Odo.FinReg

Question 1

objective of SAP vs. GAAP

Answer 1

• measure ability of pay claims
• measurement of earnings

Question 2

intended user of SAP vs. GAAP

Answer 2

• for regulators
• for general audience (PH, investors…)

Question 3

asset recognition of SAP vs. GAAP

Answer 3

• asset recognized when expense incurred
• may defer recognition of assets for asset revenue matching with expenses

Question 4

treatment of reinsurance in loss reserves of SAP vs. GAAP

Answer 4

• loss reserves net of reinsurance
• loss reserve gross of reinsurance

Question 5

deferred income taxes of SAP vs. GAAP

Answer 5

• doesnot defer income tax
• does defer income tax

Question 6

what does SEC stand for and its mission

Answer 6

Securities and Exchange Commission
- protect investors
- maintain fair, orderly and efficient markets
- facilitate capital information

Question 7

why is the accounting convention important to an insurance company?

Answer 7

• reserving
• working with regulators to monitor financial health of insurance companies
• pricing and designing insurance products
• evaluate risk transfer of reinsurance contracts

Question 8

contrast liquidation and on-going concern

Answer 8

• runoff of assets/liabilities vs. continued normal operations
• of interest to regulators vs. investors

Question 9

contrast fair value and historical cost

Answer 9

• value in open market vs. original cost minus depreciation
• more accurate vs. easier to calculate

Question 10

contrast principle-based and rule-based accounting system

Answer 10

• accounting approach requiring interpretation to apply vs. specific guidance
• more flexible vs. easier to apply but less flexible

Question 11

what is solvency 2

Answer 11

principle based insurance regulatory system for capital levels of insurance companies in EU

Question 12

what are the 3 pillars of solvency 2?

Answer 12

lGbTQ
1) Governance: supervisory activities
2) Quantitative: sets SCR & MCR (Solvency & Minimum Capital Requirements)
3) Transparency: supervisory reporting and public disclosure

Question 13

describe “Governance” under the 3 pillars of solvency 2

Answer 13

• requires adequate governance for: internal audit /actuarial /risk management/ compliance
• provides supervisors with tool to identify high risk companies and power to intervene
• companies are required to perform ORSA

Question 14

describe “Quantitative” under the 3 pillars of solvency 2

Answer 14

• uses total balance sheet approach
• SCR is defined as 99.5% of VaR meaning that the probability of ruin is <0.5%

Question 15

describe “Transparency” under the 3 pillars of solvency 2

Answer 15

• information from pillar 1 & 2 is give to the supervisory and financial markets
• purpose is to increase market discipline because companies know their decisions are public

Question 16

what happens if total capital falls below
- SCR
- MCR

Answer 16

SCR = Solvency Capital Requirement
MCR= Minimum Capital Requirement
- below SCR, regulatory intervention
- below MCR, company not permitted to operate

Question 17

method for calculating SCR

Answer 17

SCR is set using a total balance sheet approach
methods:
- standard/regulator model
- approved internal model (more costly than standard model but gives lower capital requirements)

Question 18

identify conditions that must be addressed under governance pillar

Answer 18

• fitness & propriety
• outsourcing
• internal control

Question 19

describe functions that must be addressed under governance pillar

Answer 19

• internal audit (annual report to BoD on deficiencies)
• actuarial (reasonability of methods and assumptions)
• risk management (monitor)
• compliance with law

Question 20

describe “Windows & Walls” approach of the U.S. Solvency Modernization Initiative as it applies to Solvency 2

Answer 20

gives windows for state insurance regulators to look into group wide operations
- enhanced communication between state and group regulators
- enforcement tools if violations occur
but maintain walls at the statutory legal entity level
- capital cannot be shared between legal entities

Question 21

what are the 3 key areas NAIC established for ORSA to cover?

Answer 21

• description of the insurer’s risk management framework
• insurer’s assessment of risk exposure
• group assessment of risk capital and prospective solvency assessment

Question 22

commutation calcs
S2019
F2017
F2015
F2013

Question 23

what is a commutation agreement in the context of reinsurance?

Answer 23

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

-> the reinsurer gives the ceded claims back to the original insurer

Question 24

advantages/reasons of commutation from reinsurer’s point of view

Answer 24

• increase stability for long tailed lines
• decrease claim expenses
• decrease UW leverage
• to exit market quickly

Question 25

advantages/reasons of commutation from insurer’s point of view

Answer 25

• removes reinsurance credit risk
• insurer receives benefit of favorable loss development
• decrease expense costs
• more efficient claims handling
• receives immediate CF

Question 26

disadvantages of commutation from primary insurer point of view

Answer 26

• risk of adverse development on claims
• capital required goes up to support increased liabilities