Mod 05: External risk frameworks (mandatory) Flashcards
Explain why different parts of the same organisation might be subject to different regulatory regimes and/or capital adequacy standards
(ActEd 137)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Reasons different parts of an organisation might be subject to different regulatory regimes and/or capital adequacy standards
1. having operations that are regulated by different territories
2. having subsidiaries that operate in different industry sectors, eg financial and manufacturing
3. having subsidiaries that operate in different areas within the same sector, eg banking and insurance
4. having subsidiaries or portfolios within the same sector that are subject to different regulatory requirements, eg traditional insurer and captive insurer
5. having subsidiaries which are new ventures or acquisitions and are at different lifecycle stages
(ActEd 138)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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List the types of external entities that may exercise supervision and control over a company
(ActEd 139)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Entities that may exercise supervision and control
- professional bodies – eg the Institute and Faculty of Actuaries
- professional regulators – eg the Chartered Financial Analyst Institute (CFA)
- industry bodies – eg the British Bankers’ Association (BBA)
- industry regulators (supervisors) – eg the PRA, FCA and LSE
- governments
(ActEd 140)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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List six processes that may form part of a prudential supervision system
(ActEd 141)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Prudential supervision
1. oversight (eg financial)
2. licensing
3. a requirement to maintain minimum standards (eg operational)
4. procedures for monitoring compliance with standards and licences 5. a requirement for disclosure of key information
6. processes to take action against those who fail to comply
(ActEd 142)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline the UK Senior Insurance Managers Regime (SIMR)
(ActEd 143)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Senior Insurance Managers Regime (SIMR)
There are two main parts to the SIMR:
1. a governance map giving details of:
a. company and corporate governance structures
b. identified ‘Key Functions’, ‘Key Function Holders’ and ‘Key Function Performers’
c. all individuals within the SIMR regime, their responsibilities and reporting lines
d. the rationale applied in identifying those individuals and allocating responsibilities to them.
2. an assessment of fitness and propriety of senior insurance managers and directors, based on their responsibilities as allocated through the governance map.
(ActEd 144)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline two broad types of regulation
(ActEd 145)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Two types of regulation
Two broad types of regulation:
functional regulation – where different authorities oversee different activities (eg banks, insurance companies and charities). This is the system used in the UK.
unified regulation – where a single regulator covers a broad range of activities. This is the system used in Australia.
(ActEd 146)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline the advantages and disadvantages of unified regulation
(ActEd 147)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Unified regulation
Advantages:
1.easier to regulate financial conglomerates
2. ensures a consistent approach across financial services activities
3. limits any incentive for regulatory arbitrage
4. economies of scale
5. better sharing of ideas between regulatory staff
6. improved accountability (less buck-passing between regulators)
Disadvantages:
1. may become large and bureaucratic
2. departments within the regulator can end up functioning independently
(ActEd 148)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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State five factors that an insurer should consider when developing a set of relationship management principles with a regulator
(ActEd 149)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Considerations when developing relationship management principles with a regulator
The insurer should consider what principles to adopt with respect to: 1. alignment to supervisory objectives
2. preservation of the insurer’s reputation
3. the importance of being proactive and engaging with a regulator as early as possible
4. transparency of communication
5. ensuring accountability for and governance of relationship management.
(ActEd 150)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline insurer-regulator relationship management principles relating to alignment to supervisory objectives and to preservation of the insurer’s reputation
(ActEd 151)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Principles relating to supervisory objectives / preservation of reputation
- The insurer’s overall corporate strategy should encompass a supervisory strategy.
- The supervisory strategy should be communicated to the regulator, in particular how it will lead to compliance with regulation.
- The insurer should notify the regulator early of any changes to corporate strategy, eg new lines of business.
- The insurer should have processes in place to ensure supervisory requirements are understood, accepted and met throughout the company.
- The insurer should work with the regulator to develop policy as insurers are well-placed to assess the practical implications of changes in policy.
- Best practice should be adopted before it becomes mandatory.
(ActEd 152)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline insurer-regulator relationship management principles relating to proactive engagement
(ActEd 153)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Principles for proactive engagement
The insurer should be pro-active in its engagement with the regulator, anticipating supervisory changes and seeking out opportunities to work with the regulator.
The insurer should work with a regulator to develop an overall plan of regulatory site visits and assist in the planning and logistics of each individual visit.
Recommendations from the regulator should be welcomed.
A positive perception of the supervisor should be encouraged within the insurer
(ActEd 154)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline insurer-regulator relationship management principles relating to transparency of communication
(ActEd 155)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Principles for transparency of communication
- Communication with the regulator / supervisor should be proactive, regular and open.
- The insurer should respond promptly to data requests / investigations.
- The insurer should have processes in place to report breaches, which supervisors understand will occur from time to time.
- The insurer should keep the regulator up-to-date with progress on risk management qualification and quantification exercises.
- The insurer should aim to submit responses to surveys and consultations in good time and may wish to co-ordinate submissions with other insurers, perhaps through an industry body.
- Responses to consultations should be practical and unbiased: the insurer should avoid invoking an argument that it is unique, and should not feel under pressure to comment on every aspect of a proposal.
(ActEd 156)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline insurer-regulator relationship management principles relating to accountability for / governance of the relationship
(ActEd 157)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Principles for accountability / governance
There should be clarity as to which individuals are accountable for each of the following broad groups of interactions:
- operational or procedural
- unusual or non-standard
- strategic.
The Chief Risk Officer (or the Chief Financial Officer) should have overall responsibility for the relationship and co-ordinating interactions.
Continuity of the personnel involved in each type of interaction should be maintained as it helps to develop and maintain a trusting relationship.
Boards should encourage an appropriate relationship with regulators by setting the tone and be kept fully informed of insurer-regulator interactions, especially non-standard and strategic interactions.
(ActEd 158)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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List the aspects of an organisation that a risk-based regulator typically seeks to understand
(ActEd 159)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Aspects of an organisation that a regulator typically seeks to understand
Regulators try to understand which companies represent greatest risk by examining:
- the nature of the business
- governance arrangements
- business plans
- financial (condition) reports
- risk management strategies and processes.
(ActEd 160)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Outline the three pillars of Basel Accords
(ActEd 161)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Basel pillars
Pillar 1: minimum regulatory capital requirement determined by the amount of credit, market and operational risk exposures
Pillar 2: supervisory review which relates to the bank’s internal risk management processes. Supervisors will assess the bank’s internal systems, processes and risk limits to ensure that the bank has set aside sufficient capital for its risks (additional capital may be required, but this is expected to be rare). Particular attention is paid to liquidity and concentration risks.
Pillar 3: level of disclosure that the bank is required to undertake to the public and the market. Its purpose is to facilitate market discipline on firms through appropriate pricing for capital.
(ActEd 162)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Summarise the main criticisms of the Basel II requirements
(ActEd 163)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Summary of the main criticisms of the Basel II requirements
- places too much confidence in a complex model that summarises many diverse risks into a single number
- suffers from the difficulties in quantifying certain types of risk, eg operational
- gives only cursory consideration to certain risk types, eg liquidity may create systemic risk – pro-cyclicality and risk herding
- uses market values which may under-value certain assets under certain conditions
5.is very costly to implement, especially the IRB approach and AMA - increased complexity, and implied high levels of confidence, leads to overconfidence in risk controls
(ActEd 164)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Summarise the main aims of Basel III
(ActEd 165)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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Basel III: Basel III works alongside Basel I & II.
It:
1. addresses liquidity risks (eg the risk of a run on the bank) as well as systemic and counterparty risks
2. strengthens the capital requirements for banks, including limiting cross holdings in other financial institutions and associated assets to limit systemic risk
3. introduces a conservation buffer to provide breathing space in times of financial stress
4. changes the minimum ratios of Tier 1 and Tier 2 capital
5. allows some flexibility in capital requirements in times of financial crisis to limit pro-cyclicality.
(ActEd 166)
ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.
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