Chapter 4 - Market Security Flashcards
(47 cards)
What is a ‘solvency margin’?
The amount that assets exceed liabilities.
What does ‘Solvency’ mean?
Solvency means having more assets than liabilities.
For a firm to be solvent, assets must be greater or equal to the sum of paid claims, unpaid claims & operating costs.
What 2 categories can unpaid claims be split into?
- Those that are known about
- Those that are not
What is the ‘Incurred But Not Reported’ (IBNR) figure?
The amount to be reserved for unpaid claims.
If a class of business is more volatile in nature, what does this mean in terms of claims?
There is a potential for larger claims.
What is an ‘Asset’?
Any resource owned or controlled by a business.
What are ‘Liabilities’?
Money that is owed to another person or organisation.
What constitutes an insurers ‘Liabilities’?
- Claims - paid + unpaid.
- Costs of reinsurance.
- Operating costs.
What is an insurers ‘Assets’?
It’s premium and investment income.
What does an insurers ‘Liquidity’ mean?
What does it mean if an insurer is ‘illiquid’?
The ease with which an insurers assets can be converted into cash.
If an insurer is ‘illiquid’ - it cannot convert its assets into cash very easily.
What is ‘Liquidity risk’?
The risk of not being able to convert assets into cash easily.
(Cash flow issues)
Not being able to release investments quickly enough.
i.e. The insurer has enough assets but cannot convert them into cash jockey enough.
What is a ‘Loss ratio’?
The relationship between premium and claims (paid + outstanding).
A loss ratio of less than 100% indicates profit on a pure loss ratio basis.
(Premium Vs. Claims).
What is a ‘Combined ratio’?
The relationship between premiums + investment income and operating costs + claims.
(Premium + investment income Vs. Operating costs + claims.)
What does a pure loss ratio indicate?
Indicates the relationship between premium & claims, without taking into account investment income & operating costs.
What did the ‘Solvency II and Insurance Regulations 2019’ do?
Ensured that the EU Solvency II rules continue to work in the UK now it is outside of the EU.
Who does ‘Solvency II’ apply to?
All insurers, reinsurers, captives, and mutuals with their head office in the EU.
What is the one main aim of Solvency II?
Ensure that insurers can pay their policyholders claims when needed.
How is the Solvency II Regulatory Framework structured?
3 - Pillar Structure (QSD):
Pillar 1: Quantitative requirements
Pillar 2: Supervisory review
Pillar 3: Disclosure
What are the ‘3 Pillars of Solvency II’?
- Quantitative requirements
- Supervisory review
- Disclosure
(QSD)
Pillar 1: Quantitative requirements?
Sets the quantitative requirements.
Requires insurers to demonstrate they have adequate financial resources available to cover exposure to risk.
Financial requirements: insurers assets must exceed its liabilities - this amount is their ‘Solvency Capital Requirement (SCR)’.
There is a lower amount called the ‘Minimum Capital Requirement (MCR)’.
Meaning of ‘Solvency Capital Requirement (SCR)’?
An insurer’s SCR is the amount of assets available in excess of its liabilities.
If it’s SCR is breached (insurer doesn’t have enough assets to balance liabilities), this is an early warning to regulators for problems.
SCR is part of the 1st pillar of Solvency II.
Meaning of ‘Minimum Capital Requirement (MCR)?
MCR is the lower amount an insurers assets must balance its liabilities.
If MCR is breached then regulatory intervention is likely.
Pillar 2: Supervisory review?
Sets the qualitative requirements.
Requires insurers to participate in an internal review called an ‘Own Risk and Solvency Assessment (ORSA).
Insurers must adopt an effective risk management system for all risks to which it is exposed, and determine the necessary capital to hold against these risks.
Risk management and risk assessment systems must be implemented by senior management.
Pillar 3: Disclosure?
Insurers must publicly disclose more information than historically.
