QA Bank Part 8 Flashcards

1
Q

Define provisions

A

Provisions are
… the calculated AMOUNTS
… that need to be SET ASIDE
… to meet a provider’s future LIABILITIES.

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2
Q

10 Reasons for calculating provisions

A
  • to determine the liabilities to be shown in the provider’s published accounts and reports
  • if separate accounts and reports have to be prepared for the purpose of supervision of solvency, to determine the liabilities to be shown in those accounts.
  • to determine the liabilities to be shown in internal management accounts and reports of the provider
  • to value the provider for merger or acquisition
  • to determine the excess of assets over liabilities and whether any discretionary benefits can be awarded
  • to set future contributions to a benefits scheme
  • to calculate discontinuance / surrender benefits
  • to influence investment strategy
  • to value benefit improvements for a benefits scheme
  • to provide disclosure information for beneficiaries.
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3
Q

7 Factors that will influence the choice of valuation method and assumptions when determining the value of an insurer’s liabilities

A

Factors include:
A - any legislation or ACCOUNTING principles that may apply
- whether the valuation assumes a going concern or a break-up BASIS
D - the quality and quantity of the DATA used
O - whether guarantees or OPTIONS are being valued
P - the PURPOSE of the valuation (supervisory provisions, internal accounts, published accounts)
T - the TYPE of business being considered and its risk characteristics
S - the size of the SOLVENCY capital

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4
Q

7 Reasons why a general insurance company may make a loss while writing profitable business

A

C - deterioration in CLAIMS experience of previous years’ business
R - REINSURER default / failure
A - ASSET values fall
P - PROVISIONS too cautious

F - FRAUD
F - regulatory FINES
L - change in LEGISLATION or TAX

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5
Q

6 Sources of surplus / deficit in GENERAL INSURANCE:

A
  • divergence from valuation assumptions
  • change in valuation method
  • change in valuation basis
  • policy changes
  • changes in legislation
  • surplus carried forward from previous valuation
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6
Q

Sources of surplus / deficit in GENERAL INSURANCE include divergence from valuation assumptions of…. (12)

A
  • claim RATES
  • claim AMOUNTS
  • claim INFLATION
  • INVESTMENT return

C - COMMISSION
L - LAPSE rates
E - EXPENSES && expense INFLATION
V - VOLUMES of business && MIX of business
E - ENDORSEMENTS
R - proportion of policyholders who RENEW

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7
Q

6 KEY sources of surplus / deficit expected from LIFE INSURER

A

Key source include divergence from valuation assumptions of:

  • investment return
  • mortality
  • expenses including commission
  • withdrawal rate
  • new business volumes and mix
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8
Q

A provider will want to analyse the surplus arising over a time period, in order to:

A
  • show the financial effect of divergences between the valuation assumptions and the actual experience, exposing the assumptions that are the most financially significant.
  • show the financial effect of writing new business
  • validate the calculations and assumptions used
  • provide a check on the valuation data and process, if carried out independently
  • identify non-recurring components of surplus, thus enabling appropriate decisions to be made about the distribution of surplus
  • reconcile the values for successive years
  • provide management information
  • provide data for use in executive remuneration schemes
  • provide detailed information for publication in the provider’s accounts
  • demonstrate that the variance in the financial effect of the individual levers is a complete description of the variance in the total financial effect.
  • give information on trends in the experience of the provider to feed back into the actuarial control cycle.
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9
Q

Principles underlying pension benefit projections

A
  • show the likely level of pension benefits that could be provided
  • show the likely level of the fund at retirement
  • show the return the individual is likely to obtain on contributions
  • show the effect of charges on the likely return
  • take account of individual circumstances
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10
Q

Individual circumstances to account for in pension projections (5)

A
  • age
  • gender
  • marital status
  • level of earnings and contributions
  • expected retirement age
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11
Q

Pension projections should aim to… (4)

A
  • be simple to understand
  • be transparent
  • enable comparisons to be made by the member between providers
  • not be misleading
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12
Q

The risk of insolvency can be reduced by implementing systems that … (3)

A
  • maximise the value of assets
  • minimise the value of liabilities
  • give stability to the relative value of assets to liabilities
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13
Q

How would we increase the value of assets to ensure solvency? (3)

A
  • choosing an optimal investment strategy that maximises return, subject to an acceptable degree of risk.
  • holding assets that have maximum value in the solvency test, (eg only assets that are admissible)
  • raising fresh capital (eg through a rights issue or a capital injection from a parent company)
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14
Q

How would we reduce the value of liabilities to ensure solvency? (3)

A

The insurer will want to look at its exposure to unusual and significant claim events that could jeopardise its solvency.

IT might:

  • write less classes where experience is very uncertain and hence particularly conservative reserves have to be held
  • restrict exposure to certain perils, through exclusions or upper limits on payouts
  • purchase appropriate types and levels of reinsurance cover, eg excess of loss.
  • use a weaker basis for valuing liabilities
  • tighter operational risk management
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15
Q

How could the value of liabilities be reduced through tighter operational risk management? (3)

A

More stringent:

  • underwriting
  • expense control
  • fraud management
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16
Q

Possible restrictions of the option at retirement to commute pension for a lump sum payment

A
  • A maximum amount that can be commuted (ensuring members have sufficient pension to live on)
  • minimum amount that can be commuted (to justify administration costs)
  • ring-fencing of any dependants’ pensions, so members can only commute their own benefit
  • option is unavailable or special terms apply where the member has taken ill-health or early retirement
  • if the scheme is concerned about selection risk, then some limited medical underwriting could be carried out on exercise
  • exercise of the option is at the discretion of the employer and/or trustees
  • option is irreversible once exercised
17
Q

Describe the role of the regulator in protecting policyholders from insurance company insolvency

A
  • Insurance companies are normally subject to a requirement by the regulator to maintain a specified level of solvency capital
  • regular reporting requirements, that enable the regulator to monitor the financial position of companies
  • If an insurance company’s position is serious, then the regulator may require it to close to new business
  • In less serious cases, the insurance company may be required to establish a recovery plan, and for this to be monitored closely by the regulator
  • In the extreme, there may be a statutory scheme set up from which some or all of the benefit payments are paid.
18
Q

List sources of surplus / deficit in the valuation of a final salary pension scheme

A
  • divergence from the valuation assumptions
  • difference in contributions paid vs those expected
  • a change of valuation method
  • a change of valuation basis
  • benefit changes
  • changes in legislation, eg taxation changes
  • difference in the number of new entrants vs those expected
  • surplus carried forward from a previous valuation
19
Q

Sources of surplus / deficit include divergence from valuation assumptions of:

A
  • investment returns
  • general salary increases
  • promotional salary increases
  • RPI
  • pension increases
  • ill-health retirement rates
  • pre-retirement mortality rates
  • post-retirement mortality rates
  • mortality rates of dependants
  • withdrawal rates
  • early / late retirement rates
  • amounts commuted
  • expenses
  • expense inflation
  • marital statistics experience
20
Q

List the parties to consider in a life insurer (proprietary)

A
  • shareholders
  • with-profit policyholders
  • without-profit policyholders
  • potential policyholders and brokers
  • board of directors
  • competitors
  • regulators
  • reinsurers
  • creditors of the company
  • marketing
  • administrators / IT