37 - Capital Requirements COPY Flashcards
(40 cards)
Why do providers of financial benefits need to hold provisions?
- Liabilities that have accrued but which have not yet been paid
- Future periods of insurance against which premiums have already been received
- Claims already incurred but which have yet to be settled
What 2 components make up the regulatory solvency capital
- Prudential margins in the regulatory liability valuation basis
- Additional solvency capital in excess of regulatory provisions
What 2 approaches are available for balancing between regulatory capital components?
- Strong reserving with small SCR
2. Weak reserving with large SCR
State the disadvantage of using Prudent provisions and Simple formula based Capital requirements
It makes it difficult to compare providers and to ensure there is enough security to p/hs
State 3 Pillars of SII
- Quantification of risk exposures and capital requirements
- A supervisory regime
- Disclosure
Describe what Pillar I of SII covers
- Includes rules for valuing both the assets and provisions for liabilities
- Also includes the determination of two levels of capital requirement (MCR and SCR)
Describe what Pillar II of SII covers
Deals with qualitative aspects, covers eg
1. A company’s internal controls and risk management processes &
- The company’s own view of its strategic capital needs
- Firms are also required to consider their internal economic capital requirements under the ORSA
Describe what Pillar III of SII covers
Covers both public disclosure and private disclosure by the company to the regulator.
What are the 2 levels of SII Capital requirements
- MCR - the threshold at which companies will no longer be permitted to trade
- SCR - the target level of capital below which companies may need to discuss remedies with their regulators.
State 2 types of ways that can be used to calculate the SCR
- Standard formula
2. Internal model (considerable work needs to be done to justify usage)
What are the pros/cons of using the Standard model?
- Less complex
- Less time consuming
- Captures risk profile of average company
- Approximations made in modelling risks
- May not be appropriate to the companies that use it
- Can’t be used to calculate economic capital
What are BASEL accords?
These are global banking capital requirements
They set requirements for the amount of capital needed by banks to reflect level of risks in the business
List 3 Pillars of BASEL III
- Minimum capital requirements
- Risk management and supervisions
- Market discipline and disclosure
Describe what Pillar I of BASEL III covers
Includes rules for evaluating capital requirements for credit, market and operational risks
Describe what Pillar II of BASEL III covers
- Deals with addressing firm-wide governance and risk management.
- Also includes evaluation of all other major risk types in the bank
Describe what Pillar III of BASEL III covers
- Disclosure requirements include both public disclosure and private disclosure by the bank to the regulator
3, Ensures stakeholders are able to evaluate and scrutinise banks
Define Economic Capital
Economic capital is the amount of capital that a provider determines is appropriate to hold given its assets, its liabilities, and its business objectives.
It is an internal, rather than a regulatory, capital assessment.
What is Economic capital typically based upon?
- The risk profile of the individual assets and liabilities in its portfolio
- The correlation of the risks
- The desired level of overall credit deterioration that the provider wishes to be able to withstand.
What is ORSA?
ORSA is the company’s Own Risk and Solvency Assessment.
It links regulatory capital to economic capital.
What is the purpose of ORSA?
To provide the board and senior management of an insurance company with an assessment of:
- The adequacy of its risk management and
- Its current and likely future solvency position
What does ORSA require each insurer to do?
- Identify the risks to which its exposed
- Identify the RM processes and controls in place
- Quantify its ongoing ability to continue to meet its solvency capital requirements (SCR and MCR)
- Analyse quantitative and qualitative elements of its business strategy
- Identify the relationship between RM and the level and quality of financial resources needed and available
What is ICAAP?
Internal Capital Adequacy Assessment Process (ICAAP)
Used by Banks to assess and ensure their internal capital adequacy is sufficient over the long term
What are the purpose of ICAAP
ICAAP enables banks to:
- Identify and aggregate all material risks
- Calculate the economic or internal capital necessary to cover the risks
What does ICAAP require banks to do?
- Have a process for assessing their overall capital adequacy levels
- Supervisors should review and evaluate a bank’s ICAAP
- Supervisors should be able to require banks to hold capital in excess of the minimum levels
- Supervisors should require quick remedial action if capital levels are not maintained
