Regulatory 2: Commercial And Legislative Aspects Flashcards
Solvency 1 created minimal capital requirement (90s)
What is MCR? The higher of…
The higher of two amounts:
A base capital requirement and an amount that has to be calculated from the volume and type of business (the general capital insurance requirement)
All UK regulated insurers must legally have capital at least as large as their…?
Minimal capital requirement (MCR)
Remember that MCR is the higher of two amounts: the base capital requirement and the general insurance capital requirement
The FSA advised that a U.K. Insurer must have capital resources that are adequate having regard to the size and nature of its business
Aka it disagreed with the solvency and MCR ideas
What is capital resource requirement (CRR)
Created by the FSA in 2005 is what all Uk insurers must have.
CRR is the greater of MCR and a risked based calculation that results in a higher enhanced capital requirement (ECR)
This must be met if the insurer is to avoid intervention by the regulator
Why is does liability have a higher volatility than property?
Due to claims amounts taking longer to settle which can be more substantial
Larger reserves need to be maintained over a longer period just in case of large claim
This means that they can take advantage of the investment opportunities
Management of capital:
An insurer must have a clear understanding of what 4 areas when it comes to capital?
1) how much it has
2) how much capital it needs to support targeted business
3) how much capital is required for current and future regulatory requirements
4) what is plans to do if it has too much or too little capital
What are the implications of having too much capital?
Could signify that they don’t have a correct plan in place to utilise capital correctly
Although could mean That they have no other areas to grow in and will just return capital to investors
What are the implications of too little capital?
- get the attention of the PRA
- reputation with brokers damaged
- unable to take advantage of opportunities
- ability to raise further amounts of capital at a reasonable cost may be compromised
- may have to buy reinsurance
- can’t take advantage of other opportunities
- may not be able to pay own risks
What a the implications of not having contact certainty?
- if the underwriter is not aware of exactly what they’re exposure is it could lead to inaccurate claims reserving
Inaccurate pricing
Incorrect allocation of capital
FCA would be interested the most in this area
Contract certainty is achieved when:
Complete and final agreement of the contract has been achieved on both sides of the party by the time the contract incepts
Contract documentation must be provided promptly after
When does documentation need to be handed out to retail and all other customers
Retail= 7 working days Other= 30 calendar days
From the latest of either:
Inception date of contact
Date that the parties entered into contract
The date where the final insurer enters into the contract (if more than one insurer)
Legislative influences: consumer rights act 2015 aims to make it easier for consumers to understand their rights and remedies
Terms must be: T & P (a tran prom)
1) transparent: plain language
2) prominent: average consumer should be aware of it
Contracts (rights of third parties) act 1999
What is privity of contract
A privity of contract means that a person can only enforce a contract if they are party to it I.e they’re name must be expressly identified in the contract by name, class or description
DPA act: an insurer must ensure that any data held is:
1) relevant
2) accurate
3) disclosed only to those authorised to know it
What has the introduction of solvency 2 achieved?
A harmonised risked based regulatory regime across all 28 EU states
What is contract certainty?
Contract certainty is achieved wen complete agreement from both the insured and the insurer of all terms has happened BEFORE they enter into the contract
Documentation must be provided promptly after
What is the motors insurers bureau?
A central fund set up by Insurers to compensate victims of uninsured motors
Who must have compulsory insurance?
Third party motor- Road Traffic act
Dangerous dogs, dangerous wild animals & horse riding establishments
Employers liability
Solicitors &a financial services market
Energy act
What is the criteria that justifies data to be held?
Relevant
Only given to those who are authorised
Accurate
What 5 conditions are taken into account when considering motor insurance?
- age of driver
- age &a condition of vehicle
- area where car is used
- engine capacity
- number of people it is carrying
What 6 new rating factors could technology provide for car insurance?
- time of use
- location of use
- average speed
- mileage
- length of time driven
What two general types of legislation affect the underwriter?
1) legislation that applies to insurance practice
2) legislation that applies to specific class
What is the relationship between the availability of capital between a hard and a soft market?
Soft market=less capital due to increased market capacity, falling premium levels and lower profits
Hark market= more capital due to less market capacity, higher premium levels and higher profits
What % of homes in the U.K. Are at significant risk to flooding?
5%
What is subsidence?
Structural damage usually from hot summers
What is the degree of government help for flood for the below: UK France Germany Rest of EU Japan Australia
UK: none (flood RE pool)
France: unlimited
Germany: None
Rest of EU: some have pooled systems
Japan: primary insurance and reinsurance provided through private market
Australia: primary insurance and reinsurance through private market
USA: federal government covers flood perils
What properties does flood re cover?
Top 1-2% of high risk properties
Private homes in tax bands A-G
Ineligible properties:
Built after 2009
For commercial use
In council tax H or above
What are the three types of misrepresentation that can appear from a consumer?
- honest and reasonable: insurer must pay claim
- careless: can choose whether it would have a) added to Premium in which case the claim pay out is reduced or B) if it would have been an exclusion they don’t have to pay
- reckless &a deliberate: the insurer can void and get back the premium
What is a material circumstance?
When it would have affected whether the insurer would have accepted the risk and if so on what terms?
What 7 areas does the discrimination act cover?
- race, religion, belief
- pregnancy
- gender reassignment
- marriage and civic partnerships
- sexual orientation/ sex
- age
- disability
How long must a sentence be to never be able to be “spent”
48 months
What are the issues in a soft market?
- rising expense ratios: fixed costs stay the same but profits are less
- RI cover stays the same
- pressure to expand scope of cover
What are the issues in a hard market?
- withdrawn capacity means underwriting is more difficult
The cycle is usually driven by claims or price?
Claims
