Odomirok - Financial Regulations Flashcards
What are the objectives of SAP and GAAP?
SAP: measure ability to pay claims
GAAP: measurements of earnings
Who are the intended users of SAP and GAAP?
SAP: regulators
GAAP: general audience (policyholders, investors, public)
When are the assets recognized in SAP and GAAP?
SAP: asset recognized when expense incurred
GAAP: may defer recognition of asset for asset/revenue matching with expenses (eg: DPEA)
How do SAP and GAAP treat reinsurance in loss reserves?
SAP: loss reserves NET of reinsurance
GAAP: loss reserves GROSS of reinsurance
Do SAP and GAAP defer income taxes?
SAP: no, they are not deferred
GAAP: yes, they are deferred
Contrast liquidation vs going concern.
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
Contrast fair value vs historical cost.
FAIR VALUE: Value in open market - more accurate
HISTORICAL COST: original cost MINUS depreciation - easier to calculate
Contrast principle-based vs rule-based.
PRINCIPLE-BASED: accounting approach requiring interpretation to apply (more flexible)
RULE-BASED: specific guidance (easier, but less flexible)
What is Solvency 2?
It is a principle-based insurance regulatory system TO DETERMINE the required capital levels of insurance companies IN the European Union.
What are the 3 pillars of Solvency 2?
1) quantitative
2) governance
3) transparency
Describe the QUANTITATIVE pillar of Solvency 2. (3)
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%
Describe the GOVERNANCE pillar of Solvency 2. (4)
- 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
Describe the TRANSPARENCY pillar of Solvency 2. (3)
- 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.
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
Quantitative pillar: 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)