Prudential Standard FSI 4.1 (Market Risk Capital Requirement) Flashcards

1
Q

Prudential Standard FSI 4.1 sets out …

A

the details for calculating the market risk capital requirement for insurers using the Standardised Formula to calculate the Solvency Capital Requirement (SCR).

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2
Q

Who is ultimately responsible for the prudent management of the financial soundness of an insurer?

A

Board of directors,
who need to ensure that the insurer has systems and controls in place to adequately calculate its market risk capital requirement according to the Financial Soundness Standards for Insurers.

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3
Q

Who is ultimately responsible for the prudent management of the financial soundness of an insurer?

A

Board of directors,
who need to ensure that the insurer has systems and controls in place to adequately calculate its market risk capital requirement according to the Financial Soundness Standards for Insurers.

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4
Q

To whom does Prudential Standard FSI 4.1 apply?

A

All insurers (life insurers, non-life insurers, reinsurers) licenced under the Insurance Act (2016),

other than microinsurers, Lloyd’s and branches of foreign reinsurers.

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5
Q

Define market risk

A

The risk of loss arising from movements in market prices on the value of an insurer’s assets and liabilities or of loss arising from the default of the insurer’s counterparties.

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6
Q

How is exposure to market risk measured?

A

By the impact of movements in financial variables such as stock prices, interest rates, real estate prices and exchange rates.

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7
Q

How is exposure to market risk measured?

A

By the impact of movements in financial variables such as stock prices, interest rates, real estate prices and exchange rates.

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8
Q

What should be included in the calculation of interest rate risk capital requirement?

A

All assets and liabilities that are sensitive to changes in the yield curve.

  • fixed-income securities
  • financing instruments
  • policy loans
  • interest rate derivatives
  • other items included in the valuation of technical provisions
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9
Q

Capital requirement for:

the nominal interest rate CURVE risk

A

The capital requirement for the nominal interest rate curve risk captures the risk arising from changes in the nominal yield curve.

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10
Q

Upwards nominal shock

A

An instantaneous increase in the nominal interest rate term structure used to value nominal interest rate sensitive items.

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11
Q

Downwards nominal shock

A

An instantaneous decrease in the nominal interest rate term structure used to value nominal interest rate sensitive items.

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12
Q

Capital requirement for:

the real interest rate CURVE risk

A

Captures the risk arising from changes in the real yield curve.

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13
Q

Upwards real shock

A

An instantaneous increase in the real interest rate term structure used to value real interest rate sensitive items.

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14
Q

Downwards real shock

A

An instantaneous decrease in the real interest rate term structure used to value real interest rate sensitive items.

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15
Q

Interest rate volatility risk

A

Arises when the market value of assets and liabilities are sensitive to changes in the expected future volatility of market yield curves.

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16
Q

Equity risk

A

Arises when the market value of assets and liabilities are sensitive to changes in the market prices for equities or their volatilities.

17
Q

3 categories into which equities must be split when determining the capital requirement for equity price risk

A

GLOBAL EQUITY
Covering equities listed in regulated markets in the countries which are members of the European Economic Area (EEA) or the Organisation for Economic Co-operation and Development (OECD)

SA EQUITY
Covering equities listed on the JSE

OTHER EQUITY
Covering all other equities not included in the Global and SA categories, including equities listed in emerging markets, unlisted equity, hedge funds and other investments with equity risk exposure.

18
Q

Equity volatility risk

A

Relates to the sensitivities of the market value of assets and liabilities to changes in the expected future volatility of equities.

19
Q

Property risk

A

Arises when the market value of assets and liabilities are sensitive to changes in the level of market prices of property.

20
Q

Assets & Liabilities that should be included in the calculation of the property risk capital requirement (2)

A

a) Land, buildings and immovable-property rights

b) Property investment for the own use of the insurer.

21
Q

Currency risk

A

Arises when the market value of assets and liabilities are sensitive to changes in currency exchange rates.

22
Q

Spread risk

A

Arises when the market value of assets and liabilities are sensitive to changes in credit spreads over the risk-free interest rate term structure.

23
Q

Default risk

A

Default risk arises from potential losses due to credit default events, such as the default of the counterparty or issuer of a financial instrument held by an insurer.

24
Q

9.2. on asset sets covered by default risk and spread risk

A

The two credit risk components (ie spread risk and default risk) should cover mutually exclusive sets of assets.

I.e. assets that are included in the calculation of the spread risk capital requirement should be excluded from the default risk capital requirement, and vice versa.

25
Q

Assets and liabilities that are subject to credit spreads include: (9)

A
  • Government and corporate bonds
  • Subordinated debt instruments
  • All other debt and fixed-income securities, including hybrid debt instruments
  • Asset-backed securities
  • Structured credit products such as collateralised debt obligations
  • Credit derivatives, including credit default swaps, total return swaps, and credit-linked notes
  • Participating interests
  • Loans
  • Participation in investment pools
26
Q

Type 1 exposures

A

Exposures where the counterparty or issuer of the instrument may be rated, and consist of exposures in relation to:

a) Deposits with ceding institutions, if the number of independent counterparties does not exceed 15;
b) Capital, initial funds, letters of credit as well as any other commitments received by the insurer which have been called up but are unpaid, if the number of independent counterparties does not exceed 15;
c) Guarantees, letters of credit, letters of comfort which the insurer has provided, as well as any other commitments which the insurer has provided and which depend on the credit standing of the counterparty;
d) Recoverables from eligible risk mitigation instruments; and
e) Assets not captured elsewhere in the calculation of the market risk capital requirement.

27
Q

Type 2 exposures

A

Cover exposures where the counterparty or issuer of the instrument is likely to be unrated, and consist of exposures in relation to:

a) Receivables from intermediaries;
b) Policyholder debtors, including mortgage loans;
c) Deposits with ceding institutions, if the number of independent counterparties exceeds 15; and
d) Capital, initial funds, letters of credit as well as any other commitments received by the insurer which have been called up but are unpaid, if the number of independent counterparties exceeds 15

28
Q

Type 3 exposures

A

Cash held at banking institutions

29
Q

Concentration risk

A

Refers to the risk of potential losses on investments over and above the systematic risks arising from the portfolio of investments when the portfolio of investments is not sufficiently diversified.

30
Q

Scope of concentration risk

A

For the purposes of this Standard, the scope of concentration risk is restricted to the risk related to the accumulation of exposures with the same counterparty, or group of related counterparties (i.e. exposures related to the same corporate group).

The scope does not include other types of concentrations such as geographic or industry concentrations.

31
Q

3 Steps for the calculation of the concentration risk capital requirement

A

a) Calculation of excess exposures per counterparty
b) Determination of concentration risk capital requirements per counterparty
c) Aggregation of concentration risk capital requirements across all counterparties.

32
Q

Illiquidity premium risk

A

Refers to the risk of a change in Basic Own Funds resulting from a decrease in the illiquidity premium used in the valuation of technical provisions.