Other Flashcards
Nature of business
Investment income/ premiums (or claims)
Real LT assets/ total assets
Claim settlement pattern
Time to settlement = 1/(Claims paid / OS and future claims reserve)
Financial strength
Solvency margin = Asset/ liabilities
Profitability and performance
- Gross and net claim ratio
- Expense and commission ratio
- Investment performance = investment income/ assets
- Return on capital = Post-tax profit/ free reserves at start of year (=total end of year reserves – post-tax profit)
- Profit margin = profit (gross/net) / net earned premium
Investment income/ premiums (or claims)
High = class with long term claims (eg liability claims)
Real LT assets/ total assets
High – implies large proportion of liabilities are LT and real
Reinsurance
Large diff between reins ceded based on premium and based on claim indicates good/poor value or more/less claims than average Proportion reinsured = high = new/unusual/volatile class of business
Solvency margin = Asset/ liabilities
- Need to compare to regulatory minimum and that of competitors
- High risk business (eg liability) = higher than average sol margin
- Look at previous years for trends in ratios
- Consider strength of provisioning basis
Gross and net claim ratio
- Longer tail business may be higher, as insurer can expect sufficient investment income to offset losses due to claims
- High ratios may also be due to one-event or market may be at the bottom of the UW cycle
Expense and commission ratio
Consider level of NB – if this is volatile than pattern of premiums, claims and expenses will be distorted
Investment performance = investment income/ assets
- Consider if realised/ unrealised gains are included in income figure (and therefore in profit and loss account)
- Ideally take average of start of year and end of year asset value figure
Ret on capital/ prof margin
Consider trends, unusual events, strength of basis and competitors
Commercial and economic environment
- Consider data – new product/business = lack data = may need to source externally
- Consider typical exclusions to include in policy
Specify problem
• State likely objectives (profit/ market share within given time frame
• Main risks relate to claims – understand likely sources and freq/severity
o Give examples of claim events
• Determine rates appropriate for each policy as likely to pose different levels of risk
Developing solution
- Model – build new, adapt existing, purchase externally
- Reflect features of particular risks
- Consider reserving basis
- Set assumptions relating to key areas of experience (claim freq/severity)
- Sensitivity test/ scenario analysis (esp for new product)
- Compare premium rates to competitors
Monitor experience
- Assess claims and compare with assumptions
- Need to understand why experience differs from experience, update assumptions if need be
- Monitor sales volumes
- Monitor external factors, eg if competitors change rates insurer may have to follow suit
- Monitor whether sufficient profit can be made from product while remaining competitive, may need to leave market
Professionalism
• In developing and managing the product there will be a requirement to act in a professional manner
o Adhere to technical and professional standards
Economic Capital Benefits
- Consistent with the regulatory regime targets
- Avoids risk from firms holding inadequate provisions without introducing inefficiencies from unduly higher provisions
- Hold capital appropriate to inherent risks
- Promote confidence in the markets if analysts believe that companies are holding suitable capital for the risks they hold
- Easy to explain to management to ensure better risk management.
- Avoids the risk that firms “game” the regulatory systems
- Consistency with overseas providers
- Avoids undue strength of provisions which would result in higher cost of such financial products
- Avoids inadequate provisions which would result in company failures
Standard model benefits - Insurer
- Cost effective
- Less complex
- Less time consuming to build/use
Standard model drawbacks - Insurer
- Only aims to capture risk profile of average insurer – May not be appropriate for particular insurer
- Approximations mad in modelling risks that may be inappropriate
- Regulator may build in level of prudence
- Risk of applying standard model blindly, rather than focusing on the unique risks faced and how best to manage such risks
Internal model benefits – Insurer
- Allows insurer to calculate SCR using a model that reflects its specific risk profile
- Should be more sophisticated – SCR and economic capital more closely aligned which avoids unnecessary prudence
- May be able to choose between two – can choose that which results in lower capital requirements
Internal model drawbacks - Insurer
- Need to seek approval from regulator
* Costly to develop/maintain
Standard model– regulator
- Enables regulator to compare results for wide range of insurers
- Easier to decide which companies to scrutinise further
- Need to define model and ensure it is appropriate for the range of insurers being regulated
- May not provide sufficient info for regulator to understand what action to take
Internal model – regulator
- Have to approve models before they can be used – time/effort
- Ensure insurers keep models up to date as risk profile of insurer will change over time
- Regulator responsible for maintaining confidence in financial system and protecting customers, so whichever model is used the regulator needs to ensure these objectives are met, both initially and over time
Investment Winding up practical issues
- Aim to reduce risk of funding level deteriorating – most likely to happen if there is investment mismatching
- Solution – if annuities are to be purchased then bonds could be used to match annuity prices
- This won’t be exact though, so need to progress windup as quickly as possible
Data Winding up practical issues
- Gather and check scheme membership data to ensure data is complete and accurate so that correct benefits are provided
- Take appropriate action if not = increases time/cost of wind up
Communication Winding up practical issues
- Communicate to members that scheme is winding up and how they will be affected
- Members need to be given opportunity to ask any questions they have about how the wind up will affect them
