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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
Solvency Modernization Initiative Priorities (4)
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
Reasons for Reinsurance Regulatory Modernization Framework (RRMF)
A. Promote competition in reinsurance B. Reflect globalization of insurance (streamlining regulation) C. Reduce penalties for unauthorized reinsurers that are strongly capitalized
27
Reasons why the Reinsurance Regulatory Modernization Framework (RRMF) was proposed to be federal.
A. PRESERVE and improve state-based reinsurance regulation B. UNIFORM implementation C. COMPREHENSIVE alternative to related federal legislation
28
Provisions of Nonadmitted & Reinsurance Reform Act (NRRA) of 2010
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
Levels of regulatory action (MAR)
A. MANDATORY action level B. ADMINISTRATIVE supervision C. RECEIVERSHIP
30
What causes an insurer to hit mandatory action level? And what can the regulator do?
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
What causes an insurer to hit administrative supervision level? And what can the regulator do?
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
What causes an insurer to hit receivership level? And what can the regulator do?
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
What happens when an insurer goes through rehabilitation?
Re-organization of operations so that obligations can at least partially be met. Liquidation usually follows.
34
How are insureds protected from solvencies?
State guaranty funds provides funds in the case of insolvencies and reimburses for losses and unearned premiums.
35
How does a guaranty fund work?
A. Funded by all licensed insurers B. Solvent insurers pay about 1-2% of NWPs in assessments C. Fund member elect BOD
36
What types of insurers can Dodd-Frank regulate?
1. Systematically important financial institutions 2. Insurance holding companies that own banks
37
Dodd-Frank requirements for insurers (UMAD)
U - Undergo stress-testing M - Meet liquidity requirements A - Adhere to capital requirements D - Develop a living will (resolution plan when insolvent)
38
Goals of the Federal Insurance Office
1. Monitor insurance industry 2. Identify gaps in the state-based regulatory system
39
Goals of the Financial Stability Oversight Council (FSOC)
1. Monitor all financial services markets (incl. insurance) 2. Identify risks to financial stability
40
Areas of responsibility of the Federal Insurance Office (CRITI)
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
Actuarial concerns regarding the Federal Insurance Office
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
International concerns regarding Federal Insurance Office
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
Restrictions on authority of Federal Insurance Office
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
What is Solvency II
Principles-based insurance regulatory system for capital levels of insurance companies in the EU
45
3 Pillars of Solvency II (QGT)
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
3 Pillars of Solvency II (QGT)
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
What makes up the Solvency II Quantitative Pillar Diagram?
IFRS Assets Available = Free Surplus + Solvency Capital Requirement - Minimum Capital Requirement + Minimum Capital Requirement + Risk Margin + Best Est. of Liabilities
48
What happens when a company falls below the Solvency Capital Requirements and Minimum Capital Requirements?
SCR: It will be subject to regulatory intervention MCR: It will not be permitted to operate
49
IFRS Risk Margin Calculation
Risk Margin = Solvency Required Capital * Risk cost of capital (R - i) * (1 + i)^(-duration of capital held) summed across all years
50
How is the Solvency Capital Requirements (SCR) determined?
99.5% VaR
51
Solvency II requirements for using internal model for VaR estimations
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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