Odo.FinReg Flashcards
Contrast Statutory Accounting Practices (SAP) and Generally Accepted Accounting Principles (GAAP) in terms of OBJECTIVE.
SAP: measure ability to pay claims
GAAP: measurement of earnings
Contrast Statutory Accounting Practices (SAP) and Generally Accepted Accounting Principles (GAAP) in terms of INTENDED USERS.
SAP: regulators
GAAP: general audience (policyholders, investors, public)
Contrast Statutory Accounting Practices (SAP) and Generally Accepted Accounting Principles (GAAP) in terms of ASSET RECOGNITION.
SAP: asset recognized when expense incurred
GAAP: may defer recognition of asset for asset/revenue matching with expenses (Ex: DPAE)
Contrast Statutory Accounting Practices (SAP) and Generally Accepted Accounting Principles (GAAP) in terms of TREATMENT OF REINSURANCE in loss reserves.
SAP: loss reserves NET of reinsurance
GAAP: loss reserves GROSS of reinsurance
Contrast Statutory Accounting Practices (SAP) and Generally Accepted Accounting Principles (GAAP) in terms of DEFERRED INCOME TAXES.
SAP: Not permitted
GAAP: Permitted
Compare and contrast the liquidation basis and going-concern basis in accounting concepts.
liquidiation:
- runoff of assets/liabilities
- of interest to REGULATORS (for satisfying policy holder obligations)
going-concern:
- continued normal operations
- of interest to INVESTORS
Compare and contrast principle-based accounting and rule-based accounting.
Principles-based:
- require interpretation to apply
- more flexible
Rules-based:
- specific guidance
- easier to apply
Compare and contrast fair value and historical cost in terms of accounting.
fair value:
- value in open market
- more accurate
historical cost:
- original cost MINUS depreciation
- easier to calculate
Briefly explain Solvency 2
Solvency 2 is a :
→ principles-based insurance regulatory system
→ for capital levels of insurance companies
→ in the European Union.
What are the 3 pillars of Solvency 2
- QUANTITATIVE: sets SCR & MCR (Solvency & Minimum Capital Requirements)
- uses a total balance sheet approach
- SCR is defined as 99.5% VaR (Value at Risk) meaning that the probability of ruin is < 0.5% - GOVERNANCE: supervisory activities (internal control & risk management, supervisory review process)
- requires adequate governance for the functions: ♦ internal audit ♦ actuarial ♦ risk management ♦ compliance
- supervisor identifies high-risk companies and may intervene
- note that companies are required to perform ORSA - TRANSPARENCY: supervisory reporting & public disclosure
- information from pillars 1 & 2 is given to the supervisor & financial markets
- purpose is to increase market discipline because companies know their decisions are public
Based on the quantitative pillar of Solvency 2 - what happens if total capital falls
a) below SCR
b) below MCR
- if total capital < SCR –> regulatory intervention
- if total capital < MCR –> company not permitted to operate
Based on the governance pillar of Solvency 2 - identify 3 CONDITIONS that must be addressed.
- fitness & propriety
- outsourcing
- internal control
Based on the governance pillar of Solvency 2 - describe 4 FUNCTIONS that must be addressed.
- internal audit (annual report to Board of Directors on deficiencies)
- actuarial (reasonability of methods & assumptions)
- risk management (monitor)
- compliance (with law)
Identify 1 similarity and 2 differences between MCT and Solvency 2.
Similarity: both are implementations of a capital adequacy framework.
Differences:
1. MCT is for Canada, Solvency 2 is for the European Union
2. MCT applied static risk factors, Solvency 2 is principles-based (more adaptable to circumstances, but harder to apply).
Calculate the value of commuted claims.
- Calculate PV(w/o margin)
Sum over all years of Paid Liabilities * (1+i)^-t where t = 0.5, 1.5, … - Calculate margin
Sum over all years of Remaining Liabilities * TMF * (1+i)^-t where t = 1, 2,…
TMF = Total Margin Factor = Required Margin * TargCap to Required Ratio *
Risk Cost of Capital - PV = PV(w/o margin) + margin
