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SA2 > Pillar 1 Revision > Flashcards

Pillar 1 Revision Flashcards

1
Q

What makes up Peak 1 assets and liabilities?

A 
Admissible Assets
Reg Liabs (math res)
LTICR
RCR
WPICC
Free surplus
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2
Q

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 
a = bid value
b = face value
c = valuer
d = straight line depreciation
e = face value
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3
Q

What assets have no limits under peak 1, what assets are restricted in terms of maximum exposure and how?

A
  1. Govt/local authority assets = no limit

2. Others = max exposure limit, percentage of math res + cap req

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4
Q

Where are the peak 1 asset valuation rules?

A

Prudential sourcebooks

Genpru 1.3

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5
Q

What are the peak 2 liabilities and assets made of?

A

Realistic assets
Realistic liabilities
RCM
Free surplus

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6
Q

How are the peak 2 realistic assets different from peak 1?

A
  1. Admissible assets back WP business not NP in WP
  2. PVFP form NP biz in wp fund
  3. Assets above peak 1 exposure limits
  4. MV of inadmissible derivatives
  5. support assets held outside wp fund mainly for wp support
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7
Q

What is important about the assets held to back the capital requirements?

A

There are different tiers of assets with limits that should be held for capital requirement

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8
Q

How are the SII assets and liabilities split?

A

Assets:
Tier 1, 2, 3 (backing the SCR/MCR and free capital)
Ineligible capital

Liabs:
BEL
Risk margin
MCR
SCR
Free capital
Other liabs
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9
Q

What are the SII technical provisions made of?

A

BEL + Risk margin

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10
Q

How are assets valued under SII?

A

MV
if no MV then marked to model as long as market consistent
Recoveries from insurer adjusted for reinsurer default are on assets too

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11
Q

Why is the MV asset valuation under SII quite an impact?

A

Much of europe used BV

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12
Q

How does BV differ from MV?

A 
BV = price paid when bought
MV = price that could be sold for now
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13
Q

What are the requirements for mathematical reserves under peak 1?

A
  1. Prudent assumptions with MAD’s
  2. Prospective valuation
  3. Reserve>Gteed SV (if has one)
  4. Reserve can be t exceed 97.5% of risk adjusted yield on backing assets
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14
Q

What are the peak 1 exemptions for a realistic firm in terms of valuations of liabs?

A
  1. Take account of gross premiums received
  2. Only guaranteed benefits valued (no future bonus)
  3. No RCR
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15
Q

What are the peak 2 reserve requirements?

A
  1. MC valuation (stochastic techniques)
  2. Economic assumps = MC
  3. Non-economic assumps = BE
  4. Made of WPBR+FPRL+Current liabs
  5. Management actions allowable if PPFM consistent
  6. P/h actions allowed
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16
Q

What dynamic management/policyholder actions are there?

A
  1. Dynamic EBR and asset mix
  2. Dynamic RB’s/TB’s
  3. Withdrawals when guarantees go ITM/OTM
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17
Q

What is the Pillar 1 Peak 1 MCR/ECR/CRR

A 
MCR = LTICR+RCR (or BCRR < 3.7m euro)
ECR = LTICR+WPICC
CRR = max(MCR, ECR)
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18
Q

What is the Pillar 2 Peak 2 capital requirement?

A

RCM

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19
Q

How would you summarise a capital requirement in one sentence?

A

Amount of money needed above the mathematical reserve to cover unknown future risks and maintain solvency

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20
Q

What is the ICA capital requirement? What is it after it is reviewed by PRA?

A
  1. 99.5% 1 year survival probability, where 1 year NB allowed for and closure to NB
  2. ICG is cap req after PRA check it if don’t accept it
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21
Q

What event is a 99.5th percentile scenario equal to?

A

1 in 200 year event

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22
Q

How is LTICR defined?

A
  1. Fixed percentage factors x measures of capital at risk
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23
Q

How is the RCR defined?

A
  1. Only for reg. basis firms

2. Prescribed shocks to equity/property/fixed interest yields to give market risk capital requirement

24
Q

What are the RCM stresses?

A
  1. Fall/rise of:
    a) Equity
    b) Property
    c) Fixed interest yields
    d) Lapses
  2. Credit spread widening on FI securities
  3. Allowance for impact of credit risk on reinsurance exposures
25
Q

What are the capital tiers under Pillar 1, why do we have them?

A
  1. Core/Other Tier 1, Upper Tier 2, Lower Tier 2 (in order of quality)
  2. Reduces risk of firms not being able to maintain solvency in adverse scenarios
26
Q

List 4 exclusions to admissible assets

A
  1. Assets that can’t easily be valued
  2. Assets whose realisability is not sufficient
  3. Assets that give unacceptable custody risk
  4. Assets that could give rise to large liabilities
27
Q

Give 5 examples of admissible assets

A
  1. Loans
  2. Tangible fixed assets
  3. Cash at bank and deposits
  4. Property (land and buildings)
  5. Shares
28
Q

Give the 4 risks that are covered in Pillar 1?

A

Market
interest rate
credit (including reinsurance exposure)
persistency

29
Q

On top of the 4 pillar 1 risks, what 7 risks are covered in ICA?

A 
ops
mort
morb
expense
pens scheme
liquidity
group
30
Q

Explain the valuation of assets and liabs in ICA

A 
Mostly peak 2
A = economic value (mark to market) with no admissibility
L = 
credit for PVFP of all business
MC techniques
Stochastic likely
31
Q

Explain ICA methodolody in 10 points?

A
  1. 99.5th percentile 1 year survival probability
  2. might have different prob for longer timeframe
  3. individual 1 in 200 year stresses
  4. allow for NB or closure to NB
  5. use correlation matrix for diversification benefit
  6. 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
  7. model must produce accurate behaviour in tail
  8. Real world asset model, arb free
  9. ICG may change the ICA cap req
32
Q

what business decisions should ICA be used in

A 
pricing
products
investment strategy
m and a
financial reporting
33
Q

what do the 3 core pillar 2 rules from inspru cover?

A

methodology
documentation
99.5th % 1 year survival prob or longer term equiv

34
Q

what assumptions etc. need to be derived?

A 
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
35
Q

how do you find peak 1 discount rate?

A 
expected return on backing assets
adjust for bonus payents
reduce for tax
make sure below pra max
lower = prudent
36
Q

how do you find peak 2 discount rate

A 
market consistent
risk-free
based on market yield curve
independent of backing assets
no prudence
37
Q

what is max difference in inflation and discount/unit growth?

A

2%

38
Q

if expenses are in gpv/npv what assumptions should you make?

A 
gpb = explicit for maintenance/termination including inflation
npv = margin between office and net premium to be sufficient for ongoing expenses including inflation
39
Q

what will tax assumption depend on?

A

blagab - adjust discountunit growth and expenses

oltb - (no assumption for individual)

40
Q

how to allow for adverse experience in mort/int rate/expenses/until linked investment and inflation

A

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

41
Q

6 types of global reserve

A 
AIDS
reinsurer credit defaul
3. tax on unrealised gains
4. cashflow mismatch
5. data errors
6. future nb expenses
42
Q

what can company do with free surplus in long term fund?

A
  1. transfer out to shareholders for dividends
  2. must show in form 58
  3. if with profits limit on amount can distribut vs. the previous year
  4. if more than 0.5% change then PRA informed and make public
43
Q

when would prospective wpbr be allowed?

A
  1. if bonus not directly determined by asset share e.g. wol
  2. if as only for specimin pols, not total as
  3. must account for all guaranteed ben
  4. must account for meeting TCF
  5. all material cashflows must be included till time T
44
Q

What are main iterms in FPRL?

A 
cost of gtees/fin options/smoothing/planned future enhancements to AS
misselling compensation
future tax on unrealised gains
provisions for sht
realistic current liabs
45
Q

3 ways of calculating reserves

A
  1. mc stochastic
  2. market cost of hedging
  3. deterministic projection with appropriate probs
46
Q

if closed to NB, what would be special about WC, RCM and future enhancements?

A

WC=RCM=0

future enhancements to contain the wc as all estate wil be distributed

47
Q

what is peak 2 wc

A

realistic (assets-liabs) not including rcm

48
Q

explain peak 2 stochastic asset model

A

1 mc

  1. based on market price of over the counter options
  2. series of yield curves produced
49
Q

what non-contracted commitments would you include in reserves for peak 2 at least

A
  1. include non-contracted commitments from tcf like mortgage endowment promises and non-operation of mvr
50
Q

if firm has <500m wp liabs, what is allowed in peak 1 valuation?

A
  1. discontinuarnce if gpv, even if reduces reserve

2. if no gteed sv may have negatvie reserve

51
Q

4 reserves for group life

A

unexpired prem
ibnr
deficiency
experience refund

52
Q

for minor classes of business how do u reserve

A

approx methodology e.g. multiple of premium

53
Q

how to treat a) optional retirement date and b) gao in terms of reserves

A

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

54
Q

how would an option be priced?

A

value of market option closest to it and adjust for differences

55
Q

explain how to value a unit linked contract?

A
  1. unit and non-unit res valued separately
  2. unit res must be matched as close as poss
  3. allow for actuarial funding
  4. non-unit res has discontinuities e.g. amc related to investment return
  5. use discounted cashflows for non-unit
  6. no grouping
  7. negative non-unit reserve allowed individually but not in total
  8. discontinuities allowed even if lower reserves

SA2 (23 decks)

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