Odo.FinReg Flashcards
objective of SAP vs. GAAP
- measure ability of pay claims
- measurement of earnings
intended user of SAP vs. GAAP
- for regulators
- for general audience (PH, investors…)
asset recognition of SAP vs. GAAP
- asset recognized when expense incurred
- may defer recognition of assets for asset revenue matching with expenses
treatment of reinsurance in loss reserves of SAP vs. GAAP
- loss reserves net of reinsurance
- loss reserve gross of reinsurance
deferred income taxes of SAP vs. GAAP
- doesnot defer income tax
- does defer income tax
what does SEC stand for and its mission
Securities and Exchange Commission
- protect investors
- maintain fair, orderly and efficient markets
- facilitate capital information
why is the accounting convention important to an insurance company?
- reserving
- working with regulators to monitor financial health of insurance companies
- pricing and designing insurance products
- evaluate risk transfer of reinsurance contracts
contrast liquidation and on-going concern
- runoff of assets/liabilities vs. continued normal operations
- of interest to regulators vs. investors
contrast fair value and historical cost
- value in open market vs. original cost minus depreciation
- more accurate vs. easier to calculate
contrast principle-based and rule-based accounting system
- accounting approach requiring interpretation to apply vs. specific guidance
- more flexible vs. easier to apply but less flexible
what is solvency 2
principle based insurance regulatory system for capital levels of insurance companies in EU
what are the 3 pillars of solvency 2?
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1) Governance: supervisory activities
2) Quantitative: sets SCR & MCR (Solvency & Minimum Capital Requirements)
3) Transparency: supervisory reporting and public disclosure
describe “Governance” under the 3 pillars of solvency 2
- 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
describe “Quantitative” under the 3 pillars of solvency 2
- uses total balance sheet approach
- SCR is defined as 99.5% of VaR meaning that the probability of ruin is <0.5%
describe “Transparency” under the 3 pillars of solvency 2
- 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
what happens if total capital falls below
- SCR
- MCR
SCR = Solvency Capital Requirement
MCR= Minimum Capital Requirement
- below SCR, regulatory intervention
- below MCR, company not permitted to operate
method for calculating SCR
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)
identify conditions that must be addressed under governance pillar
- fitness & propriety
- outsourcing
- internal control
describe functions that must be addressed under governance pillar
- internal audit (annual report to BoD on deficiencies)
- actuarial (reasonability of methods and assumptions)
- risk management (monitor)
- compliance with law
describe “Windows & Walls” approach of the U.S. Solvency Modernization Initiative as it applies to Solvency 2
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
what are the 3 key areas NAIC established for ORSA to cover?
- description of the insurer’s risk management framework
- insurer’s assessment of risk exposure
- group assessment of risk capital and prospective solvency assessment
commutation calcs
S2019
F2017
F2015
F2013
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
-> the reinsurer gives the ceded claims back to the original insurer
advantages/reasons of commutation from reinsurer’s point of view
- increase stability for long tailed lines
- decrease claim expenses
- decrease UW leverage
- to exit market quickly
advantages/reasons of commutation from insurer’s point of view
- removes reinsurance credit risk
- insurer receives benefit of favorable loss development
- decrease expense costs
- more efficient claims handling
- receives immediate CF
disadvantages of commutation from primary insurer point of view
- risk of adverse development on claims
- capital required goes up to support increased liabilities
