Module 2 - Unit 4 Risk And Organisations

Question 1

What is the purpose of corporate governance?

Answer 1

Corporate governance is the system by which companies are directed and controlled.
Its purpose is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.

Question 2

Describe economic capital

Answer 2

Economic capital - the methods or practices that allow institutions to consistently assess risk and attribute capital to cover the economic effects of risk taking.

Question 3

Examples of internal stakeholders/ external stakeholders

Answer 3

Internal stakeholders could include: shareholders, directors, employees and group companies.

External stakeholders could include: customers (actual and potential), suppliers, governments, regulators, analysts, credit agencies, press/social media.

Question 4

Solvency II ratio calculations:

Answer 4

Solvency II specifies that the Solvency Ratio (SR) of an insurance firm should always be above 100% as follows:

Solvency ratio = Market value of assets - Market value of contractual liabilities ( this gives the Total Solvency Capital Requirement (SCR))

Question 5

What is regulatory capital?

Answer 5

Pillar 1 of both Basel III and Solvency II regulations set a minimum capital levels. The regulatory capital requirement refers to the minimum capital a bank must hold

Question 6

What SCR/ MCR stands for?

Answer 6

SCR - Solvency Capital Requirement
MCR - Minimum Capital Requirement

Question 7

Explain the “comply or explain” regime:

Answer 7

A “comply or explain” regime is one similar to the requirement in the UK stock Exchange where firms must comply with the UK Corporate Governance Code and where there are areas of non-compliance these must be explained in the annual report and accounts.

Question 8

What is the difference between Tier 1 & Tier 2 capital and why is important to regulators?

Answer 8

Tier 1 = shareholders EQUITY + “inovative capital”
Tier 2 = subordinates term debt and RESERVES

The difference between the two is the quality of capital.

It is important to regulators as it helps them understand the extent to which the capital can be relied upon.

The capital tiering will be disclosed in the ICAPP/ORSA and also the Pillar 2 reports (Financial Condition Reports)

Question 9

List the 3 Pillars or Solvency II/ Basel III?

Answer 9

Pillar 1: Financial/ Capital Requirements
Pillar 2: Governance and Supervision
Pillar 3: Reporting and Disclosure

Question 10

EIOPA Corporate Governance Principles (Insurance sector)

Answer 10

Section 1: General governance requirements
Section 2: Remuneration
Section 3: Fit & Proper
Section 4: Risk Management
Section 5: The prudent person principle and the system of governance
Section 6: Own fund requirements and the system of governance

Question 11

Bank for International Settlements (BIS) corporate governance principles:

Answer 11

Prin 1: Board’s overall responsibilities
Prin 2: Board qualifications and composition
Prin 3: Board’s own structure and practices
Prin 4: Senior Management
Prin 5: Governance of group structures
Prin 6: Risk Management Function
Prin 7: Risk Identification, monitoring and controlling
Prin 8: Risk communication
Prin 9: Compliance
Prin 10: Internal Audit
Prin 11: Compensation
Prin 12: Disclosure And Transparency
Prin 13: The role of supervisors

Question 12

List 4 responsibilities of the board

Answer 12

• set strategy
• set risk tolerance levels
• oversee recruitment
• oversee senior management

Question 13

List 8 elements of the role of non- executive director

Answer 13

• Strategy
• Performance
• Risk
• Controls
• People
• Confidence
• Independence
• Knowledge

Question 14

5 main features of UK corporate governance code:

Answer 14

Leadership
Effectiveness
Accountability
Remuneration
Relation with stakeholders