Odomirok - Financial Regulations Flashcards

1
Q

What are the objectives of SAP and GAAP?

A

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

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2
Q

Who are the intended users of SAP and GAAP?

A

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

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3
Q

When are the assets recognized in SAP and GAAP?

A

SAP: asset recognized when expense incurred
GAAP: may defer recognition of asset for asset/revenue matching with expenses (eg: DPEA)

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4
Q

How do SAP and GAAP treat reinsurance in loss reserves?

A

SAP: loss reserves NET of reinsurance
GAAP: loss reserves GROSS of reinsurance

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5
Q

Do SAP and GAAP defer income taxes?

A

SAP: no, they are not deferred
GAAP: yes, they are deferred

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6
Q

Contrast liquidation vs going concern.

A

LIQUIDATION: sees assets/liabilities as runoffs - of interest to REGULATORS (for satisfying policyholder obligations)
GOING-CONCERN: sees assets/liabilities as continued normal operations - of interest to INVESTORS

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7
Q

Contrast fair value vs historical cost.

A

FAIR VALUE: Value in open market - more accurate

HISTORICAL COST: original cost MINUS depreciation - easier to calculate

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8
Q

Contrast principle-based vs rule-based.

A

PRINCIPLE-BASED: accounting approach requiring interpretation to apply (more flexible)
RULE-BASED: specific guidance (easier, but less flexible)

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9
Q

What is Solvency 2?

A

It is a principle-based insurance regulatory system TO DETERMINE the required capital levels of insurance companies IN the European Union.

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10
Q

What are the 3 pillars of Solvency 2?

A

1) quantitative
2) governance
3) transparency

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11
Q

Describe the QUANTITATIVE pillar of Solvency 2. (3)

A

Sets the SCR (Solvency Capital Requirement) and the MCR (Minimal Capital Requirement):

  • uses total balance sheet approach
  • SCR is defined as 99.5% VaR meaning that the probability of ruin is <0.5%
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12
Q

Describe the GOVERNANCE pillar of Solvency 2. (4)

A
  • supervisory activities
  • requires adequate governance for the functions of internal auditing, actuarial, risk management and compliance
  • supervisor identifies high risk companies and may intervene
  • note that companies are required to perform ORSA
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13
Q

Describe the TRANSPARENCY pillar of Solvency 2. (3)

A
  • supervisor 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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14
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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15
Q

Quantitative pillar: method for calculating SCR.

A

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)

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16
Q

Governance pillar: Identify CONDITIONS that must be addressed. (3)

A
  • fitness & propriety
  • outsourcing
  • internal control
17
Q

Governance pillar: Identify FUNCTIONS that must be addressed. (4)

A
  • internal audit (annual report to BoD on deficiencies)
  • actuarial (reasonability of methods & assumptions)
  • risk management (monitor)
  • compliance (with law)
18
Q

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

A

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, maintains the Walls at the statutory legal entity level
- capital cannot be shared between legal entities