ODO.FINREG

Question 1

SAP (Statutory Accounting Principles) purpose, main concept, uniqueness versus other accounting systems

Answer 1

SAP measures insurer’s ability to pay claims (& regulatory early warning system)
SAP is conservative
UNIQUENESS: used only by insurers, assumes insurer is in liquidation, more conservative (include only revenue that has been invoiced)

Question 2

GAAP (Generally Accepted Accounting Principles) purpose, main concept, uniqueness versus other accounting systems

Answer 2

GAAP provides a measurement of earnings
GAAP is less conservative than SAP (GAAP uses revenue-expense matching)
UNIQUENESS: used by most companies, assume company is an ongoing concern, less conservative (include revenue even if not invoiced)

Question 3

(SAP v GAAP) - intended user

Answer 3

SAP: regulators
GAAP: general audience (policyholders, investors, public)

Question 4

(SAP v GAAP) - objective

Answer 4

SAP: measure ability to pay claims
GAAP: measurement of earnings

Question 5

contrast (liquidation, going-concern)

Answer 5

liquidiation:
- runoff of assets/liabilities
- of interest to REGULATORS (for satisfying policy holder obligations)
going-concern:
- continued normal operations
- of interest to INVESTORS

Question 6

contrast (fair value, historical cost)

Answer 6

fair value:
- value in open market
- more accurate
historical cost:
- original cost MINUS depreciation
- easier to calculate

Question 7

contrast (principle-based, rule-based) accounting system

Answer 7

principles-based:
- accounting approach requiring interpretation to apply
- more flexible
rules-based:
- specific guidance
- easier to apply, but less flexible

Question 8

what is Solvency 2

Answer 8

Solvency 2 is a :
→ principles-based insurance regulatory system
→ for capital levels of insurance companies
→ in the European Union.

Question 9

what are the 3 pillars of Solvency 2

Answer 9

QUANTITATIVE: sets SCR & MCR (Solvency & Minimum Capital Requirements)
- uses a total balance sheet approach
- SCR is defined as 99.5% VaR (Value at Risk) meaning that the probability of ruin is < 0.5%
GOVERNANCE: supervisory activities (internal control & risk management, supervisory review process)
- requires adequate governance for the functions: ♦ internal audit ♦ actuarial ♦ risk management ♦ compliance
- supervisor identifies high-risk companies and may intervene
- note that companies are required to perform ORSA
TRANSPARENCY: supervisory reporting & public disclosure
- information from pillars 1 & 2 is given to the supervisor & financial markets
- purpose is to increase market discipline because companies know their decisions are public

Question 10

quantitative pillar - what happens if total capital falls below SCR; below MCR

Answer 10

• if total capital < SCR –> regulatory intervention
• if total capital < MCR –> company not permitted to operate

Question 11

what is a ‘commutation agreement’ (in the context of reinsurance)

Answer 11

An AGREEMENT between a ceding insurer and the reinsurer that PROVIDES for the valuation, payment, and complete discharge of ALL OBLIGATIONS between the parties under a particular reinsurance contract
IN PLAIN ENGLISH: the ReInsR gives the ceded claims BACK to the original InsR

Question 12

advantages of (or reasons for) commutation - from primary insurer point-of-view

Answer 12

• removes reinsurance CREDIT risk
• insurer receives benefit of favorable LOSS development
• decreases EXPENSE costs
• more EFFICIENT clms handling
• receives immediate Cash Flow

Question 13

disadvantages of commutation from primary insurer point-of-view

Answer 13

DISADVANTAGES:
- risk of adverse development on claims
- CapReq goes up (to support increased liabilities)