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Flashcards in Capital Management Deck (23):
1

What is required capital?

Amount of money required above assets-liabs to cover bad scenarios

2

What is available capital?

difference between assets and liabs

3

3 people interested in capital position of company

shareholder
policyholder
regulator

4

Reasons to hold capital

Policyholder Protection:

Ratings Agency Capital
Gain/keep credit rating (Rating agency capital)

Economic capital:
Internal measure (EC)

Regulatory Capital:
Regulator (Reg Capital)
Give policyholders confidence in company

Required by company:

Risk Capital:
Survive extreme stress (Risk capital)
Survive day to day risks (market/credit/insurance/ops/liquidity/group) (risk capital)

Working capital
Write NB (WC)
Required capital for being sure can pay policy/shareholders
Support company plans e.g. M&A (WC)
Support ongoing company costs e.g. overheads/development of products/rent/overseas (WC)

Other:

Misselling
Flat charges enforced
Low inflation/low return environment
Longevity risk
TCF
Increased competition from fund management
Changing distribution systems


5

Why do you want to project solvency into future?

1. Understand and monitor how risk profile changes
2. Effect of business decisions
3. Prepare run-off plan for close WP
4. Estimate pattern of capital released
5. Effective risk management
6. Find volume of NB can support
7. Find cost of capital in EV calc
8. Find return on capital
9. For stress and reverse stress testing

6

What is reverse stress testing?

Where you find the stress needed to get a particular result e.g. insolvency over 1 year

7

Why do companies have available capital (free money over the liabs)

1. Original money put in by original shareholders
2. More from shareholders after original
3. Profits retained from without profit
4. Under distribution of with-profits though not all of inherited estate will be shareholders

8

Why might available capital decrease over the years?

1. Dividends
2. Losses on without profits which shareholder is 100% liable
3. Consistent over-distribution on WP pols

9

what particular asset is allowed in a pillar 2 situation (therefore part of available capital) but not pillar 1?

1. PVFP
In pillar 1 there is prudence in the liabs but not PVFP to counter it

10

What is the inherited estate?

The capital in a WP fund that company has chosen to retain (but will need to be distributed before the last policy runs off)

11

Why would you have an inherited estate?

1. Attract new policyholders as secure
2. Future NB funding
3. WC over short and long term
4. Investment flexibility for more profit
5. Meet RCM
6. Tax on distribution to shareholders
7. Smoothing

12

Why would there be an expectation from policyholders that an inherited estate would not just be immediately distributed to shareholders?

They expect it to provide capital support on an ongoing basis

13

Why are WP policyholders paid bonuses?

Because their AS is greater than their guarantee (ie. they share in profit from their premiums)

14

Why do mutuals have available capital?

1. Initial or subsequent capital injections
2. Under-distribution of surplus to WP policyholders
3. Support the company

15

When thinking about distributing capital to shareholders what Must be concluded first?

The remaining capital is enough to protect the current policyholders

16

What is realistic capital?

Difference between market value of assets and market consistent value of liabilities

17

Why is Realistic Capital a good measure of available capital from policyholder and shareholder persepctive?

1. It's the best estimate of assets needed to cover claims
2. Provides best measure of policyholder downside risk as measures interaction between assets and liabilities to movements in market
3. If Realistic capital is positive with some probability is saying that policyholder claims met with same probability, so ensures some security
4. Can define shareholder capital locked away in company (although for WP 90/10 fund more has to be done)

18

What are the methods of raising/managing available capital?

1. equity (incuding mutual demutualising)
2. subordinate loan stock
3. securitisation
4. fin re (reins commission, surplus relief, virtual capital, reinsure block of business)
5. derivatives
6. review matching - use more admissible assets and less inadmissibile
7. review matching - lower reserves by better matchingof cost of options/gtees
8. Less prudent peak 1 assumptions

19

Which methods only increase capital on a regulatory peak 1 position rather than have an actual effect on realistic capital?

securitisation
fin re
reducing admissible assets

20

What managing available capital methods have real effect on realistic capital not just regulatory capital measure

issue equity capital
subordinate loan stock
securitisation

21

What will be the effect of SII on the ways to increase/manage available capital?

Prudence on assumptions released (BE)
No admissible assets
Rethink how company increases available capital

22

Why would derivatives be held for ALM purposes?

1. Reduce reg cap req so increased capital/income
2. Reduce tax/investment costs
3. Acquire/despose of rights of assets in efficient way
4. Hende one or more VA guarantees (hence help meet claims)
5. Hedge one or more guarantees in wp or guaranteed equity bond (hence help meet claims)

23

What risks do derivatives still have?

counterparty risk
liquidity
ops risk
basis risk as derivative payments/value movements may not be exactly based off same index