Financial strength of insurance companies Flashcards
(21 cards)
What are the main credit rating agencies (CRAs)?
Standard and Poor’s (S&P), AM Best, Moody’s, and Fitch.
What factors are considered in the rating methodology for insurance companies?
Economic and industry risk
competitive position
management and corporate strategy
enterprise risk management (ERM)
operating performance, investments
capital adequacy
liquidity
financial flexibility.
What is the regulatory requirement for solvency margins?
Firms must maintain overall financial resources adequate to ensure liabilities can be met as they fall due.
What is the Solvency II Directive?
A prudential regime for EU insurance and reinsurance undertakings, established on 1 January 2016, aimed at ensuring adequate protection of policyholders and beneficiaries.
What are the three pillars of Solvency II?
Pillar 1: Financial requirements, Pillar 2: Governance and supervision, Pillar 3: Reporting and disclosure.
What is the role of the actuary under Solvency II?
Solvency II specifies the need for an actuarial function, carried out by persons with sufficient knowledge of actuarial and financial mathematics.
What are the differences between Solvency II and IFRS 17?
IFRS 17 does not restrict liquidity premium.
Solvency II measures are more prescriptive and comprehensive.
Profits are recognized immediately under Solvency II; under IFRS 17, profits are recognized over the life of the insurance contract.
What are the similarities between Solvency II and IFRS 17?
Both allow the insurer’s own assessment and management of risks.
Both use a best estimate basis for expected future cash flows.
The discount rate includes the risk-free rate and liquidity premium.
What is a credit rating agency?
A firm that assesses financial strength (e.g. S&P, Moody’s).
What is the Solvency II Directive?
EU rules for insurer capital, governance, and reporting.
What are the 3 pillars of Solvency II?
Capital
Governance
Disclosure.
Reverse stress-testing
Scenarios most likely to render a business model unviable
Pillar 1 - Financial Requirements
Applies to all firms and considers quant requirements of solvency capital requirement and minimum capital requirement
Done through either an approved full / partial model or standard formula approach
Assets reflect current market value
Pillar 2 - Governance and supervision
Qualitative requirements
Effective risk management system and prospective risk identification
Pillar 3 - Reporting and disclosure
Insurers are required to publish details of the risks facing them, capital adequacy, and risk management
Firms are required to publish a solvency and financial condition report annually
ORSA
Own risk and solvency assessment
Internal process to assess adequacy of risk management and current and prospective solvency positions under stress scenarios
Firm breaches minimum capital requirement (MCR)
Regulatory action taken, firm must submit a plan to restore capital above MCR within 3 months
Firm breaches solvency capital requirement (SCR)
Firm must consider and action a plan to restore capital provision and / or reduce its risk profile
2 options when there is inadequate regulatory capital
Raise more capital (shares, long term debt)
Reduce regulatory capital requirements (lower business volume, increase reinsurance, switch out of higher risk assets)
Use test
Used to verify that internal models satisfy SCR requirements AND internal risk management processes
What are credit rating agencies
Financial assessment on ability to meet principal and interest payments on debts (claims)
