Flashcards in Chapter 6 Deck (85):
define the term financial management
its how an insurance company manages its resources to meet the company's financial goals, especially the overall goals of solvency and profitability.
which two standing board committees directly affect financial management?
1. investment committee sets the company;s investments policy and oversees investment operations
2. the audit committee, directs the company's internal and control function
which chief offficeer typically oversees the company's finances and financial policies?
CFO chief financial officer
name 8 duties of a CFO
1. strategic planning activities
2. coordinates, monitors, and reports to company;s financial activiteies
3. work with IT to ensure the quality and accurary of fin info
4. present fin reports to board of directors
5. communicates critical informaiton to managers, external auditors, rating agencies etc
6. works with investment baners to obtain necessary financing to raise funds
7. acts as a final arbiter to resolve internal fin issues
8. maintains financial controls and measurement tools to ensure quality.
what is accounting?
a system or set of rules and methods for collecting, recording, analyzing, summarizing and reporting financial information?
define financial reporting
its the process of presenting financial data about a company's financial position, operating performances, and flow of funds into and out of the company.
who heads the accounting and financial reporting function?
the controller, AKA comptroller
what are the responsibilities of the controller?
overseeing the timely and accurate collection and reporting of the companys financial data.
what are the 4 primary responsibilities of the accounting and financial reporting function?
1. record, track, report on financial transactions
2. coordinate the budget process and oversee expense analysis
3. prepare financial statements and reports for external stakeholders
4. gather, records, analyze and distribute financial information to a company manger.
who manages the cash coming into and out of a company?
treasury operations, (cash management)
who is the treasurer,
usually oversees the tresury operations, and maintenance and manages the records and reports for all insurer's cash transactions, specifically money deposits or withdrawn from the insurer's accounts at a bank or other financial institution.
NAme 6 typical activities of the treasury operations
1. cash management-
2. bank relations and acount administrations
3. bank reconciliation
4. short-term credit activities
5. cash forecasting
6. liquidity management
what is liquidity?
the ease and speed with which an asset can be converted to cash for an approximation for its value
define liquid assets
a companys cash and other assets that are readily marketable for their value.
What is found on an insurance company's investment policiy?
1. investment objectives -long term goals,
2. investment strategies- long term formal plan of action for achieving the investment objectives.
what are the responsibilities of the chief Investment officer?
1. make recommendations to the board and implementing board directives
2. ensure investment decisions are in line with investment policies and regulatory requirements
3. communicating to the accounting and actuarial areas the current and expected rates of return on the company's investments
who does the Cheif investment officer direct?
a team of portfolio managers and asset/liability managers who coordinate investment strategies for a specific type of invested assets.
what is a portfolio?
a collection of assets assembled to meet a defined set of financial goals.
what is ALM? (asset/liability management)
the practice of coordinating the administration of an insurers' asset portfolio( its investments) with the administration of its liability portfolio( its obligations to customers) so as to mange risk and still earn and adequate level of return.
what does the asset/liability manager do>
monitors the investments for a specific line of the insuere's business and makes sure funds are available when needed to support that line.
who is responsible for determining the financial resources needed to support and insurer's obligations to customer for each insurance product?
who forecasts and tracks economic trends?
what does a trader to?
buys and sells assets for the insurer's portfolios
who researches specific investment opportunities and make recommendations regarding those oppertunities?
who oversees audits and internal controls for the company's operations?
what are the duties of an insuere's audit committee?
1. monitor internal controls for financial operations
2. supervising and meeting with internal auditors to discuss their activities and findings
3. monitoring organizational activities to improve operating efficiencies
4. reporting the commitees' acitivites to the board of directors as well as in the annual report to stockholders and policy owners
how do actuaries work in conjunction with financial managers?
designing new products. investment operations works closely with actuaties in coordinating income from investments with contractual obligations.
how does IT work with financial managers?
most processes for managing, recording and reporting financial transactions are automated. they work together to insure data quality
how does risk management work with financial manager
to reduce the insures' risk of exposure.
what are the financial managers responsibilities (6)?
1. setting financial strategy
2. managing risk
2. managing company solvency and profitability
4. managing capital
5. managing cash flow
6. providing financial informaiton to stakeholder
financial strategies can be either aggressive, conservative or a mixture of both. Define an aggressive strategy
a company that places strong emphasis on taking risks that could enhance its profitability.
ie. high risk assests, developing new products,
financial strategies can be either aggressive, conservative or a mixture of both. Define a conservative strategy
an insurere that places a strong emphasis on avoiding risks that could threaten its solvency
- low risk investments
Which financial strategy do most companies use?
A combination of both.
the posibility that an investment or other venture might have an unexpected result.
What is an investment?
ANy use of resources with the aim of earning a profit or +ve return,
Name some examples of investments an insurance company may use?
1. buying stock or bonds
2. launching a new product
3. hiring an employee
4. issuing a policy
5. opening a branch office
6. installing a new informaiton system
7. acquiring a line of business from a competitor
what is risk management
the process of systematically identifying, assssing and minimzalizing the -ve impact of risk.
what is diversification?
an important risk management tool, which spreads a protfolio of risks accross many risk characteristics to reduce the effect of any one risk.
how can a company diversify risks?
1. purchasing assets in a verity of asset classes , (stocks, bonds, mortgages)
2. issuing a verity of products to people in a variety classes, geographic areas, occupations, and industries
3.maintaining several offices and storing backups of data in several palces so the insuere can contirnue operating in the event of an emergency
4. placing reinsurance with a variety of carriers to reduce the insures dependence on any one reisnurance company
what is investment risk?
the posibility that an investor will fail to learn some or all of an expect return or will lose all or part of the original investment or principal.
what is a market risk
risk arising from unexpected movements in the value of an entire market for assets .
what is interest-rate risk?
the uncertainty arising from fluctuations in market interest rates.
what is default risk?
the risk that a borrower will fail to repay a debt
what is liquidity risk?
the risk of being unable to quickly convert an asset to cash at its true value.
what is currency risk
the risk arising from changes in currency exchange rates
Define operational risk
a broad category of risks originating from inadequacies in an isnurers' operational areas or from external events affecting an insurers operational areas. the two kinds are business process risk and event risks.
define business process risk?
the risk of inadequate or failed internal processes and controls, people or systems.
define event risk
the risk that external events such as earthquakes, hurricanes, political unrest, will negatively impact operations.
what is product risk?
the risk that a compnays products might not sell as awell or be as profitable as expected
define pricing risk
the risk that an insueres actual experience with an insurance product will be significantly worse than expected when the product was priced causing the fear to lose money on the product.
define policy behavior risk
the risk that insureres face as results of the choices that policyholders makes
define regulatory risk, competition risk and reputation risk
1. risk of changes in insurance regulations
2. risk associated with competitiors actions
3. risk that a companys reputation will be damaged
What is the act of hedging?
through this act, an insurer balances one risk with a complementary risk. When one investment suffers negative outcomes from a risk, the other investment experiences +ve outcomes from same risk.
How do insurers control expenses? what methods do they use?
1. financial rations
2. cost-effective policies and procedures
3. selling a line of business
4. decreasing maintenance and other costs
5. eliminating staff positions
6. preparing budgest and analyzing costs
What is ERM (enterprise risk management)
a system that identifies and quantifies risks both from potential threats and potential opportunities and manages them.
What is needed for ERM to work effectively.
for it to be effective all departments must work together to identify risks. Regulators and rating agencies need this information to evaluate the quality and effectiveness of the program
risks an insurer faces
insurer's strategies for managing risks.
a measure of a company's financial success during a relatively short period of time, its used as a synonym for net income
the broader measure of a company's overall success in geenrating positive returns for its owners. refers to both a companys abilitiy to generate profit and its ability to increase the wealth of valye of the company other time.
what does long-term profitability enable for an insurere?
1. provide funds for investments
2. pay policy dividends
3. pay cash dividends to stockhgolders and increase the attractiveness of the company's stock to investors
4. generate high-quality ratings
5.; provide funds to develop products, expand product lines, or add distribution channels
6. provide funds for company expansion, joint ventures or acquisitions
how can capital be calculated?
the amount by which a company;s assets exceed its liabilities.
C= A- L
what are the benefits to maintaining a strong capital position?
1. ^ ability to withstand bad conditions (economy fail)
2. better rating from raitng agencies
3. ^ ability to attract more business
4. ^ company;s value
5. ^ flexibility in its operations
6. ^ ability to raise capital on favorable terms
7. potential bran enhacement
8. symbolic measur of confidence for current and potential networking
how can a company raise capital?
inssue new shares
reinsure part of its business
sell part of business
how can a company use capital?
create new products
invest in stocks
buy back shares
expand into new markets
pay policy dividends
pay off debt
what is a cash flow?
any movement of cash into or out of an organization
what is the term for the movement of cash into an organization? also known as source of funds
a cash inflow,
Name souces of cash inflow?
1. revenye from product sales
2. investment income
3. sales of existing assets
4. external financing
what term is used for the movement of cash out of an organization, aslo known as use of funds?
name examples of cash outflow
1. payments to policy owners and beneficiaries, or benefits, surrenders and with drawls
2. payments for operating expenses
3. purchase new assets
how do insures generally provide information to stakeholders?
form of financial statements, annual reports and the annual statement.
what is a financial statement?
a summary of a company financial condition on a specified date or its performance during a specified period. Two key examples are income statements and the balance sheet.
define an income statement
shows a company's revenue and expenses during a defined period, and shows whether the company experiences a profit or loss during that period.
what is revenue?
amount that a company ears from its business operations.
define the term expenses
the amount that a company spends to support it's operations
how do you calculate net income
define a balance sheet
it lists the values of an isnere's assets, liabilities and capital and surplus as a specified date.
what is surplus?
represent the cumulative amount of money- calculated as an insurance company's assets minus its libailities and capital that remains in the company to accumulate.
What is the basic accounting equation interms of assets, liabilities, capital and surplus
assets= liabilities + capital and surplus
What is an annual report?
a financial document that an incorporated business issues to its stockholders and other interested parties to report the business' activities and financial performance for the preceding year.
What is insolvency?
a situation in which a company is unable to meet its financial obligations.
what two questions to reinsurance regulators look at, when looking at insurers financial situation?
1. does the insurere have enough current assets to satisfy current liabilities without borrowing money or selling long-term investments?
2. .does the insurer have enough capital and surplus relative to its long0term liabilities to remain solvent?
Insurance regulators require what to be submited from insurance companys in the US and in CAN in terms of their financial reports??
1. US:Sibmit an annual statement with the insurance department in each state in which it does it business as well as the NAID.
2. CAN: life insurers must file the Life-1, accounting report. with the OSFI and with the regulators of every province in which it does business
what is financial condition examination?
a formal investigation of an insere that insurance regulators perform to identify and monitor any threats to an insurers solvency.
What is included in a financial condition examination?
1. examining account records to ensure that the insure is operating on a sound and lawful basis
2. investigating the insurers' fin and business activities to ensure that they do not present any hazards to the insurers solvency
3. producing an examination report, which identifies potential problems and recommends solutions
what is the outcome of a completed external audit?
1. independant professional opinion as to whether a company's financial statement fairly presents the company's operations and that the statements were prepared accounting to a given set of accounting standard
2. suggestions for changes to the company;s system of internal control
3. a report of audit findings.