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F103 > Untitled Deck > Flashcards

Untitled Deck Flashcards

1
Q

Components of return to shareholders of an insurer

A

An insurance (or underwriting) result, and an investment result.

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2
Q

Primary objectives of investment

A

To maximise return subject to meeting contractual obligations: meeting claims and expenses as they fall due, maintaining statutory solvency and any internal company solvency constraints.

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3
Q

The risk appetite of the insurer will depend on

A

Its liabilities, assets, external influences, insurer-specific constraints.

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4
Q

Liability characteristics that need to be considered

A
  • Nature
  • currency
  • term
  • level of uncertainty (timing and amount) of existing liabilities
  • estimated future liabilities arising from the portfolio of business planned
  • location of liabilities
  • whether the liabilities are discounted.
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5
Q

The nature of existing liabilities

A

Are they fixed or ‘real’ in monetary terms. The majority of general insurance liabilities will be real in nature.

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6
Q

Currency of existing liabilities

A

Many domestic, personal and commercial insurers may have portfolios predominantly denominated in their local currency. However, international insurers and reinsurers have portfolios that contain a range of currencies.

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7
Q

Term of existing liabilities

A

Most general insurers’ portfolios are likely to contain a significant proportion of short-term liabilities (1-3 years), with a smaller proportion of medium-term (4-10 years) and long-term liabilities (10+ years).

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8
Q

Considerations with respect to the assets

A
  • Size of the assets, in relation to the current liabilities
  • expected long-term return from various asset classes
  • expected volatility within the various asset classes
  • existing asset portfolio
  • non-investible funds
  • economic outlook.
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9
Q

Free reserves

A

The excess of the value of an insurer’s assets over its technical reserves and current liabilities.

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10
Q

Monies not available for investment include

A

Monies held by agents (e.g., brokers holding premiums for two months before passing them on), policyholders (e.g., premium payments by instalment, or end-of-year adjustment premiums due to exposure adjustments or experience rating), reinsurers (i.e., delays in making recoveries).

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11
Q

External influences on investments

A
  • Tax treatment of different investment and the tax position of the general insurer
  • statutory, legal, ethical or voluntary restrictions on how the insurer may invest
  • statutory valuation requirements
  • solvency requirements
  • rating agency constraints on capital required to maintain the insurer’s desired rating
  • competition - strategy followed by other funds
  • regulatory constraints.
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12
Q

Insurer-specific investment considerations

A

Risk appetite, company-specific investment objectives.

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13
Q

Possible insurer situations with respect to cashflow

A
  • Insurer expects that premiums and investment income will continue to exceed claim payments for the indefinite future
  • insurer is in run-off and expects to have to rely on the maturity and realisation of assets
  • insurer has suffered a major insurance event and needs to obtain short-term liquidity in order to settle claims.
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14
Q

Fundamental choices when modelling future liability outgo

A
  • Whether to include premium income and outgo relating to business that will be written after the accounting date
  • whether to use model point data.
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15
Q

Overall liability outgo can be calculated as

A

Liability outgo = total gross claim payments - reinsurance and other recoveries + expenses - outstanding premiums received + tax and dividend payments.

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16
Q

Claim payment projection must include

A
  • All future payments in respect of unsettled reported claims
  • IBNR and reopened claims
  • claims that will emerge from unexpired risks
  • claims that will emerge from new business.
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17
Q

Important considerations in an investment income projection

A
  • Income from investment
  • any capital proceeds, e.g., the redemption payments on any maturing bonds, during the period of consideration
  • the expenses of investment
  • the future volatility of capital values and investment income.
18
Q

Possible solvency requirements might be related to

A
  • The length of tail
  • the likelihood of catastrophes and accumulations
  • the spread of risk groups within the portfolio
  • the insurer’s experience in writing the class.
19
Q

The purposes of a new business projection might be to assess

A
  • The future solvency of the office under different volumes of new business,
  • the future solvency under different scenarios for asset distributions
  • the likely levels of profitability.
20
Q

Risks relating to an insurer’s investment strategy

A

Liquidity, currency, market, credit, group.

21
Q

Liquidity risk

A

The risk of not having sufficient cash to meet the liabilities as they fall due.

22
Q

Currency risk

A

The risk that changes in the values of the assets, or the liabilities of the company adversely impact the available capital or investment funds.

23
Q

Market risk

A

The risk relating to changes in the value of the portfolio due to movements in the market value of the assets held.

24
Q

Economic risk

A

The risk of investing in certain asset classes at certain stages in the economic cycle when the assets are overpriced.

25
Q

Credit risk

A

The risk that a counterparty to an agreement will be unable or unwilling to fulfil its obligations.

26
Q

Group risk

A

The risk that an insurance subsidiary might be required to change investment strategy following a change in the parent’s requirements.

27
Q

Asset liability modelling (ALM)

A

Any model that covers both the assets and liabilities of an entity within one structure.

28
Q

The basic concept behind ALM

A
  • Project liability outgo in each future time period for a chosen timeframe
  • project asset proceeds in each future period
  • compare the two for each future period
  • run the comparisons again using different assumptions
  • decide whether the asset proceeds are appropriate for the liability outgo
  • if not, investigate alternative asset distributions.
29
Q

Characteristics of the liabilities of employer’s liability insurance

A

Liabilities relating to injury or disease will be long-tailed due to reporting delays, settlement delays, and possible benefits in the form of regular payments. Legal environment will have a significant effect on settlement delays.

30
Q

Why might reporting delays exist with liability insurance?

A

Potential claims could remain undetected for many years.

31
Q

Why might settlement delays exist with liability insurance?

A

These could extend over a number of years caused by the need to establish the extent of the liability.

32
Q

Suitable assets for a liability insurer

A

Index-linked bonds, equities, fixed-interest bonds, cash, property.

33
Q

Factors that influence the extent to which a company might mismatch its assets

A
  • Size of the company
  • level of free assets
  • need for diversification
  • availability of suitable assets
  • extent of reinsurance
  • attitude to risk
  • access to parent company resources
  • outlook for returns
  • regulatory requirements.
34
Q

Reasons why it is important to adjust premium rates to keep up with new technology

A

Premiums need to cover all costs incurred by the insurer. Changes in technology can affect these costs. Failure to adjust can lead to losses, and unadjusted premiums can lead to loss of business.

35
Q

Factors that could determine the importance of regularly updating premium rates

A
  • Frequency of significant improvements in technology
  • customer loyalty
  • cost of the premium update
  • percentage of policyholders affected
  • level of competition
  • strategy of the insurer.
36
Q

Characteristics of creditor insurance liabilities

A
  • Mostly fixed
  • term of liabilities usually a maximum number of benefit payments
  • currency of liabilities usually in the currency of the country that the insurer operates in
  • uncertainty of the liabilities influenced by economic circumstances.
37
Q

Key considerations in reviewing the investment strategy

A
  • The nature
  • term
  • currency
  • location and uncertainty of the liabilities
  • level of free assets
  • company risk appetite
  • tax, legal and regulatory requirements
  • extent to which new business may be relied upon for cashflows
  • diversification
  • existing assets.
38
Q

Advantages of stochastic ALM

A
  • Better for considering a bigger set of possible scenarios
  • outputs incorporate probabilities
  • better understanding of risks faced by the company.
39
Q

Disadvantages of stochastic ALM

A
  • Higher risk due to complexity
  • practical difficulties
  • requires more data
  • more costly
  • output may be more difficult to interpret
  • more time-consuming to run.
40
Q

Purpose of an ESG within an ALM exercise

A

An ESG typically takes the form of a specialised asset model that stochastically models various asset classes.

F103 (3 decks)

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