Pillar 1 Revision Flashcards
What makes up Peak 1 assets and liabilities?
Admissible Assets Reg Liabs (math res) LTICR RCR WPICC Free surplus
How do you value, under peak 1:
a) quoted investments
b) loans if all recoverable
c) property
d) tangible fixed assets
e) cash and bank deposits
a = bid value b = face value c = valuer d = straight line depreciation e = face value
What assets have no limits under peak 1, what assets are restricted in terms of maximum exposure and how?
- Govt/local authority assets = no limit
2. Others = max exposure limit, percentage of math res + cap req
Where are the peak 1 asset valuation rules?
Prudential sourcebooks
Genpru 1.3
What are the peak 2 liabilities and assets made of?
Realistic assets
Realistic liabilities
RCM
Free surplus
How are the peak 2 realistic assets different from peak 1?
- Admissible assets back WP business not NP in WP
- PVFP form NP biz in wp fund
- Assets above peak 1 exposure limits
- MV of inadmissible derivatives
- support assets held outside wp fund mainly for wp support
What is important about the assets held to back the capital requirements?
There are different tiers of assets with limits that should be held for capital requirement
How are the SII assets and liabilities split?
Assets:
Tier 1, 2, 3 (backing the SCR/MCR and free capital)
Ineligible capital
Liabs: BEL Risk margin MCR SCR Free capital Other liabs
What are the SII technical provisions made of?
BEL + Risk margin
How are assets valued under SII?
MV
if no MV then marked to model as long as market consistent
Recoveries from insurer adjusted for reinsurer default are on assets too
Why is the MV asset valuation under SII quite an impact?
Much of europe used BV
How does BV differ from MV?
BV = price paid when bought MV = price that could be sold for now
What are the requirements for mathematical reserves under peak 1?
- Prudent assumptions with MAD’s
- Prospective valuation
- Reserve>Gteed SV (if has one)
- Reserve can be t exceed 97.5% of risk adjusted yield on backing assets
What are the peak 1 exemptions for a realistic firm in terms of valuations of liabs?
- Take account of gross premiums received
- Only guaranteed benefits valued (no future bonus)
- No RCR
What are the peak 2 reserve requirements?
- MC valuation (stochastic techniques)
- Economic assumps = MC
- Non-economic assumps = BE
- Made of WPBR+FPRL+Current liabs
- Management actions allowable if PPFM consistent
- P/h actions allowed
What dynamic management/policyholder actions are there?
- Dynamic EBR and asset mix
- Dynamic RB’s/TB’s
- Withdrawals when guarantees go ITM/OTM
What is the Pillar 1 Peak 1 MCR/ECR/CRR
MCR = LTICR+RCR (or BCRR < 3.7m euro) ECR = LTICR+WPICC CRR = max(MCR, ECR)
What is the Pillar 2 Peak 2 capital requirement?
RCM
How would you summarise a capital requirement in one sentence?
Amount of money needed above the mathematical reserve to cover unknown future risks and maintain solvency
What is the ICA capital requirement? What is it after it is reviewed by PRA?
- 99.5% 1 year survival probability, where 1 year NB allowed for and closure to NB
- ICG is cap req after PRA check it if don’t accept it
What event is a 99.5th percentile scenario equal to?
1 in 200 year event
How is LTICR defined?
- Fixed percentage factors x measures of capital at risk
How is the RCR defined?
- Only for reg. basis firms
2. Prescribed shocks to equity/property/fixed interest yields to give market risk capital requirement
What are the RCM stresses?
- Fall/rise of:
a) Equity
b) Property
c) Fixed interest yields
d) Lapses - Credit spread widening on FI securities
- Allowance for impact of credit risk on reinsurance exposures
What are the capital tiers under Pillar 1, why do we have them?
- Core/Other Tier 1, Upper Tier 2, Lower Tier 2 (in order of quality)
- Reduces risk of firms not being able to maintain solvency in adverse scenarios
List 4 exclusions to admissible assets
- Assets that can’t easily be valued
- Assets whose realisability is not sufficient
- Assets that give unacceptable custody risk
- Assets that could give rise to large liabilities
Give 5 examples of admissible assets
- Loans
- Tangible fixed assets
- Cash at bank and deposits
- Property (land and buildings)
- Shares
Give the 4 risks that are covered in Pillar 1?
Market
interest rate
credit (including reinsurance exposure)
persistency
On top of the 4 pillar 1 risks, what 7 risks are covered in ICA?
ops mort morb expense pens scheme liquidity group
Explain the valuation of assets and liabs in ICA
Mostly peak 2 A = economic value (mark to market) with no admissibility L = credit for PVFP of all business MC techniques Stochastic likely
Explain ICA methodolody in 10 points?
- 99.5th percentile 1 year survival probability
- might have different prob for longer timeframe
- individual 1 in 200 year stresses
- allow for NB or closure to NB
- use correlation matrix for diversification benefit
- allow for non-lin/separability
7 which is where 1 x 1 in 200 year event using all risks gives higher than the diversified requirement of multiple 1 in 200 year event - model must produce accurate behaviour in tail
- Real world asset model, arb free
- ICG may change the ICA cap req
what business decisions should ICA be used in
pricing products investment strategy m and a financial reporting
what do the 3 core pillar 2 rules from inspru cover?
methodology
documentation
99.5th % 1 year survival prob or longer term equiv
what assumptions etc. need to be derived?
mortality morbidity withdrawals disc rate unit growth rate inflation expenses tax variations in experience global reserves ability to vary amc's and other charges in ul waiver of premiums
how do you find peak 1 discount rate?
expected return on backing assets adjust for bonus payents reduce for tax make sure below pra max lower = prudent
how do you find peak 2 discount rate
market consistent risk-free based on market yield curve independent of backing assets no prudence
what is max difference in inflation and discount/unit growth?
2%
if expenses are in gpv/npv what assumptions should you make?
gpb = explicit for maintenance/termination including inflation npv = margin between office and net premium to be sufficient for ongoing expenses including inflation
what will tax assumption depend on?
blagab - adjust discountunit growth and expenses
oltb - (no assumption for individual)
how to allow for adverse experience in mort/int rate/expenses/until linked investment and inflation
mort and int rate = margins
expenses = margins in expliscity assumps and inflation
ul inflation and investment = high infl high int rate or low inflation low int rate
6 types of global reserve
AIDS reinsurer credit defaul 3. tax on unrealised gains 4. cashflow mismatch 5. data errors 6. future nb expenses
what can company do with free surplus in long term fund?
- transfer out to shareholders for dividends
- must show in form 58
- if with profits limit on amount can distribut vs. the previous year
- if more than 0.5% change then PRA informed and make public
when would prospective wpbr be allowed?
- if bonus not directly determined by asset share e.g. wol
- if as only for specimin pols, not total as
- must account for all guaranteed ben
- must account for meeting TCF
- all material cashflows must be included till time T
What are main iterms in FPRL?
cost of gtees/fin options/smoothing/planned future enhancements to AS misselling compensation future tax on unrealised gains provisions for sht realistic current liabs
3 ways of calculating reserves
- mc stochastic
- market cost of hedging
- deterministic projection with appropriate probs
if closed to NB, what would be special about WC, RCM and future enhancements?
WC=RCM=0
future enhancements to contain the wc as all estate wil be distributed
what is peak 2 wc
realistic (assets-liabs) not including rcm
explain peak 2 stochastic asset model
1 mc
- based on market price of over the counter options
- series of yield curves produced
what non-contracted commitments would you include in reserves for peak 2 at least
- include non-contracted commitments from tcf like mortgage endowment promises and non-operation of mvr
if firm has <500m wp liabs, what is allowed in peak 1 valuation?
- discontinuarnce if gpv, even if reduces reserve
2. if no gteed sv may have negatvie reserve
4 reserves for group life
unexpired prem
ibnr
deficiency
experience refund
for minor classes of business how do u reserve
approx methodology e.g. multiple of premium
how to treat a) optional retirement date and b) gao in terms of reserves
a. highest reserve date
b. allow for higher reserve of cash or annuity but can allow for take up rates being not the worst to company e.g. tax free cash
how would an option be priced?
value of market option closest to it and adjust for differences
explain how to value a unit linked contract?
- unit and non-unit res valued separately
- unit res must be matched as close as poss
- allow for actuarial funding
- non-unit res has discontinuities e.g. amc related to investment return
- use discounted cashflows for non-unit
- no grouping
- negative non-unit reserve allowed individually but not in total
- discontinuities allowed even if lower reserves
