Flashcards in Capital Management Deck (23):
What is required capital?
Amount of money required above assets-liabs to cover bad scenarios
What is available capital?
difference between assets and liabs
3 people interested in capital position of company
Reasons to hold capital
Ratings Agency Capital
Gain/keep credit rating (Rating agency capital)
Internal measure (EC)
Regulator (Reg Capital)
Give policyholders confidence in company
Required by company:
Survive extreme stress (Risk capital)
Survive day to day risks (market/credit/insurance/ops/liquidity/group) (risk 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)
Flat charges enforced
Low inflation/low return environment
Increased competition from fund management
Changing distribution systems
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
What is reverse stress testing?
Where you find the stress needed to get a particular result e.g. insolvency over 1 year
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
Why might available capital decrease over the years?
2. Losses on without profits which shareholder is 100% liable
3. Consistent over-distribution on WP pols
what particular asset is allowed in a pillar 2 situation (therefore part of available capital) but not pillar 1?
In pillar 1 there is prudence in the liabs but not PVFP to counter it
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)
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
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
Why are WP policyholders paid bonuses?
Because their AS is greater than their guarantee (ie. they share in profit from their premiums)
Why do mutuals have available capital?
1. Initial or subsequent capital injections
2. Under-distribution of surplus to WP policyholders
3. Support the company
When thinking about distributing capital to shareholders what Must be concluded first?
The remaining capital is enough to protect the current policyholders
What is realistic capital?
Difference between market value of assets and market consistent value of liabilities
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)
What are the methods of raising/managing available capital?
1. equity (incuding mutual demutualising)
2. subordinate loan stock
4. fin re (reins commission, surplus relief, virtual capital, reinsure block of business)
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
Which methods only increase capital on a regulatory peak 1 position rather than have an actual effect on realistic capital?
reducing admissible assets
What managing available capital methods have real effect on realistic capital not just regulatory capital measure
issue equity capital
subordinate loan stock
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
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)