Run OFF Flashcards
What are High Guarantee Books?
These are insurance policies where the insurer promises to pay a certain amount of money back to the policyholder, no matter how the investments perform. For example, a life insurance policy might guarantee a minimum return of 2% per year. These are safe for the policyholder but risky for the insurer because if the investment market performs poorly, the insurer still has to pay the guaranteed amount, which can be costly.
What are In-Force Portfolios?
An “in-force portfolio” is made up of all the insurance policies that a company has sold and that are currently active, meaning the policyholders are paying their premiums. Think of it like a subscription service where each active customer is a policyholder. The insurer manages these active policies to ensure they stay profitable and cover the promised benefits.
What is Strategic Asset Allocation (SAA)?
SAA is like a long-term investment plan that insurers use to manage the money they collect from policyholders. It involves deciding how to divide their investments between different asset types, like stocks, bonds, and real estate, to meet their financial goals and pay the claims of policyholders. It’s about balancing risks and returns to ensure there’s enough money to cover future payouts
What are Closed Books:?
These refer to insurance policies that an insurer sold in the past but is no longer selling to new customers. For example, if a life insurance company decides to stop offering a certain type of policy, the existing ones become part of a “closed book.” The insurer still has to manage these policies and pay out claims, but they can’t grow this part of their business with new sales. It’s like a subscription service that has stopped accepting new members but continues to serve existing ones.
What are closed books in life insurance, and why do they pose a profitability challenge?
Closed books are insurance policies that the company sold in the past but no longer sells to new customers. These books can be hard to manage because the number of policies decreases over time as people stop paying or pass away. With fewer policies, the fixed costs (like IT systems or administration) are spread over fewer customers, making it more expensive per policy to manage. Plus, many of these policies promise guaranteed payouts, adding financial strain.
How does Strategic Asset Allocation (SAA) help insurers manage their investments?
SAA is a strategy insurers use to decide how to invest the money they collect from policyholders. It’s about balancing investments between safer options like bonds and riskier ones like stocks. By carefully choosing where to put their money, insurers can ensure they have enough returns to cover what they owe to policyholders while reducing risks. For example, they might put more money in stable investments to match the long-term payouts they promised to policyholders.
What makes high guarantee books a risk for insurance companies?
High guarantee books contain policies where the insurer promises a minimum return, regardless of how the financial markets perform. For example, even if the stock market is down, the insurer might still have to provide a 2% return. This is risky because the company must find ways to meet these guarantees, which can be challenging in a low-interest-rate environment. It’s like owing a friend money with interest, even if your own investments aren’t making much profit.
How do insurers benefit from optimizing in-force portfolios
An in-force portfolio is all the active insurance policies an insurer manages. By optimizing this portfolio—cutting unnecessary costs and adjusting investment strategies—insurers can make these existing policies more profitable. It’s like a company improving its existing subscription service to increase profits from current customers instead of focusing only on attracting new ones.
What is the role of the legacy market in the insurance industry?
The legacy market focuses on managing insurance portfolios that are no longer actively sold but still require management for existing liabilities. It offers insurers a way to transfer non-core business, providing capital relief and reducing their long-term risk. For example, a legacy acquirer might buy a portfolio of old car insurance policies, taking on the risk and potential rewards from managing the remaining claims.
Why is capital relief important for insurers managing run-off books?
Capital relief allows insurers to free up capital tied up in managing old insurance portfolios, enabling them to invest in new business or improve their financial ratios. It can be achieved by selling the run-off book or through reinsurance agreements, which transfer risk. For example, selling a legacy book helps an insurer improve its solvency ratio, making it easier to meet regulatory requirements.
How does proactive claims management enhance value in the run-off sector?
Proactive claims management uses data analytics to streamline the claims process, identify patterns, and settle claims quickly. This reduces administrative costs and helps avoid large, unexpected payouts. For instance, using AI to analyze claims can speed up decisions, reducing the time spent on each claim and increasing overall efficiency.
What are solvency ratios, and why are they crucial in the run-off market?
Solvency ratios measure an insurer’s capacity to pay future claims by comparing its available capital to the risks it has taken on. In the run-off market, a strong solvency ratio indicates that an insurer can manage its long-term liabilities effectively. If an insurer’s solvency ratio falls, it may need to sell parts of its run-off book to strengthen its financial position.
Why is understanding reserve volatility important for managing legacy insurance portfolios?
Reserve volatility reflects the uncertainty in predicting how much money needs to be set aside for claims. This is crucial for legacy portfolio managers, as unexpected changes, like inflation, can require more capital to cover claims, affecting profitability. For example, if inflation spikes, insurers may need to hold more reserves to cover the increased costs of claims, impacting their balance sheet.
