ODO.FINREG Flashcards

1
Q

SAP (Statutory Accounting Principles) purpose, main concept, uniqueness versus other accounting systems

A

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)

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2
Q

GAAP (Generally Accepted Accounting Principles) purpose, main concept, uniqueness versus other accounting systems

A

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)

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3
Q

(SAP v GAAP) - intended user

A

SAP: regulators
GAAP: general audience (policyholders, investors, public)

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4
Q

(SAP v GAAP) - objective

A

SAP: measure ability to pay claims
GAAP: measurement of earnings

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5
Q

contrast (liquidation, going-concern)

A

liquidiation:
- runoff of assets/liabilities
- of interest to REGULATORS (for satisfying policy holder obligations)
going-concern:
- continued normal operations
- of interest to INVESTORS

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6
Q

contrast (fair value, historical cost)

A

fair value:
- value in open market
- more accurate
historical cost:
- original cost MINUS depreciation
- easier to calculate

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7
Q

contrast (principle-based, rule-based) accounting system

A

principles-based:
- accounting approach requiring interpretation to apply
- more flexible
rules-based:
- specific guidance
- easier to apply, but less flexible

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8
Q

what is Solvency 2

A

Solvency 2 is a :
→ principles-based insurance regulatory system
→ for capital levels of insurance companies
→ in the European Union.

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9
Q

what are the 3 pillars of Solvency 2

A

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

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10
Q

quantitative pillar - what happens if total capital falls below SCR; below MCR

A
  • if total capital < SCR –> regulatory intervention
  • if total capital < MCR –> company not permitted to operate
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11
Q

what is a ‘commutation agreement’ (in the context of reinsurance)

A

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

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12
Q

advantages of (or reasons for) commutation - from primary insurer point-of-view

A
  • removes reinsurance CREDIT risk
  • insurer receives benefit of favorable LOSS development
  • decreases EXPENSE costs
  • more EFFICIENT clms handling
  • receives immediate Cash Flow
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13
Q

disadvantages of commutation from primary insurer point-of-view

A

DISADVANTAGES:
- risk of adverse development on claims
- CapReq goes up (to support increased liabilities)

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