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IF1 2022 > Chapter 10 - part 4 > Flashcards

Chapter 10 - part 4 Flashcards

1
Q

What does Capital acts as a buffer for?

A

Absorbing unexpected losses

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2
Q

Having enough capital of sufficiently high quality reduces what?

A

the risk of a firm becoming unable to meet the claims of its creditors.

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3
Q

What is a solvency margin?

A

the amount by which assets must exceed liabilities

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4
Q

Solvency I required a general insurer to calculate its solvency on two different bases. What were they?

A

to apply a scale of percentages to premiums

to apply a different scale to claims

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5
Q

What did the design of Solvency I lack?

A

risk sensitivity and did not capture key risks, including market, credit and operational risk

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6
Q

What does ECR stand for?

A

enhanced capital requirement

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7
Q

The ECR was calculated by a non-life insurer by adding together what?

A

• an asset-related requirement: a prescribed percentage determined by each type of admissible asset an insurer has, such as loans and shares; and

• an insurance-related requirement: a prescribed percentage determined by each class of business and calculated separately for net written premiums (total debited premiums less reinsurance costs) and technical reserves (these include elements such as current outstanding claims and unearned premium reserves).

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8
Q

What was the ECR designed for?

A

to minimise the risk of an insurance company having insufficient funds to meet present and future claims

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9
Q

What does MCRs stand for?

A

minimum capital requirements

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10
Q

Where the minimum capital requirements (MCRs) prescribed are not maintained by a company, the regulator can do what?

A

Intervene

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11
Q

Solvency II sets out a new, stronger EU-wide requirement on capital adequacy and risk management for insurers with what aim?

A

increasing protection for policyholders

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12
Q

Solvency II has the following three pillars, what are they?

A

• Pillar 1 – capital adequacy.
• Pillar 2 – systems of governance.
• Pillar 3 – supervisory reporting.

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13
Q

What does Pillar 1 ensure??

A

that a firm is adequately capitalised to deliver policyholder protection.

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14
Q

What does SCR and MCR stand for? and what do they mean?

A

• Solvency capital requirement (SCR): the level of capital required to give 99.5% confidence that assets will be sufficient to cover liabilities over the following twelve months.

• Minimum capital requirement (MCR): the level of capital required to give the national supervisor 85% confidence that assets will be sufficient to cover liabilities over the following twelve months.

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15
Q

What happens to firms that fall below the SCR?

A

It triggers the “ladder of intervention”

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16
Q

What does the “ladder of intervention” consist of?

A

common European intervention tools aimed at recovering firms’ solvency position within a
set period of time

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17
Q

What happens to firms that fall below the MCR?

A

They will have a shorter period of time to recover their position, with the ultimate supervisory action being closure if the solvency position is not recovered

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18
Q

Firms can calculate their capital requirements using one of the three methods which are?

A

Standard Formula - capture the standard risks a firm may face and calculate the capital requirements to these risks.

Undertaking specific parameters - hange the parameters on the standard formula to ones more appropriate to their business

Internal Models - For complex firms, a full or partial internal model allows a more bespoke assessment of a particular business and its risk profile.

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19
Q

What does a firm wishing to use an internal model or partial model have to do?

A

obtain prior approval of their model from the PRA.

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20
Q

What does a Lloyds managing agent wishing to use an internal model or partial model have to do?

A

seek approval of their models from Lloyd’s of London, who in turn get approval from the PRA.

21
Q

What is the second Pillar?

A

systems of governance

22
Q

What does ORSA stand for?

A

Own Risk and Solvency Assessment

23
Q

What is the Own Risk and Solvency Assessment?

A

a set of processes and procedures that are used to identify, assess, monitor, manage and report the short- and long-term risks a
(re)insurance company faces or may face.

24
Q

What does the ORSA also enables companies to determine?

A

the level of funds which would be necessary to ensure that their solvency needs are met

25
Q

Who is the ORSA information is reported to?

A

o the supervisory authorities and will help inform their view of capital adequacy as part of the supervisory review process.

26
Q

What helps promote a strong culture of risk management in a business.?

A

The matching of own funds to the risk profile

27
Q

What is Pillar 3?

A

supervisory reporting

28
Q

Pillar 3 has a key role to play in the Solvency II regime by ensuring what?

A

greater transparency to encourage market discipline

29
Q

How does pillar 3 ensure greater transparency to encourage market discipline?

A

by giving information to the regulator and the market in the form of public and private reports

30
Q

What public and private reports are there?

A

• Solvency and Financial Condition Report (SFCR) – this is public.
• Regulator Supervisory Report (RSR) – this is a private report between a firm and its
national supervisor.

31
Q

What does SFCR and RSR stand for?

A

• Solvency and Financial Condition Report (SFCR) – this is public.

• Regulator Supervisory Report (RSR) – this is a private report between a firm and its
national supervisor.

32
Q

What does the RSR do over and above what is required on the SFCR?

A

an additional level of detail and granularity

33
Q

Are the results of the ORSA kept private in the RSR?

A

Yes - in order to allow firms to conduct a fully transparent ORSA

34
Q

Name some examples of what sections are covered in the quantitative reports?

A

• Balance sheet.
• Premium claims and expenses.
• Own funds.
• Variation analysis.
• SCR and MCR.
• Assets.
• Technical provisions.
• Reinsurance.
• Group reporting.

35
Q

Name some examples of what sections are covered in the qualitative reports?

A

• Business and performance.
• System of governance.
• Risk profile.
• Valuation for solvency purposes.
• Capital management.

36
Q

How often are qualitative and quantitative reports required?

A

Qualitative - Annually
Quantitative - Quarterly

37
Q

What would the PRA do if a company has departed significantly from its original business plan?

A

Intervene

38
Q

Name some examples of what the PRA can do to intervene?

A

• restrict the company’s premium income;
• require the company to submit accounts more frequently than yearly;
• require the company to provide further information;
• prevent the insurer from accepting new business;
• require a company to restore its capital position;
• impose requirements on the company’s investment policy; and/or
• as a final sanction, withdraw authorisation

39
Q

What does winding up mean in relation to the PRA intervening?

A

PRA can intervene and the company can be wound-up (i.e. formally cease to operate).

40
Q

What example of insurance sale would be exempt from FCA regulation?

A

Extended Warranty

41
Q

Define Insurance mediation?

A

the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim.

42
Q

What is an AR?

A

appointed representative

43
Q

Why would an AR be exempt from FCA regulation?

A

another authorised firm (the principal) takes responsibility for them under a written contract

44
Q

What must an AR - Authorised Firm contact set out?

A

how the principal will control and monitor their activities and supervise them

45
Q

In an AR - Authorized Firm arrangement who accepts responsibility’s of the AR?

A

The Principle ie authorised firm

46
Q

Does the FCA require knowledge of an AR - appointed firm arrangement?

A

yes they must be advised of appointment to be added to the register and directors approved.

47
Q

Who audits an ARs files in order to establish that proper procedures are being followed?

A

The principle - authorised firm

48
Q

Do the The ICOBS rules apply to intermediaries?

A

yes

IF1 2022 (19 decks)

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