriate level of claims provisions to hold. * Preparation of the statutory accounts of the company for approval by the board and shareholders. * Making presentations to, and managing the relationships with, the investment analysts who prepare reports on the company’s performance and holders of the company’s debt. * Preparation of the financial information required by the PRA and be one of the main contacts the PRA has with the company. * Preparation of the management information, such as leading indicators of financial performance, for the executive team and the board. * Management of debt, cash flow, liquidity and treasury matters. * Management of the investment portfolio. * Management of the financial aspects of the planning process, the budgetary process and the forecast process. * Preparation for the reviews by rating agencies. * Preparation and planning for the statutory external audit conducted by the independent auditors. * Management of the reinsurance accounting process.

Answer 21

All public companies are obliged to have a company secretary. The company secretary is an officer of the company and their duties can be wide ranging. While the Companies Act does not generally specify the role of the company secretary, they usually undertake the following duties: * Maintaining the company's statutory books. * Filing annual returns at Companies House. * Arranging meetings of the directors and the shareholders. * Informing Companies House of any significant changes in the company's structure or management. * Establishing and maintaining the company's registered office as the address for any formal communications. * Ensuring the security of the company's legal documents, including for example, the certificate of incorporation and memorandum and articles of association. * Deciding on the company's policy for the filing and retention of documents. * Advising directors on their duties and ensuring that they comply with corporate legislation and the articles of association of the company.

Answer 22

* technical pricing of new and existing products; * calculation of claims reserves; * calculation of risk-based capital requirements; * assessment of investment risk for funds supporting technical reserves.

Answer 23

* bring about change in the culture and structure of the business more quickly; * achieve a low turnover of employees, improved motivation and mutual trust; * facilitate decision making, as employee participation in the decision-making process not only increases the quality of the decision but ensures better implementation; * encourage staff to be cooperative and innovative; and * ensure that all relevant members of staff are helping to meet corporate objectives.

Answer 24

Providing direction and guidance Understanding the strengths and weaknesses of team members Organising tasks and setting goals Upholding the vision of the group Solving problems and resolving conflicts

Answer 25

The company looks after its employees in a fatherly way, and the employees respect the organisation’s managers in the way that children respect their parents; this style is sometimes perceived as too interfering.

Answer 26

Strategic planning is a process whereby the future direction of the business entity is decided upon and a statement (the plan) is developed detailing long-term goals together with a definition of the strategies and policies, which will ensure achievement of those goals. Such goals typically cover periods of between three and ten years.

Answer 27

Control is the process by which management assures itself that actions taken by staff conform to the management’s plans and policies. A series of milestones are identified, which can be tracked over time. These serve as benchmarks for evaluating strategic and operational performance and provide early warning of deviations from expected outcomes.

Answer 28

Briefly summarised, balanced scorecards identify the knowledge, skills and systems (learning and growth) that employees will need in order to innovate and build the right strategic capabilities and efficiencies (the internal processes) that deliver specific value to the marketplace (the customers), which will eventually lead to higher shareholder value (the financials). -- IT attempts to take a holistic view of an organisation and coordinates its resources so that efficiencies are experiance by all departments and in a joined -up fashion.

Answer 29

because it: * tethers the company to strategy execution; * aligns every member of the organisation to the same mission and vision; * makes organisations more responsive to abrupt changes; * presents the health of an organisation; * enhances transparency; * connects projects to measurements and measurements to strategy.

Answer 30

* Internal – these compare the performances of divisions and departments within the same organisation. * External – these contrast the company’s overall performance with competing firms, e.g. profitability, rate of return on capital employed, growth, market share. * Functional – this covers an assessment of the company’s main functions and processes and compares them against the same functions and processes in other organisations but not necessarily competitors.

Answer 31

comprehensive and accurate information is available on competing or comparable industries; * benchmarks are based on industry best practice; * benchmarks used are flexible and can be altered if the external environment changes; * benchmarks relate to the company’s corporate strategies and plans; * there are sound internal audit processes in place.

Answer 32

Management by objectives: MBO is a process of defining objectives within an organisation so that both management and employees agree to the objectives and understand what they need to do in order to achieve them. MBO is appropriate for knowledge-based organisations such as insurance companies.

Answer 33

* Motivation – involving employees in the whole process of goal setting and increasing employee empowerment. This increases employee job satisfaction and commitment. * Better communication and coordination – frequent reviews and face-to-face interactions between managers and employees help to maintain harmonious relationships within the organisation and also to solve many problems. * Clarity of goals using the SMART methodology. * Employees tend to have a higher commitment to objectives they set for themselves than those imposed on them by another person. * Managers can ensure that objectives of the employees are linked to the organisation’s objectives. * A common goal for the whole organisation means it is a directive principle of management.

Answer 34

* Employees may believe that MBO is another management ploy to ensure subordinates work harder and become more dedicated and involved. * There is the potential for considerable paperwork and/or meetings. * The emphasis is more on short-term goals. * It does not leave any ground for subjective goals as these may be difficult to quantify and even more difficult to evaluate. * Managers may not be sufficiently skilled in interpersonal interaction, such as coaching and counselling, which is extensively required. * Managers and employees who are wholly focused on objectives might be prone to distort results to achieve their individual short-term goals.

Answer 35

Managers also need to be able to control the activities of the organisation to enable it to meet its strategic objectives. To this extent, the budget is not only a plan, but also a target and a tool that the managers use to exercise organisational control. The budget must not, therefore, be seen as a one-off exercise at the beginning of the financial period; it is a mechanism for monitoring the progress of the organisation in financial terms over a period of time and it also, therefore, becomes a means by which performance will be assessed at some point in the future.

Answer 36

The owners or directors decide on the individual plans for each department and function and these plans are given to the individual managers to implement. While this approach is easy to operate it may become remote from the realities of the marketplace

Answer 37

Individual department managers construct their own budgets, within set guidelines. These are then passed up to the managers and directors, who incorporate the individual budgets into the organisation’s master budget.

Answer 38

A fixed budget is not changed once it has been established, regardless of any alterations in the organisation’s performance in reality. Projected figures are compared against actual figures at the end of the budget period.

Answer 39

A flexible budget is changed in accordance with the organisation’s real activity levels over time. For example, if salary costs increase unexpectedly halfway through the budget period, the budgeted figures for these costs will be altered on the budget document, to show the true picture.

Answer 40

The ZBB method relies on managers to justify their expenditure from a fresh standpoint. Rather than looking at the amount of expenditure, which was budgeted for an item in the previous budget period, ZBB requires managers to start a position of having nothing in their budget for the item in question.

Answer 41

Rolling budgets are budgets that constantly look forward. With a conventional twelve-month budget, monthly figures might be produced prior to a future budget period, such as from January to December

Answer 42

consider, consult, crunch, communicate and check.

Answer 43

Strategic information - This refers to the "what" and "why" the business chooses to do something. Tactical information This helps an organisation to identify "how" they plan to accomplish their strategic objectives Operational information This relates to the day-to-day operations of the organisation and thus, is useful in exercising control over the operaations.

Answer 44

A management information system, or MIS, collects data from many different sources and then process is and organises the data to help businesses make decisions.

Answer 45

* Information flows horizontally and vertically. It is with the vertical flow (between managers/ team leaders and team members) that management information systems are most concerned. * Reports generated by an information system will range between: – information for low-level management about the small area of the organisation under their control; – reports of a broader nature for top-level management concerned with overall control. * The centre core of an MIS is likely to be tactical information for management control, although the MIS will have many sub-systems and sub-sub-systems providing information ranging from operational through tactical to strategic. * The control cycle (i.e. the comparison of actual results against a plan and the production of exceptional reports to show where control action may be needed) cannot be effective unless the plan is carefully prepared. * A precise and carefully drawn-up specification of the areas of management responsibility is essential. This specification is necessary to ensure that information will flow to the managers who need it. * The information produced must be able to measure actual results against the plan in such a way that control decisions can be taken at all levels of management. Data must also be available to enable senior management to plan for the future and computers are of special value in preparing forecasts from large quantities of data.

Answer 46

1)codification strategy. In most such organisations, knowledge is carefully codified and stored in databases, where it can be accessed and used easily by appropriate employees. 2) personalisation strategy. In other, more specialised, financial services organisations, knowledge is closely tied to the person who developed it and is shared mainly through direct person-to-person contacts and structured training programmes.

Answer 47

It is the process by which company objectives are established, achieved and monitored. Corporate governance is also concerned with the relationships and responsibilities between the board, management, shareholders and other relevant stakeholders within a legal and regulatory framework.

Answer 48

Transparency and accountability are the most important elements of good corporate governance.

Answer 49

The FRC’s mission is to promote transparency and integrity in business. It sets the UK corporate governance and stewardship codes and UK standards for accounting and actuarial work, monitors and takes action to promote the quality of corporate reporting, and operates independent enforcement arrangements for accountants and actuaries.

Answer 50

page 3 charpter 4

Answer 51

NO UK companies are not legally required to comply with the Corporate Governance Code, but if the firm is listed on the London Stock Exchange then compliance (or an explanation as to why the firm is not compliant with the Code) is required under the Listing Rules.

Answer 52

Page 6 chapter 4.

Answer 53

Companies House keeps the public records of companies registered in the United Kingdom. It lists its three statutory functions as to: * incorporate and dissolve limited companies; * examine and store company information delivered under the Companies Act and related legislation; and * make this information available to the public.

Answer 54

To gain official recognition, a company must be registered with Companies House. Until the company is registered, it has no legal existence. It therefore cannot enter into contracts or undertake any business.

Answer 55

* the company’s name; * whether the company is a private or public company; * whether the liability of the members of the company is to be limited, and if so whether it is to be limited by shares or by guarantee; * the situation of the company’s registered office, i.e. whether it is in England, Wales, Scotland or Northern Ireland; * the address of the registered office (which must be the same as the situation of the registered office); * the statement of the proposed officers; and * the proposed Articles of Association. Chapter 4 4/8 M92/April 2023 Insurance business and finance

Answer 56

1) Confirmation statement (annual return). - This contains a range of information including the company’s registered office address, the principal business activities of the company, details about the company’s directors, company secretary (where applicable), shareholders and the company’s share capital. 2) Report and accounts - The Companies Act requires that every company must keep accounting records which are sufficient to show and explain the company’s transactions, and as such to: * disclose with reasonable accuracy, at any time, the financial position of the company at that time; and * enable the directors to ensure that any accounts required to be prepared comply with the requirements of the Act. By law, a company’s annual accounts must give a true and fair view of its economic state. 3) Directors’ report - This is a bsuiness review, which should be a ‘fair review of the company’s business and a description of the principal risks and uncertainties facing the company’. 4) Directors’ remuneration report - Details must be given of directors’ service contracts, salaries, fees, bonuses, share options, long-term incentive schemes, pensions, retirement benefits, compensation for past directors, and sums paid to third parties for directors’ services. 5) Chairman’s statement - This is normally a broad statement about the company’s activities attributed to the company’s chairman. --The external auditors are not required to judge whether the content of either the directors’ or chairman’s statements provides a ‘true and fair view’.

Answer 57

Private companies must file their accounts within nine months of the year end and public companies must file within six months. In addition, quoted companies must ensure that their report and accounts are available on a website. Late delivery of accounts to Companies House is likely to result in penalties. Failing to deliver accounts on time is also a criminal offence for which company directors and the company secretary may be prosecuted.

Answer 58

A company should secure that the secretary…of the company is a person who appears to them to have the requisite knowledge and experience to discharge the functions of secretary of the company.

Answer 59

by virtue of his holding or having held any other position or his being a member of any other body, appears to the directors to be capable of discharging the functions of secretary of the company

Answer 60

* guiding the chairman and board on their responsibilities under the rules and regulations to which they are subject and on how those responsibilities should be discharged; * supporting the chairman in ensuring the board functions efficiently and effectively; * ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating induction and assisting with professional development as required; * maintaining good shareholder relations and keeping the board informed on shareholders’ views; * developing and overseeing the systems that ensure that the company complies with all applicable codes, in addition to its legal and statutory requirements; * monitoring changes in relevant legislation and the regulatory environment and taking action accordingly; * overseeing the day-to-day administration of the company, e.g. maintaining statutory books, including registers of members, directors and secretaries, organising board meetings and AGMs, preparing agendas and taking minutes; and * having responsibility for facilities, HR, insurance, investor relations, pension administration, premises and share registration (this only applies to some company secretaries).

Answer 61

'First line of defence' Once a risk strategy is set, with an associated control environment, it is primarily the responsibility of front-line managers to ensure that risks are identified and controlled in keeping with the strategy and control environment. 'Second line of defence' Although the risk management department will be actively involved in discussing the most appropriate and effective controls to be put in place, accountability for the delivery of risk control remains with operational management. 'Third line of defence' The internal audit team has the responsibility of reviewing, from time to time, the overall risk management operation – ensuring that the risk management strategy agreed by the senior management or board is being actively complied with.

Answer 62

Scrutinise the robustness of the control framework and to assess its application in practice. The UK Corporate Governance Code states that the audit committee should consist of a minimum of three directors, with independent directors forming a majority.

Answer 63

Two of the below must be met. * a turnover exceeding £10.2m; * net assets exceeding £5.1m; or * more than 50 employees.

Answer 64

The report must state clearly whether, in the auditor's opinion, the annual accounts: 1. give a true and fair view: * in the case of an individual balance sheet, of the state of affairs of the company as at the end of the financial year, * in the case of an individual profit and loss account, of the profit or loss of the company for the financial year, * in the case of group accounts, of the state of affairs as at the end of the financial year and of the profit or loss for the financial year of the undertakings included in the consolidation as a whole, so far as concerns members of the company; 2. have been properly prepared in accordance with the relevant financial reporting framework; and 3. have been prepared in accordance with the requirements of this Act (and, where applicable, Article 4 of the IAS Regulation).

Answer 65

As of 6 April 2022 over 1,300 of the largest UK registered companies and financial institutions will be required to disclose climate related financial information on a mandatory basis, using guidelines from the task force on climate related financial disclosures. Specifically for the environment, climate related disclosures include: * climate change-related risks and opportunities; * how these risks and opportunities are managed through targets and KPIs; * how climate change is addressed in corporate governance; * how climate risk impacts strategy.

Answer 66

1. Lawfulness, fairness and transparency: data should be processed lawfully; data should be handled in ways people would expect giving consideration to the effect of processing the data on the individuals concerned; and there should be full compliance with the obligations of the 'right to be informed'. 2. Purpose limitation: data should only be collected for specified, explicit and legitimate purposes and not further processed in a manner that is incompatible with those purposes. 3. Data minimisation: data should be adequate, relevant and limited to what is necessary in relation to the purposes for which it is processed. 4. Accuracy: data should be accurate and, where necessary, kept up to date. 5. Storage limitation: kept in a form which permits identification of data subjects for no longer than is necessary for the purposes for which the personal data is processed. 6. Integrity and confidentiality: data should be processed in a manner that ensures appropriate security of the personal data, including protection against unauthorised or unlawful processing and against accidental loss, destruction or damage, using appropriate technical or organisational measures.

Answer 67

1) Consent - Consent must be a freely given, specific, informed, and unambiguous indication of the individual's wishes. 2) Contract - The processing is necessary for a contract a firm has with the individual, or because they have asked the firm to take specific steps before entering a contract. 3) Legal obligation 4) Vital interests - The processing is necessary to protect an individual's life. 5) Public task - The processing is necessary for a firm to perform a task in the public interest or for its official functions, and the task or function has a clear basis in law. 6)Legitimate interests The processing is necessary for a firm's legitimate interests or the legitimate interests of a third party, unless there is a good reason to protect the individual's personal data which overrides those legitimate interests.

Answer 68

In the UK compliance with data protection legislation is overseen by an independent government authority, the Information Commissioner’s Office (ICO). The ICO upholds information rights in the public interest, promoting openness by public bodies and data privacy for individuals.

Answer 69

The ICO have powers to regulate and enforce data protection laws. * For the most serious data breaches, it can levy fines of up to £17.5 million or 4% of annual global turnover. * The ICO can bring criminal proceedings against a data controller or processor if they have altered records following an SAR with the intent to prevent disclosure.

Answer 70

Pure risk premium is that part of the premium necessary to pay for losses and loss-related expenses only. It excludes other expenses such as sales and marketing and any allowance for profit.

Answer 71

managing general agent the MGA organisation not only 'holds the underwriting pen' of the insurer, it also undertakes all the other activities of an insurer such as marketing, selling, and administration. It does not, however, provide the funding for claims, although it may undertake claims payments from a fund provided by the insurer.

Answer 72

Typically, the principals and staff of the MGA will have specific expertise in a given sector. This means the insurer can gain access to a hopefully profitable stream of revenue, without the expense of committing its own staff and resources.

Answer 73

A line slip is an agreement between an individual broker and a group of two or more insurers or underwriters whereby each insurer or underwriter agrees to accept a preagreed proportion of a specified type of insurance. General criteria for risk acceptance and terms and conditions are agreed at the outset between the insurers and underwriters and there is usually some form of pre-agreed rating (pricing) scheme used for premium calculation.

Answer 74

*communicating to all relevant staff the regulatory requirements of their role as well as any updates or changes that are introduced; * acting as the point of contact for regulators in their dealings with the firm; * checking individual sales to ensure all customer protection procedures have been carried out; * carrying out anti-money laundering and anti-fraud procedures (usually undertaken by a sub-unit of the compliance department); * ensuring proper credit checks are carried out; * dealing with customer complaints fairly; * developing new compliance procedures; * auditing current processes and practices to make sure they conform to regulations; * ensuring all members of staff carrying out controlled functions (as defined by the regulator) are duly registered as Approved Persons; * arranging or undertaking training for key regulatory or legal issues such as UK sanctions legislation, the Proceeds of Crime Act 2002 (for anti-money laundering), Data Protection Act 2018 (for personal data), the Bribery Act 2010 (for anti-corruption) and the Senior Management and Certification Regime (SM&CR); * regularly reporting on compliance performance (and any breaches of compliance) to the board; and * creating and maintaining a compliance manual, containing all the requirements for compliant operations as well as matters such as terms of reference for the board, committees and individuals carrying out controlled functions.

Answer 75

1. Pre-transactional. – customer service mission statement, staff training, complaints handling processes and preparation of warranties. 2. Transactional. – managing customer service demand patterns, timing and monitoring levels of customer service delivery. 3. Post-transactional. – claims handling service, handling complaints and cross-selling.

Answer 76

The Companies Act 2006 includes regulations on accounting such as the: * requirement to keep adequate accounting records; * directors’ duty to prepare accounts for a company; * directors’ duty to prepare accounts for a group of companies and the consistency of financial reporting within a group; and * requirement to prepare accounts that show a true and fair view.

Answer 77

The income statement which shows the results of the company as a consequence of transactions during the accounting period. It sets out the income, expenses, tax and the profit or loss.

Answer 78

statement of the financial position of the business at a point in time (‘as at’ a particular date), i.e. the end of the accounting period or year-end date. It is a ‘snap shot’ of the company’s position at a particular point in time, listing all the company’s assets and liabilities – what is owned and what is owed. What is owed by the company includes the shareholders’ equity, which is the total of the assets less the total of the liabilities.

Answer 79

Cash flow statements are presented as an integral part of a company’s financial statements to recognise that accounting profit, or loss, is not the only indicator of a company’s performance. Cash flow statements show the sources and uses of cash and are a useful indicator of a company’s liquidity.

Answer 80

financial and management accounting. Financial accounting involves the day-to-day recording of the company’s transactions and presenting this information in financial statements for external consumption for those outsiders who have an interest in the company. By comparison, management accounting can be formulated in different ways to suit many purposes. As well as using the source day-to-day transactional data captured for financial accounting information, management accounting will also incorporate a variety of other different information sources to enable managers to fulfil their responsibilities.

Answer 81

Income is simply all of the amounts of money earned by the organisation from any source, including sales, rentals, interest payments and investments. Income generated from sales (excluding VAT) is sometimes called revenue or turnover.

Answer 82

Expenditure is all the amounts of money incurred to pay for goods or services.

Answer 83

In accounting terms, profit is any excess of income over expenditure incurred in running the business that earns that income.

Answer 84

Shareholders’ equity is the stake shareholders have in the company. It is calculated as the total value of all the assets in the business less the total value of all the liabilities.

Answer 85

The capital of a trading company is the sum of the equity and long-term debt used to finance the business. For regulatory captial the formula is the same, but Long-term debt can only be classified as regulatory capital if it meets stringent rules set by the PRA. Equity counts as Tier 1 capital (this is the best sort of capital as it gives the greatest protection to policyholders).

Answer 86

An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Answer 87

A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits. In other words, a liability is an amount owed by an organisation.

Answer 88

(cost of asset – scrap or residual value)/ the life of the asset

Answer 89

Non current assets, are items of walth that are controlled by the business, which the company intends to keep for more then one year. 1) Goodwill and other intangible assets. Goodwill is the difference between the amount paid for acquiring a business and the value of the net assets of that business when acquired. Other intangible assets include patents, brands and licences 2) Property This includes freehold and leasehold property and land used by the business for trading. 3) Investments Investments includes property if held for investment rather than used by the business for trading, equities, government bonds and corporate bonds.

Answer 90

A current asset are items of wealth the the business controls and intends to use within the next twelve months. 1) Cash and cash equivalents 2) Stock 3) Debtors - Debtors are customers who owe the business money. They are created when goods or services are sold on credit.

Answer 91

Working capital is the money used to finance day-to-day trading activities. Working capital is used to pay for wages and raw materials and for overheads such as utility bills. On the balance sheet the value of working capital is calculated by subtracting current liabilities from current assets. Working capital is known as net current assets.

Answer 92

Assets employed are calculated by adding non-current assets to working capital (net current assets).

Answer 93

Gross profit is calculated by subtracting cost of sales from turnover

Answer 94

1) Finance income the income earned on any investments held during the year. 2) Finance costs the cost of loans made to the company such as bank loans, mortgages and corporate bonds. 3) Overheads the other expenses incurred by a company such as the cost of management, administration staff and office accommodation. 4) Taxation All businesses have to pay corporation tax on their profits.

Answer 95

The cash flow statement records the movements of cash in and of cash out that took place during the last financial year. It also shows the company’s net cash flow for the year.

Answer 96

1) Cash flows from operating activities - Businesses generate cash flows from their trading activities. This section of the cash flow statement deals with how much cash the business managed to generate or consume as a direct consequence of its trading activities including tax paid. 2) Cash flows from investment activities - This section shows cash inflows and outflows created by investing activities. 3) Cash flows from financing activities - This section deals with changes to loan and share capital and payment of dividends to shareholders. If the business has managed to raise cash by negotiating new loans or by issuing more shares, a cash inflow is shown.

Answer 97

* the productivity of the factory and possibly the productivity of individual machines; * the quality of goods being produced; * the cost of goods being produced analysed as appropriate for the factory such as labour costs, machinery costs, wastage costs and costs relating to quality assurance; * the capital absorbed by the business in raw materials, work in progress and finished goods.

Answer 98

* customer satisfaction; * the quality of the service provided; * the cost of the service analysed as appropriate for the business; * the financial performance of each of the various distribution channels such as direct sales force, outsourced call centres and web.

Answer 99

Management accounts will report on non-financial information, such as productivity ratios, quality of goods and customer satisfaction as well as financial information.

Answer 100

This is concerned with establishing the necessary accounting information for profit and contributions to overhead costs of the various components of the business.

Answer 101

1. The first shows the effective interest rate (internal rate of return or IRR) each project will produce. By way of a simple example if the day one investment is 100 and the return is 110 in one year’s time the IRR is 10%. 2. The second shows the value of the projects expressed in today’s money (this is called net present value or NPV). This technique recognises that having £100 today is worth more than earning £100 in one year’s time. Cashflows in the future are reduced in value to recognise the cost of holding capital to finance the business.

Answer 102

The IFRS Foundation is a not-for-profit international organisation responsible for developing a single set of high-quality global accounting standards, known as IFRS Standards.

Answer 103

To develop standards that bring transparency, accountability and efficiency to financial markets around the world

Answer 104

UK companies listed on the London Stock Exchange are required to prepare their consolidated accounts following the UK-adopted International Financial Reporting Standards (IFRS). In the USA the Securities Exchange Commission (SEC) allows overseas firms to use IFRS (the international version, not the UK version) when doing business or listing securities in the USA but has said, ‘U.S. constituents have advised us that they do not support a move to, or an option to use, IFRS for financial reporting by U.S. companies’. Many of the world’s capital markets now require IFRS, or some form thereof, for financial statements of public-interest entities. The remaining major capital markets without an IFRS mandate are (a) the USA, as mentioned above, with no current plans to change; (b) Japan, where voluntary adoption is permitted but not required.

Answer 105

If it is: * comparable; * verifiable; * timely; and * understandable.

Answer 106

statements each year which give a ‘true and fair’

Answer 107

Yes. If directors conclude that compliance with an accounting standard would be misleading and conflict with the requirement to give a ‘true and fair’ view the entity is required to depart from the accounting standard, with detailed disclosure of the nature, reasons, and impact of the departure. This is only expected to happen in very rare occasions.

Answer 108

* Insurers need to make extensive disclosures about their insurance risk management policy, interest and credit risk information, and terms and conditions of insurance contracts with the impact on future cash flows. * Insurance liabilities must be kept in the insurer’s balance sheet until they are discharged, cancelled or expire. * Insurance liabilities must be included in the balance sheet without offsetting them against related reinsurance assets. * A test for the adequacy of recognised insurance liabilities. * An impairment test for reinsurance assets. * Provisions for possible claims under contracts that are not in existence at the reporting date, such as catastrophe, and equalisation provisions, are not permitted.

Answer 109

Financial Reporting Council The FRC is currently the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance and it is to be replaced by the ARGA during 2023/24.

Answer 110

The FRC's mission is to promote transparency and integrity in business to serve the interests of the public and the UK economy.

Answer 111

A small entity is one that satisfies any two of the following: * Turnover less than £10.2m. * Total assets less than £5.1m. * 50 employees or less

Answer 112

A micro entity is one that satisfies any two of the following: * Turnover less than £632,000. * Total assets less than £316,000. * 10 employees or less.

Answer 113

The uncertainty over setting an appropriate level of claims reserve is influenced by a number of factors including: * legislative change in the future having a retrospective impact on existing claims; * future claims payment patterns differing from historical experience; * claims, such as stress and disease claims, emerging from risks written many years ago; * cases of latent exposures such as asbestos being reported (for example, cases of mesothelioma can have a latent period of up to 40 years); * the outcome of litigation on existing claims; * failure to recover reinsurance; * unanticipated changes in claims inflation; and * unexpected changes to the interest rates (Ogden rate) applied by courts on personal injury claims.

Answer 114

The IBNR calculation is based on an extrapolation of the pattern of claims reported in prior years and up to the balance sheet date. The prior year patterns are used to estimate the number of claims expected to be reported after the balance sheet date with incident dates prior to the balance sheet date. The total value of IBNR is calculated from multiplying the number of such claims by the average cost of claims. Note that if claim numbers are stable the IBNR increases by claims inflation each year.

Answer 115

* Number of claims reported. * Number of nil claims (in case the policy for recording nil claims changes which could have a distorting effect on total reported claims). * Total value of paid claims. * Total value of the outstanding case estimate of claims at the period end (from which the case incurred development can be modelled as the case incurred value is the sum of the claims paid in the year plus the value of the case estimates outstanding at the end of the year, less the value of the case estimates brought forward from the prior year).

Answer 116

The simplest method is to just extrapolate the paid claims and not use any other information available such as the incurred cost of claims. As payments would have been subject to inflation this method assumes that the typical claims inflation experienced in the past will be experienced in the future. An inflation adjusted method is particularly useful when inflation experienced to date is expected to differ markedly from that expected in the future.

Answer 117

Gross profit percentage ratio (Gross profit/Sales (revenue ))*100 Net profit percentage ratio "Net profit/Sales (revenue/turnover))*100 Return on capital employed (ROCE) ratio (Profit before interest charges and tax/ share capital+reserves+borrowing)*100

Answer 118

* A decrease may indicate greater competition in the market causing lower selling prices and a lower gross profit; or an increase in the cost of purchases. * An increase in the gross profit percentage may indicate that the company is in a position to exploit the market and charge higher prices for its products, or that it is able to source its purchases at a lower cost. * A change can also be due to a change in the mix of products sold. An increasing volume of a product with a high gross margin will increase the overall ratio.

Answer 119

gives an indication of how well a company is managing its business expenses. If the net profit percentage has decreased over time while the gross profit percentage has remained the same, this might indicate a lack of internal control over expenses.

Answer 120

The return on capital employed (ROCE) ratio enables an investor to see if the insurer is making money for them and make comparisons between companies. The ratio is basically concerned with the relationship of profit to the total capital employed and is seen as giving an indication of how efficiently and effectively management have deployed the resources available to it, irrespective of how those resources have been financed.

Answer 121

* A low return could easily be wiped out in a recession. * When acquiring other businesses or moving into new markets, there should be a high ROCE to make it worthwhile for the capital providers. * A persistently low ROCE in a business division may signal that it is time to dispose of it.

Answer 122

The receivables/debtors collection period (in days or months) provides an indication of how successful (or efficient) the debt collection has been: ((Trade receivables/debtors)/ Sales) × 365 days The payables/creditors payments period links the value of payables/creditors with the amount of goods and services that a company is purchasing on credit. (Payables/creditors)/ Purchase) × 365 days Payable/creditors can provide a source of free finance to the company and so it is in the company’s interest to try and defer payments as long as possible. ((Inventory/stock)/Cost of Sales)*365 A change in the inventory/stock turnover period can be a useful indicator of how well a company is doing. A lengthening in the inventory/stock turnover period may indicate a slowing down of trading or an unnecessary build up of stock/inventory.

Answer 123

current assets/ current liabilities A current ratio of more than 2 is seen as prudent in order to maintain creditworthiness, but in recent years a figure of 1.5 has become quite normal. However, it will depend on the nature of the business and how much stock is readily saleable. An example of a business that can trade with a low current ratio is a supermarket. They buy goods on credit and sell mainly for cash and so can usually survive on a current ratio of less than 1 (i.e. current assets less than current liabilities).

Answer 124

current assets excluding stock/ current liabilities The quick ratio (which is more liquid or cash driven) will often be below 1, which means if a company had paid up all its creditors and collected from all its debtors at once, the company would require an overdraft facility. The question is then – are the bankers happy to offer an overdraft? If not, then the company is possibly starting to get into trouble.

Answer 125

They compare some aspect of the company’s activities (usually sales or purchases) with a relevant balance sheet item. When comparing sales over a longer period of time, it may be advisable also to take inflation into account.

Answer 126

cost of sales/ average stock This ratio is used to investigate a company’s stockholding policy. If a company has annual cost of sales of 120 and holds an average stock of 20, the stock is turned over six times per year, or once every two months. Changes in this ratio affect a business’s liquidity. If the stock is turned over more slowly, less cash is generated and relatively more cash is tied up in stock.

Answer 127

1) The debt tunover - Sales/Debtors When expressed in this form, this ratio indicates how often the amount of debtors is turned over each year. Sales of 180 per year and average debtors of 30 would produce a debtor turnover of six times per year. This is the same as saying that debtors are turned over once every two months, i.e. that debtors stay on the company’s books for two months and they take, on average, two months to pay. 2) The credit turnover - Purcahses/Creditors This ratio is based on the same principle as the stock and debtor turnover ratios, but since creditors are created when the business buys something, it should be based on purchases and not on sales. If our purchases amount to 120 per year and our average amount of creditors is ten, our creditor turnover is twelve times per year or once a month. This means that we receive one month’s credit from our suppliers.

Answer 128

(Long-term borrowin/shareholders equity)*100 It is a measure of financial leverage and shows the extent to which a company finances its activities from borrowings as opposed to shareholders’ equity. The higher this ratio, the more the business in question relies on debt finance. Gearing ratios of between 25% and 50% are typical. Companies that can generate a sustainable high level of profits can have higher levels of debt/equity. Companies with high levels of fixed assets, such as plant and machinery, are likely to have high levels of gearing and private equity companies typically use much higher gearing ratios for the companies they acquire and have been successful in generating high returns for their investors.

Answer 129

total eligible capital/ solvency capital requirement

Answer 130

net assets/ earned premium net of reinsurance It will be appreciated that, in general terms, the higher the figure the stronger the company although the weakness of the calculation is that in a hard market where premium rates increase the solvency will show an apparent deterioration whereas the economic position is an improvement. Another issue to deal with is that a company with a high level of capital to support the premiums written is usually seen as being ‘overcapitalised’ and will have a lower return on equity than a company that has a lower level of capital.

Answer 131

total liabilities/ cash+investments

Answer 132

(profit after tax/ shareholders’ equity (capital)) × 100 The ratio is basically concerned with the relationship of profit to the shareholders’ capital and is seen as giving an indication of the efficiency with which that capital is employed.

Answer 133

Debt capital for an insurance company is subject to special requirements as, to be effective, the debt capital has to comply with the rules laid down by the regulator. Due to these restrictions it is more common for an insurer that chooses to use debt capital to have a gearing ratio in the range 10 to 25% although a highly capitalised insurer may choose to have a higher percentage of gearing. (long-term borrowing/Shareeholder equity)*100 A highly geared ratio may suggest that a company cannot finance its own activities. Generally, it is not considered to be a good thing for a company to have to borrow a high percentage of its sources of finance for long-term investment, as it will have to meet a substantial annual interest bill, which will be to the detriment of profits available for shareholders. However, a high gearing ratio is acceptable in some circumstances, for example this may be preferred to: * losing control by having too many issued shares; and * with fewer shares there are fewer shareholders to participate in the profit, so a small increase in pre-interest profit could lead to a large increase in dividends.

Answer 134

The combined ratio measures the underwriting performance by combining the claims ratio with the expense ratio and the commission ratio. A combined ratio does not take account of investment income and tracks the underwriting performance rather than profitability – so it does not provide the whole picture. A combined ratio below 100% generally indicates a good underwriting performance and above 110% generally indicates poor underwriting or catastrophe losses. In the past, insurance companies boosted poor underwriting results with investment income. Recently, the fundamentals within the investment markets have forced all insurance companies to rethink their underwriting strategies and focus on driving the combined ratio below 100%.

Answer 135

1) the claims ratio: (claims incurred net of reinsurance/ earned premium net of reinsurance) × 100 2) the expense ratio: (administrative expenses earned premium net of reinsurance) × 100 3) the commission ratio: (acquisition costs earned premium net of reinsurance )× 100 the combined (or operating) ratio: = (claims+expenses + acquisition costs/ earned premium net of reinsurance) × 100

Answer 136

Outstanding claims are the major liability of a general insurance company. Changes in bases of valuation can affect both net assets and profit, yet valuation is always a problem and there is a particular concern at the risks inherent in undervaluation. The lower the ratio the more secure the position – but, paradoxically, a company which is under-reserved will show a better result and this will create problems for the future, maybe even leading to failure. outstanding claims net of reinsurance/ net assets

Answer 137

The simple answer is that all customers purchasing an insurance contract are simply buying a promise that the insurer will honour all valid claims as and when they become due at a future point in time. Occasionally, insurance organisations go into liquidation, so many commercial customers and brokers rely on financial strength ratings when making decisions regarding placing business.

Answer 138

* it demonstrates to policyholders that a third party has measured the likelihood of them meeting their financial commitments; * it allows for financial strength comparisons between different insurers; * it should allow an extremely strong (AAA) insurer to charge a higher premium or be offered a wider range of business than a good (BBB) insurer as the customer is buying into a stronger rated (and therefore potentially more secure) company; and * brokers and customers can decide on their risk appetite by choosing the financial strength rating that they prefer for their insurance carriers. For example, they may decide that their insurance policies must be placed with companies that have an S&P financial strength rating of higher than A-.

Answer 139

* Economic and industry risk. The environmental framework in which insurance companies operate. Typical points would be to look at the threat of new entrants, volatility of the sector, country risk and the potential ‘tail’ to liabilities or risk of catastrophic losses. * Competitive position. The profile of the business mix in terms of the competitive strengths and weaknesses. This is particularly relevant in terms of the insurance company’s strategy. * Management and corporate strategy. This looks at the quality and credibility of an insurer’s senior management team and the strategy it has set, and is one of the most important elements in determining how successful the company will be going forward. * Enterprise risk management (ERM). ERM is the method by which a company manages risk (both risks that have an upside as well as a downside). ERM provides a framework to assess the frequency and severity of risks, risk mitigation, monitoring and reporting. They will assess how an insurer identifies, measures, and manages risk. Some insurers’ ERM includes the use of an internal model, and the rating agencies will incorporate the results of ERM modelling in their analysis of capital adequacy. Most large insurers are expected to have an effective ERM to earn the stronger financial ratings. * Operating performance. This involves looking at the performance ratios – loss ratio, expense ratio, combined ratio, return on equity etc. * Investments. Of key importance here is how the insurer’s investment strategy fits with its liability profile, and to what extent investment results contribute to total company earnings. * Capital adequacy. This looks at the quality and level of capital required to run the business based on the risk appetite adopted. * Liquidity. The ability to manage cash flows efficiently and easily borrow money if required. * Financial flexibility. This looks at the insurer’s potential need for additional capital or liquidity in the future.

Answer 140

Critics of the credit rating process have commented that credit rating agencies do not downgrade companies promptly enough

Answer 141

* a statement of the risks that it is acceptable for the company to bear; * what risks are not acceptable; * the probability of failure that is deemed to be acceptable; * the maximum loss that is acceptable from any one incident; * the target level of financial security; and * the quality and diversity of investments.

Answer 142

The PRA requires that the probability of failure should not be higher than one chance in two hundred over a twelve-month timescale.

Answer 143

* the risk acceptance criteria; * an investment policy; * a reinsurance policy; and * other financial and risk policy statements.

Answer 144

* Pillar 1 – Financial requirements. This applies to all firms and considers key quantitative requirements, including own funds, technical provisions and calculation of the Solvency II capital requirements the solvency capital requirement (SCR) and minimum capital requirement (MCR) through either an approved full or partial internal model or the standard formula approach. * Pillar 2 – Governance and supervision. This includes an effective risk management system and prospective risk identification through the own risk and solvency assessment (ORSA). * Pillar 3 – Reporting and disclosure. Insurers are required to publish details of the risks facing them, capital adequacy and risk management. Transparency and open information are intended to assist market forces in imposing greater discipline on the industry.

Answer 145

to enhance policyholder protection and create a safer, more resilient insurance sector.

Answer 146

the solvency capital requirement - The SCR is the quantity of capital that is intended to provide protection against unexpected losses, over the following year, up to the statistical level of a ‘1 in 200-year event’

Answer 147

minimum capital requirement (MCR) - The MCR denotes a level below which policyholders would be exposed to an unacceptable level of risk and is intended to correspond to an 85% probability of adequacy over the following year.

Answer 148

The firm must then consider and action a plan to restore its capital position and/or reduce its risk profile. Distributions to investors are either cancelled or deferred. The SCR acts as an intervention point for supervisors to take action.

Answer 149

regulatory action is taken and the firm must submit a plan for approval, explaining how it will restore capital above the MCR within three months. If the firm is unable to do so, its authorisation may be withdrawn

Answer 150

* Raise more regulatory capital. This could be by means of: – issuing new shares in a limited company; – issuing long-term debt that meets the PRA requirements for Tier 1 or Tier 2 regulatory capital; or * Reduce the regulatory capital requirement. – the volume of business written, particularly in lines which generate a high capital requirement; – increasing reinsurance; and/or – switching out of higher risk assets such as equities, into lower risk ones such as government bonds.

Answer 151

Send 10 mins going through the chapter.

Answer 152

a stakeholder perspective.

Answer 153

Appoint a company secretary.

Answer 154

1) Information flows horizontally and vertically. It is with the vertical flow (between managers/ team leaders and team members) that management information systems are most concerned. 2) Reports generated by an information system will range between: - information for low-level management about the small area of the organisation under thier control. - reports of a broader nature for top-level management concerned with overall control. 3) The centre core of an MIS is likely to be tactical information for management control, although the MIS will have many sub-systems and sub-sub-systems providing information ranging from operational through tactical to strategic. 4) The control cycle (i.e. the comparison of actual results against a plan and the production of exceptional reports to show where control action may be needed) cannot be effective unless the plan is carefully prepared 5) A precise and carefully drawn-up specification of the areas of management responsibility is essential. This specification is necessary to ensure that information will flow to the managers who need it. 6) The information produced must be able to measure actual results against the plan in such a way that control decisions can be taken at all levels of management. Data must also be available to enable senior management to plan for the future and computers are of special value in preparing forecasts from large quantities of data.

Answer 155

It is optional in all circumstances.

Answer 156

A cash flow statement.

Answer 157

The insurance company.

Answer 158

Large insurance companies (or reinsurance companies) frequently pay rating agencies to provide an opinion of their financial strength which is a measure of their ability to pay claims under their insurance policies and contracts.

Answer 159

A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.’

Answer 160

Balance sheet to be based on the principle of market-consistent valuations. Essentially, this means that the value of assets and liabilities reflect the current value at which they could be traded in financial markets, rather than their original accounting value.

Answer 161

it requires insurers to forecast expected future liability cash flows and then discount them using risk-free interest rates of an appropriate maturity, to arrive at a ‘best estimate’.

Answer 162

Tier 1 capital, such as common equity and retained earnings, is the highest quality of capital and must be able to absorb losses on a day-to-day, ‘going-concern’ basis.

Answer 163

based on its ability to absorb losses.

Answer 164

Tier 2 capital, such as subordinated debt, is of a lower quality and only needs to absorb losses on insolvency.

Answer 165

Finally, Tier 3 capital is the lowest quality of capital permitted and has only limited loss-absorbing capacity. It is unlikely that firms will have significant quantities of Tier 3 capital under Solvency II.

Answer 166

The use test will be used to verify that internal models are employed not just to satisfy the regulatory requirement of calculating the SCR, but as a tool that is part of a firm’s wider, risk management and decision-making processes

Answer 167

Regular and robust monitoring of internal models is needed to verify that, following approval of an internal model, it continues to reflect the true risk profile of a firm and is used and understood appropriately within the business. When considering the ongoing appropriateness of internal models, the PRA will consider the lessons learnt from the use of models in the banking industry.

Answer 168

Individuals that run insurance companies should have clearly defined responsibilities and are expected to behave with honesty, integrity and competence in order to provide sound and prudent management. For this purpose, the PRA has introduced the Senior Managers and Certification Regime (SM&CR) which is intended to ensure the accountability of senior management in the insurance sector.

Answer 169

Solvency II requires insurers to take a comprehensive approach to considering their risks through the own risk and solvency assessment (ORSA). Furthermore, firms face risks that span the entirety of their business plan, such as the long-term effects of climate change, which are not necessarily significant over the one-year time horizon used in the calibration of the SCR. By requiring a firm’s management to consider risks such as these, the ORSA should help firms to understand and manage all the risks they are exposed to.

Answer 170

Firms are required to publish a SFCR annually, and to disclose additional information privately to regulators in the Regulator Supervisory Report. In the SFCR, firms need to clearly explain aspects of their approach to Solvency II, such as the use of an internal model and any non-compliance with regulatory solvency requirements. Solvency II sets out the disclosure requirements for the SFCR such that the quality and standardisation of firm disclosures should improve. The improved reporting requirements also provide supervisors with better and more consistent information.

Answer 171

firms consider the potential impact of certain adverse circumstances on their business

Answer 172

Insurers are required to develop, implement and action a robust and effective stress testing programme that assesses their ability to meet capital and liquidity requirements in stressed conditions, as a key component of effective risk management. All firms should undertake relevant analysis, commensurate with the nature, scale and complexity of their business.

Answer 173

Reverse stress tests are stress tests that require a firm to assess scenarios and circumstances that would render its business model unviable, thereby identifying potential business vulnerabilities. This differs from general stress and scenario testing, which tests for outcomes arising from changes in circumstances. A firm’s business model is described as being unviable at the point when crystallising risks cause the market to lose confidence in the firm

Answer 174

The firm’s actuarial function must contribute to the effective implementation of the risk management system in particular with respect to the design, calibration and build of the internal model, with a feedback loop being used to improve the model. The actuarial function should use the outputs of the internal model, for example in providing an improved understanding of its reserve volatility and may well use the internal model to assess the firm’s technical provisions

Answer 175

acting independently from the executive, to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control

Answer 176

the management is under an obligation to ensure the audit committee is kept properly informed and should take the initiative in supplying information rather than waiting to be asked. The board should make it clear to all directors and staff that they must cooperate with the audit committee and provide it with any information it requires. In addition, executive board members will have regard to their duty to provide all directors, including those on the audit committee, with all the information they need to discharge their responsibilities as directors of the company.

Answer 177

* monitoring the integrity of the company’s financial statements; * reviewing the company’s internal financial controls; * monitoring and reviewing the effectiveness of the company’s internal audit function; * making recommendations to the board, for it to put to the shareholders for their approval in the general meeting, in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of the external auditor; * reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process; * developing and implementing policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and * to report to the board, identifying any matters where it considers that action or improvement is needed, and making recommendations as to the steps to be taken.

Answer 178

the nominal value of their shareholding.

Answer 179

This distribution channel is referred to as white labelling, where the organisation offers insurance products branded with their own name but underwritten by an insurance company or with a Lloyd’s syndicate.

Answer 180

development of new insurance products over a 2-year period.

Answer 181

* IT downtime. * Examples of fraud (internal and external). * Complaints. * Property loss or damage. * Employee injury or illness.

Answer 182

written rules about running the company agreed by the shareholders or guarantors, directors and the company secretary.

Answer 183

Balance sheet

Answer 184

earned an amount of income which is balanced by an increase in cash.

Answer 185

This principle shows the two-fold effect on the accounting equation by reflecting that the business both receives and gives value in each transaction.

Answer 186

* the amount of the debt incurred; * the individual or organisation who owes the money; * the organisation to whom the debt is owed; * the date when the debt was incurred; * the date when payment is due; * the way the debt amount was calculated and what service or goods were supplied; * ancillary financial information such as any VAT associated with the charge and the organisation’s VAT registration number.

Answer 187

net financial position

Answer 188

This is a straightforward combination of the loss-ratio method with either a paid loss or incurred loss development.

Answer 189

This method is rarely used on its own but can be used for the most recent incident years where the value of paid and/or incurred claims is low in relation to the total value of claims expected.

Answer 190

As this uses more information, the expectation is that this method will produce a more accurate estimate of total claims than a projection of paid claims. However, issues will arise with this method when there has been a significant change to the claims handling procedures

Answer 191

The simplest method is to just extrapolate the paid claims and not use any other information available such as the incurred cost of claims. As payments would have been subject to inflation this method assumes that the typical claims inflation experienced in the past will be experienced in the future.

Answer 192

a measure of its ability to pay claims

Answer 193

Financial Services and Markets Act 2000

Answer 194

Confidential information which is in paper form, such as insurance policy records, including claims information, should be marked ‘private and confidential’ and stored in a secure, preferably lockable, cabinet or desk. Access to the safe storage area should be restricted to individuals who can be trusted to treat the information properly by not disclosing it to any unauthorised parties.

Answer 195

Limiting access to computer files can be achieved through password systems and the encryption (i.e. coding) of information. Encryption is used in particular when confidential information is transmitted through the internet. The information is encoded during transmission and decoded when it arrives at its intended destination. This protects the information from being understood by any unauthorised person who intercepts it. As an additional measure for encouraging personal information to be kept confidential, data protection law prohibits the unauthorised disclosure of records stored in any way (including on a computer database) to third parties.

Answer 196

* Insider dealing – when an insider deals, or tries to deal, on the basis of inside information. * Improper disclosure – where an insider improperly discloses inside information to another person.

Answer 197

it's sets out what constitutes insider dealing and the unlawful disclosure of inside information

Answer 198

UK MAR prohibits persons in possession of inside information from using that information to deal or attempt to deal in financial instruments or to recommend or induce another person to transact on the basis of inside information.

Answer 199

For breaches of UK MAR the FCA can impose unlimited fines, order injunctions, or prohibit regulated firms or approved persons. Criminal sanctions for insider dealing and market manipulation can incur custodial sentences of up to 10 years and unlimited fines.

Answer 200

* Limit the number of people who need to know about a deal to the practical minimum and a requirement to justify adding people to the list of insiders/senior level sign-off. * Not passing information to individuals unless they are first clearly made aware of their responsibilities for handling sensitive information. * If members of staff are identified as needing to know some, but not all, of the deal information then, as far as practical, limit their knowledge to only those parts that are necessary, rather than allowing them access to all information that is available. * Where appropriate, communicate to all other insiders when someone is removed from an insiders’ list.

Answer 201

* Ensuring that sensitive health, social care and education data can continue to be processed, to ensure confidentiality in health and safeguarding situations. * Restricting the rights to access and delete data where there are legitimate grounds for doing so (e.g. for national security purposes). * Setting the age from which parental consent is not needed to process data online. * Providing the ICO with enhanced powers to regulate and enforce data protection laws.

Answer 202

The senior management of the firm will consider the risks associated with matters such as takeover bids, starting new lines of business, opening branches in new locations, including overseas, and the distribution policy (e.g. through brokers, direct, comparison websites etc.

Answer 203

Insurance risks relate largely to the potential for the loss ratio to be higher than that which was assumed in the business plan. The risk to insurers is that the amount reserved transpires to be insufficient to meet the final cost of the claims. Where this occurs across a large portfolio of business it can threaten the solvency of the company

Answer 204

The scope of this risk category includes losses due to the reduction in value of investments or returns that are below the planned level

Answer 205

Credit risks cover those that relate to premium payments by clients and also for reinsurance recoveries

Answer 206

The scope of operational risk is very wide and in effect sweeps up all risks that are not included in the other categories. The risks include property damage to the insurers’ offices and equipment, fraud by employees, breach of regulatory rules, injury or illness to staff or visitors, IT interruptions or security failures etc.

Answer 207

Risks within this category emerge where a firm is part of a wider group. For example, an insurer may be the UK subsidiary of a large US group. The UK entity may rely on the parent for solvency capital, technical support and centralised services such as actuarial. If the strategy at the centre should change (such as the redistribution of capital) then the UK firm may not be able to fulfil its business aims.

Answer 208

* Maintaining a sound system of internal control by reviewing how a company identifies and manages risk. * Reviewing board reports to ensure that they present a balanced and understandable viewpoint. * Ensuring the directors are up to date with new accounting and auditing issues, e.g. international accounting standards. * Communicating with the external auditors and ensuring a unified approach to work. * Ensuring that the board receives the correct communications and information required from the external auditors

Answer 209

This is a centralised data source on all risks that the company is known to face and it is the job of the risk management department to keep it current and report significant findings

Answer 210

The inherent analysis describes the risk without any special controls applied, except perhaps the basic ‘common sense’ controls. For example, when considering health and safety risks there is an inherent risk of injury but it is reasonable to expect people to take care of themselves.

Answer 211

Risk Ranking

Answer 212

* Classes of business to be written. * Maximum values to be insured for any one policyholder and any one location. * Gross premiums (before brokerage if applicable) for each class of business. * A profile of the gross premiums by currency. * Planned loss ratios for each class. * A profile of the geographical spread of business. * Levels (percentage of gross premium) to be paid in brokerage. * Main sources of business, split by direct and estimated income through each broker. * An expense profile, detailing staff costs, building and IT costs, advertising budget, regulatory fees, outsourcing costs and general expenses. * Investment strategy, including planned investment income. * Reinsurance strategy, including a profile of the reinsurers to be used, maximum limits tobe reinsured per reinsurer, and minimum credit agency rating for each reinsurer. * A summary of key changes to be included in the plan for the year ahead.