Chapter 24 - Supervisory reserves and capital requirements (2)

Question 1

How can the supervisory authority’s primary concern be to ensure that insurance companies have sufficient assets to cover liabilities with a high degree of certainty

Answer 1

• Requiring insurance companies to hold reserves calculated on a prudent basis
• Requiring a minimum level of solvency capital to be held
• Requiring a combination of prudent reserves and solvency capital to be held

Question 2

What is market-consistent value of a liability

Answer 2

It is the price that someone would charge for taking responsibility for ( the ownership) of the liability, in a market in which such liabilities are freely traded

Question 3

What rates of return are used in the market-consistent valuation

Answer 3

The risk-free rates

Question 4

What is the illiquidity premium

Answer 4

It is the part of the yield that represents the illiquidity of the asset

Question 5

What is the purpose of solvency capital requirements

Answer 5

It is seen as providing an additional level of protection to policyholders

Question 6

What is an example of a risk-based solvency capital requirement

Answer 6

The VaR measure, normally expressed at a minimum required confidence level

Question 7

What is the formula for the aggregated capital requirement

Answer 7

SQRT(SUM(Corr ij x Cap i x Cap j))

Question 8

What is a passive valuation approach

Answer 8

It is an approach that uses a valuation methodology which is relatively insensitive to changes in market conditions and a valuation basis which is updated relatively infrequently

Question 9

What is the advantages of using a passive valuation approach?

Answer 9

• More straightforward to implement
• Involves less subjectivity
• Result in relatively stable profit emergence ( to the extent they are used for accounting purposes)

Question 10

What are the disadvantages of passive valuation approach

Answer 10

• Becoming out of date
• Insensitive to changes in market conditions and has a valuation basis that is updated relatively infrequently

Question 11

What is active valuation approach

Answer 11

It is based more closely on market conditions, with assumptions being updated frequently

Question 12

What are the advantages of using an active valuation approach

Answer 12

• More informative in terms of understanding the impact of market conditions on the ability of the company to meet its obligations, particularly in relation to financial guarantees and options

Question 13

What are the disadvantages of active valuation approach

Answer 13

• Results are more volatile
• More complex than passive valuation