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F103 Own > Quick Ones > Flashcards

Quick Ones Flashcards

1
Q

Commutation factor and the types of reinsurance contracts it applies to:

A

Premium to terminate a reinsurance contract. It covers all existing claims and all future claims in the cover period.
Applicable to all reinsurance contract types.

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2
Q

Stop loss cover

A

Is used to provide cover when there might be accumulations of risk. It is very expensive and it is only sensible for an insurer whose claims outcomes are very uncertain.

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3
Q

Profit margin, solvency margin, return on capital

A

insurance profit / net earned premiums
free reserves / net written premiums
profit after tax / free reserves at start of year

remember that free reserves = 3rd component on the balance sheet ie not assets or liabilities (share capital + share premium + profit and loss account)

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4
Q

when analysing accounts, what to mention about ratios calculated

A

that the ratios are heavily dependent on the valuation basis of the accounts

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5
Q

What does book price mean and how do you use it?

A

The book price is the insurer/reinsurer’s theoretical price. This price is usually used in credibility methods. (1-Z) is the credibility allocated to the book price.
the other rate is usually a IBC rate.

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6
Q

Pricing methods and the main classes of business they are used for:

A
  1. Burn cost (effective and indexed)
  2. Freq*Sev : individually trended losses = commercial business (apply individual programs)
  3. GLMs: classes where there is a lot of competition, and many predictable factors influencing amount of risk = motor and home business (personal + commercial)
  4. OLCs: where there are no limits to the amount of loss the directly insured can suffer = liability classes (casualty insurance) ILFs can be used when there is little to no data.
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7
Q

ALAE

A

Allocated loss adjusted expenses: expenses that can be allocated to a particular loss.
Not a big deal for non liability classes but can be very significant for say liability classes like casualty insurance: court inflation, lawyer costs etc.

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8
Q

The traditional method of calculating the expected cost of claims (9)

A
  1. Collect relevant data, including past exposure data and claims arising from the exposure.
  2. Adjust the data to make it more relevant e.g. if policy conditions have changed.
  3. Group data into risk groups (if there are significant differences between groups).
  4. Select the most appropriate rating model for the specific case.
  5. Analyse the data (e.g. to pick up trends in the ratio of claims to exposure over time).
  6. Set assumptions required by the model or process.
  7. Test the assumptions for goodness of fit or likelihood probability.
  8. Run the model or process to arrive at an estimate of future claims costs.
  9. Perform sensitivity and scenario testing, or apply other methods, to check the
    validity of the estimate.
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9
Q

The difference between an exposure measure and a risk factor:

A

An exposure measure is the basic unit measure that insurers use to measure the amount of risk a risk poses for the cover period.
The risk factor is a factor that is expected (from data and experience) to effect the level of risk that a policy poses.

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10
Q

Investment strategy (risk appetite), what to consider: (4,many)

A
  • Liabilities (nature, term, currency, uncertainty, discounting)
  • Assets (existing portfolio, classes’ returns, free reserves vs liabs, non-investable funds, economic outlook)
  • External (solvency req, regulatory constraints, competition, legal constraints)
  • Internal (company spec objectives)
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11
Q

When asked about scenario testing a practical example:

A

Consider all the assumptions made to the reserve/SCR/premium etc and flex each of the assumptions.

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12
Q

3 key things to decide on when capital modelling

A

to do this 3 things need to be decided before starting:

  1. Risk profile = defined by the risks being modeled and the key outcome that defines success or failure
  2. Risk measure = the link between the outcome and the capital required to achieve that outcome
  3. Risk tolerance = the confidence interval stated in the risk measure
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13
Q

Economic Capital

A

Is the amount of capital the insurer deems is appropriate to hold given its assets, liabilities and its business objectives. It is determined by considering:

  • the risk profile individual assets and liabilities in its portfolio
  • the correlations of risks
  • the level of credit deterioration that it would like to withstand

Also, remember that MVA -MVL = AVAILABLE capital and this amount is compared to economic capital requirement to see how much free capital there is.

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14
Q

Capital modelling: Insurance Risk

A

Model 2 parts: Res Risk + UW Risk

Res risk
- model ult costs of expired business under scenarios and compare with reserves currently held

UW Risk

  • model prms and clms over period (1yr probably) looking forward [clms: att, lar freqsev, cat proprietary, prms mix and volumes]
  • get a dist of underwriting result
  • extract ‘worse case scenario’ or 1 in 200 yr from there and hold that amount of capital
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15
Q

Capital modelling: Market Risk

A

Market risk is a result of the value of assets decreasing relative to value of liabilities due to economic factors such as: interest rates, inflation, exchange rates.
This risk is heavily impacted by how closely an insurer matches its assets with liabilities.
How to model:
- decide how to group assets (equities, bonds etc)
- then apply stresses and calculate the charges over all assets (eg interestrates down by 5%) [difference between normal value and stressed value]
- OR use ESG models to model asset values (NB to calibrate correctly)
[say the val of assets go down from 25m to 22m then the market risk charge is 3m.]

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16
Q

Capital modelling: Credit Risk (1st part)

A

Credit risk is a result of uncertainty around creditors being able to repay monies owed. This can be split into 2: investment credit risk and counter party credit risk.

Modelling investment credit risk:
- take asset proceeds at various times and multiply by prob of default and size of default using credit rating of party involved
- overlay this with a model that predicts party’s credit rating at that time
- to be fancy you can consider the correlations between parties
[get the charge as the sum of all values that you might not receive in a 1 in 200 yr event, given transitions of the parties between credit states]

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17
Q

Capital modelling: Credit Risk (2nd part)

A

Credit risk is a result of uncertainty around creditors being able to repay monies owed. This can be split into 2: investment credit risk and counter party credit risk.

Modelling counterparty risk:

  • centered around reinsurers defaulting
  • model past claims, future claims and CAT scenarios with probabilities of default and sizes of default
  • using credit rating agency matrices
18
Q

Capital modelling: Operational Risk

A

It is the risk that gets modeled last. It would be a charge for all risks not covered else where. Risks due to uncertainty in internal processes, fraud etc.
Use risk registers to calculate a capital charge. Probably quite subjective.

19
Q

Capital modelling: Group risk

A

ERM is best.

20
Q

Heads of Damage

A

Refers to bodily injury (motor third party liability).
It refers to the components that the court awards compensation for separately. 3 components: loss of income, medical costs, compensation for pain and suffering.

21
Q

How to use a stochastic ALM model to model reinsurance and investment strategy together to improve solvency position:

A
  1. Define objectives, period, risk tolerance, risk measure, whether to include new business.
  2. Select model parameters: ie distributions for liabilities (ATT, LAR, CAT), return distributions for assets and correlations, including premium rates, expenses, volumes, taxes.
  3. Project and measure outputs: start with current conditions, work through combinations, and pick optimal one.
  4. Test model output selected: varying input parameters.
22
Q

Professional Indemnity

A

Indemnifies the insured against the legal liability resulting from negligence in the provision of a service

23
Q

Environmental Indemnity

A

Indemnifies the insured against the legal liability to compensate third parties for the for death, personal injury or damage to their property as a result of unintentional pollution for which the insured is deemed responsible

24
Q 
Capital Terms:
Available Capital
Free reserves 
Free Capital
Required capital
Solvency margin
Technical Reserves
A

Available Capital = MVA - MVL
Free reserves = Assets - Liabilities
Free Capital = Available capital - Required Capital
Required capital can be Regulatory capital OR Economic Capital. Solvency measured by comparing Available capital with Required Capital in practice.
Solvency margin = Free reserves
Technical reserves = reserves to meet liabs of existing policyholders (past and future exposure)

25
Q

Key factors to consider when allocating a capital requirement: (5)

A
  1. For what purpose the capital is allocated? (performance measurement, pricing, or business planning)
  2. Decide on desirable properties of results: stability over time, easy to understand.
  3. Practically some methods may be too difficult eg Shapeley method if there are many classes.
  4. There may not be a single method that is suitable for all purposes of allocating capital.
  5. Consider what was done previously.
26
Q

Allocating capital methods (1st):

A

Percentile method: scholastically simulate the capital requirement and pick one simulation. Use its compilation to allocate the capital (ie UW result for each class of business)

27
Q

Allocating capital methods (2nd):

A

Marginal capital method: consider how much additional capital needs to be held as each element is added to the business (heavily dependent on order)

28
Q

Allocating capital methods (3rd):

A

Shapley method: marginal capital method allowing for all combinations of order averaging.

29
Q

Allocating capital methods (4th):

A

Proportion method: allocate economic capital to each class of business in proportion to its contribution to the risk metric on a standalone basis. Ie calc indiv capital requirement and aggregate all and calc proportion. Then cal agg capital requirement allowing for diversification and apply proportions.

30
Q

Factors that effect level of risk and uncertainty (HNN FAV DCCC)

A 
Homogeneity of risks
Non-independence of risks
Number of claims
Fraudulent claims
Accumulations - single event causes many claims
Variability of experience
Delay patterns
Changing risks - changing address etc.
Claim cost
Claim inflation
HNN FAV DCCC
31
Q

Financial (finite risk) reinsurance products

A 
Financial quota share (F)
Industry loss warrant (I)
Spread loss cover (S)
Time and distance policies (T)
FIST
32
Q

Liability insurance products

A 
Motor Third Party Liability (M)
Marine and aviation liability (M)
Directors and Officers liability (D)
Employers' Liability (E)
Environmental liability (E)
Public liability (P)
Product liability (P)
Professional indemnity (P)

MM DEEPPP

33
Q

Property Damage Insurance Products

A 
Land vehicles
Marine and aviation vehicles
Buildings (Commercial and Residential Property)
Construction and engineering
Goods in Transit
Moveable property (contents)
LMB CGM
34
Q

Financial loss insurance products

A

Fidelity guarantee
Creditors insurance (Protection against debtors defaulting)
Credit Insurance (Protection against loss of income)
Business interruption cover
Legal expense cover
FCC BL

35
Q

Reasons for calculating reserves

A

To determine liabilities to be shown in published accounts (P)
Determine reasonableness and adequacy of reserves booked by insurer (A)
To value the company for merger or acquisition (V)
To transfer a book of business (T)
To determine liabilities to be shown in internal management accounts, business plans and budgets (I)
To determine tax liability (T)
To determine liabilities for accounts for supervision of solvency (S)
To negotiate a commutation for the buyer or seller (C)
To test adequacy of case estimates (A)
To assess performance of business and give indication of profitability of written book (P)
Estimate claims cost incurred as intermediate step in rating process (C)
PAV TITS CAP C

36
Q

Assumptions needed for a capital model

A 
RI share of ultimate claims/ RI bad debt
Exhaustion of reinsurance and reinsurer
Downgrade assumptions
Ultimate gross claims
Ceded premiums
Expenses

Dividends
Operational losses
Gross written premium

Catastrophe claims
Reserve movements (gross) by COB
Inflation
Tax
Investment returns, split by asset class
Claims payment profiles
REDUCE DOG CRITIC
37
Q

General advantages and disadvantages to be categorized for reinsurance reserving methods

A
  1. add to automated reserving process
  2. easy to understand and apply
  3. what happens when changes in reinsurance program
  4. assess distribution of recoveries
  5. adjust to allow for CATs
  6. specific features of contracts
38
Q

Ratios and values to calculate: CEC PIP RSA

A 
Claim ratio
Expense ratio
Combined ratio
Percentage Reinsured
Investment return
Profit Margin
Return on Capital
Solvency margin
Assets to Liabilities
39
Q

Revaluation reserve on balance sheet

A

Accounts for unrealized capital gains or losses.

40
Q

Capital Model Big Question Order of Things

Dane has consistently continued sensing religious dudes’ persuing doctorin constantly.

A 
Data
How to model
Claims Experience
Correlations
Sensitivity testing
Reinsurance
Diversification
Practical considerations
Documentation
Control cycle - monitor

F103 Own (1 decks)

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