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Exam 6 > Tier 4 > Flashcards

Tier 4 Flashcards

1
Q

Goals of TRIA

A

A. STABILIZE private market by providing temporary terrorism insurance
B. PROTECT consumers by ensuring availability and affordability
C. PRESERVE state regulation of insurance

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2
Q

Motivation for TRIA

A

A. Fill unmet need: Private insurance withdrew coverage after 9/11
B. Convenience: Government can set up a program quickly
C. Social Purpose: Lessen economic disruption from lack of terrorism insurance

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3
Q

Terrorism Loss Sharing Mechanism

A

A. Certification: Terrorism act must be certified and losses must be greater than $5M in the US
B. Federal Gov. Threshold: Industry losses >200M
C. Federal Gov. Limit: No federal coverage for agg. losses over $100B
D. Coverage: Limited to commercial
E. Deductibles: 20% of direct EP (commercial EP)
F. Coinsurance: Insurer pays 20%
G. Surcharge: For agg. losses <37.5B, treasury must recoup 140% and has the option to do so when losses are >37.5B

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4
Q

NBCR Terrorism Events

A

Nuclear, biological, chemical, radiological

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5
Q

Does TRIA cover NBCR?

A

Not explicitly covered or excluded, but primary insurers usually exclude

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6
Q

Does TRIA cover cyber?

A

Yes, but 50% of cyber policies don’t cover terrorism

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7
Q

How does Spain handle terrorism insurance?

A

Government owned reinsurer

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8
Q

How does the UK handle terrorism insurance?

A

Privately owned mutual with government backing

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9
Q

How does Germany handle terrorism insurance?

A

Private insurer with government backing

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10
Q

How does Canada handle terrorism insurance?

A

Rejected the creation of government program

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11
Q

How is the low credibility of terrorism data handled?

A

Events are modelled

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12
Q

What makes a risk insurable? (C-MAC)

A

A. CREDIBLE: Lots of loss data needed
B. MEASURABLE: Losses are definite and measurable
C. ACCIDENTAL: Losses must be fortuitous
D. CATASTROPHIC: Losses must not be catastrophic

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13
Q

What is a retrospectively rated contract?

A

A contract where the premium is decided at the end of the policy period and is dependent on loss experience.

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14
Q

What is a retrospective insurance contract called?

A

Loss Sensitive Contract

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15
Q

Are premium adjustments for loss sensitive contracts considered admitted assets?

A

Yes, but with exceptions. For example, premiums deemed uncollectible are not.

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16
Q

What are the two ways of estimating retrospective premium adjustments?

A
  1. Historical retrospective rated developments / Earned standard prem * rated policy prem
  2. Known - anticipated loss development
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17
Q

How are retrospective premium adjustments accounted for in financial documents?

A

Premium increases are booked as receivables and have a corresponding written premium adjustment
Premium refunds are booked as liabilities and have a corresponding WP or EP adjustment

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18
Q

Required disclosures for retrospective policies (4)

A
  1. Amount of premium that is subject to change
  2. Method used to estimate adjustments
  3. Calculation of non-admitted retro. premium
  4. Accounting method for adjustments (WP or EP adjustment)
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19
Q

Who created the Solvency Modernization Initiative (SMI)?

A

State insurance regulators

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20
Q

What are the key components of Solvency Modernization Initiative (SMI)?

A
  1. Capital requirements
  2. Governance & risk management
  3. Group supervision
  4. Statutory accounting
  5. Financial reporting
  6. Reinsurance
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21
Q

NAIC mission?

A

To protect policyholders by combining financial and market regulation

22
Q

3 Stages of US financial regulatory process

A
  1. MITIGATE forseeable risks
  2. CORRECTIVE ACTION
  3. BACKSTOP (state guaranty funds)
23
Q

How do you determine the effectiveness of the regulators? (RIICH)

A
  1. REHABILITATION actions were effective?
  2. IDENTIFY problems before policyholders were impacted?
  3. INSOLVENCIES are infrequent and guaranty funds are sufficient?
  4. COST-BENEFIT analysis is positive?
  5. HEALTHY marketplace?
24
Q

Core principles of US insurance financial solvency? (POORER-C)

A
  1. PREVENTION & CORRECTION - Require regulatory approval
  2. OFF-SITE EXAMS - Regulators maintain an insurer profile
  3. ON-SITE EXAMS - Risk-focused exams covering governance, management, financial strength
  4. REPORTING - Public financial statements
  5. EXITING MARKET - Framework for orderly exit
  6. REGULATORY CONTROL OF RISKY TRANSACTIONS - Approval needed
  7. CAPITAL ADEQUACY - RBC and other tools
25
Q

Solvency Modernization Initiative Priorities (4)

A
  1. Create a document explaining regulatory system
  2. Examine international developments
  3. Comply with insurance core principles
  4. Learn from the global financial crisis
26
Q

Reasons for Reinsurance Regulatory Modernization Framework (RRMF)

A

A. Promote competition in reinsurance
B. Reflect globalization of insurance (streamlining regulation)
C. Reduce penalties for unauthorized reinsurers that are strongly capitalized

27
Q

Reasons why the Reinsurance Regulatory Modernization Framework (RRMF) was proposed to be federal.

A

A. PRESERVE and improve state-based reinsurance regulation
B. UNIFORM implementation
C. COMPREHENSIVE alternative to related federal legislation

28
Q

Provisions of Nonadmitted & Reinsurance Reform Act (NRRA) of 2010

A
  1. A state can’t deny credit for reinsurance if the domiciliary state has already granted credit and is an NAIC-accredited state
  2. A state may proceed with reinsurance collateral reforms on an individual bases (if the state is NAIC-accredited)
29
Q

Levels of regulatory action (MAR)

A

A. MANDATORY action level
B. ADMINISTRATIVE supervision
C. RECEIVERSHIP

30
Q

What causes an insurer to hit mandatory action level? And what can the regulator do?

A

Any or all of the following:
- RBC < 150%
- Multiple IRIS ratios outside normal ranges
- Judgement by regulator

Regulator can do the following:
- Require insurer to submit financial improvement plan
- Require reduction in liabilities (and/or increase in capital)
- Place restrictions on new and renewal business

31
Q

What causes an insurer to hit administrative supervision level? And what can the regulator do?

A

Any or all of the following:
- Mandatory corrective actions fail
- RBC < 100%
- Further deterioration of IRIS ratios
- Judgement by regulator

Regulator can do the following:
- Require consent for the insurer to incur new debt, issue new policies, or purchase reinsurance

32
Q

What causes an insurer to hit receivership level? And what can the regulator do?

A

Any or all of the following:
- Mandatory corrective actions and administrative supervision fail
- Regulator judges determine insurer is incapable of managing operations

Regulator can do the following:
- Rehabilitation
- Liquidation

33
Q

What happens when an insurer goes through rehabilitation?

A

Re-organization of operations so that obligations can at least partially be met. Liquidation usually follows.

34
Q

How are insureds protected from solvencies?

A

State guaranty funds provides funds in the case of insolvencies and reimburses for losses and unearned premiums.

35
Q

How does a guaranty fund work?

A

A. Funded by all licensed insurers
B. Solvent insurers pay about 1-2% of NWPs in assessments
C. Fund member elect BOD

36
Q

What types of insurers can Dodd-Frank regulate?

A
  1. Systematically important financial institutions
  2. Insurance holding companies that own banks
37
Q

Dodd-Frank requirements for insurers (UMAD)

A

U - Undergo stress-testing
M - Meet liquidity requirements
A - Adhere to capital requirements
D - Develop a living will (resolution plan when insolvent)

38
Q

Goals of the Federal Insurance Office

A
  1. Monitor insurance industry
  2. Identify gaps in the state-based regulatory system
39
Q

Goals of the Financial Stability Oversight Council (FSOC)

A
  1. Monitor all financial services markets (incl. insurance)
  2. Identify risks to financial stability
40
Q

Areas of responsibility of the Federal Insurance Office (CRITI)

A

C - Collect data on insurance industry
R - Report annually to Congress
I - (Suggest) Improvements
T - TRIA (help administer)
I - International (help negotiate international agreements)

41
Q

Actuarial concerns regarding the Federal Insurance Office

A
  1. Dual regulation (Inconsistent and excessive)
  2. Capital requirements (stricter requirements should apply to banks more than insurers)
  3. Standardization (Forced standardization decreases innovation & competition)
  4. Banking regulation spillover (increases compliance costs for insurers that have banks in their structure)
42
Q

International concerns regarding Federal Insurance Office

A
  1. Conflict between NAIC & FIO
  2. Federal approach - Better for international coordination standards, but worse for transparency (FIO is less transparent than NAIC)
  3. Standardization of insurance - may decrease innovation and reduce options for consumers
43
Q

Restrictions on authority of Federal Insurance Office

A

Cant preempt state regulation of:
- rates
- UW
- coverage requirements
- sales practices
- capital requirements
EXCEPT if state requirements result in less favorable treatment of a non-US insurer

44
Q

What is Solvency II

A

Principles-based insurance regulatory system for capital levels of insurance companies in the EU

45
Q

3 Pillars of Solvency II (QGT)

A

QUANTITATIVE: Sets solvency and minimum capital requirements
- Uses total balance sheet approach
- Solvency capital requirements is 99.5% VaR
GOVERNANCE: Supervisory activities - requires adequate governance for
- Internal audit
- Actuarial (reasonability of data, assumptions, methods)
- Risk management
- Compliance
TRANSPARENCY:Supervisory reporting & public disclosure
- Info from pillars 1+2 are given to the supervisor and financial markets

46
Q

3 Pillars of Solvency II (QGT)

A

QUANTITATIVE: Sets solvency and minimum capital requirements
- Uses total balance sheet approach
- Solvency capital requirements is 99.5% VaR
GOVERNANCE: Supervisory activities - requires adequate governance for
- Internal audit
- Actuarial (reasonability of data, assumptions, methods)
- Risk management
- Compliance
TRANSPARENCY:Supervisory reporting & public disclosure
- Info from pillars 1+2 are given to the supervisor and financial markets

47
Q

What makes up the Solvency II Quantitative Pillar Diagram?

A

IFRS Assets Available =
Free Surplus +
Solvency Capital Requirement - Minimum Capital Requirement +
Minimum Capital Requirement +
Risk Margin +
Best Est. of Liabilities

48
Q

What happens when a company falls below the Solvency Capital Requirements and Minimum Capital Requirements?

A

SCR: It will be subject to regulatory intervention
MCR: It will not be permitted to operate

49
Q

IFRS Risk Margin Calculation

A

Risk Margin = Solvency Required Capital * Risk cost of capital (R - i) * (1 + i)^(-duration of capital held) summed across all years

50
Q

How is the Solvency Capital Requirements (SCR) determined?

A

99.5% VaR

51
Q

Solvency II requirements for using internal model for VaR estimations

A
  1. Model is used for running the business
  2. Model has been validated by independent third party
  3. Model is documented appropriately

Exam 6 (8 decks)

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