ODO.FINREG Flashcards
SAP (Statutory Accounting Principles) purpose, main concept, uniqueness versus other accounting systems
SAP measures insurer’s ability to pay claims (& regulatory early warning system)
SAP is conservative
UNIQUENESS: used only by insurers, assumes insurer is in liquidation, more conservative (include only revenue that has been invoiced)
GAAP (Generally Accepted Accounting Principles) purpose, main concept, uniqueness versus other accounting systems
GAAP provides a measurement of earnings
GAAP is less conservative than SAP (GAAP uses revenue-expense matching)
UNIQUENESS: used by most companies, assume company is an ongoing concern, less conservative (include revenue even if not invoiced)
(SAP v GAAP) - intended user
SAP: regulators
GAAP: general audience (policyholders, investors, public)
(SAP v GAAP) - objective
SAP: measure ability to pay claims
GAAP: measurement of earnings
contrast (liquidation, going-concern)
liquidiation:
- runoff of assets/liabilities
- of interest to REGULATORS (for satisfying policy holder obligations)
going-concern:
- continued normal operations
- of interest to INVESTORS
contrast (fair value, historical cost)
fair value:
- value in open market
- more accurate
historical cost:
- original cost MINUS depreciation
- easier to calculate
contrast (principle-based, rule-based) accounting system
principles-based:
- accounting approach requiring interpretation to apply
- more flexible
rules-based:
- specific guidance
- easier to apply, but less flexible
what is 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
quantitative pillar - what happens if total capital falls below SCR; below MCR
- if total capital < SCR –> regulatory intervention
- if total capital < MCR –> company not permitted to operate
what is a ‘commutation agreement’ (in the context of reinsurance)
An AGREEMENT between a ceding insurer and the reinsurer that PROVIDES for the valuation, payment, and complete discharge of ALL OBLIGATIONS between the parties under a particular reinsurance contract
IN PLAIN ENGLISH: the ReInsR gives the ceded claims BACK to the original InsR
advantages of (or reasons for) commutation - from primary insurer point-of-view
- removes reinsurance CREDIT risk
- insurer receives benefit of favorable LOSS development
- decreases EXPENSE costs
- more EFFICIENT clms handling
- receives immediate Cash Flow
disadvantages of commutation from primary insurer point-of-view
DISADVANTAGES:
- risk of adverse development on claims
- CapReq goes up (to support increased liabilities)