Odo.FinReg

Question 1

Contrast (SAP v GAAP) - objective

SAP :statutory Acounting principles / GAAP: Generally Accepted Accounting principales

Answer 1

SAP: measure ability to pay claims
GAAP: measurement of earnings

Question 2

Contrast (SAP v GAAP) - intended user

SAP :statutory Acounting principles / GAAP: Generally Accepted Accounting principales

Answer 2

SAP: regulators
GAAP: general audience (policyholders, investors, public)

Question 3

Contrast (SAP v GAAP) - asset recognition

SAP :statutory Acounting principles / GAAP: Generally Accepted Accounting principales

Answer 3

SAP: asset recognized when expense incurred
GAAP: may defer recognition of asset for asset/revenue matching with expenses (Ex: DPAE)

Question 4

Contrast (SAP v GAAP) - treatment of reinsurance in loss reserves

SAP :statutory Acounting principles / GAAP: Generally Accepted Accounting principales

Answer 4

SAP: loss reserves NET of reinsurance
GAAP: loss reserves GROSS of reinsurance

Question 5

Contrast (SAP v GAAP) - treatment of reinsurance in loss reserves in terms of DEFERRED INCOME TAXES.

SAP :statutory Acounting principles / GAAP: Generally Accepted Accounting principales

Answer 5

SAP: Not permitted
GAAP: Permitted

Question 6

Compare and contrast the liquidation basis and going-concern basis in accounting concepts.

Answer 6

liquidiation:
- an accounting concept where the elements are valued on a run-off
- regulators interest to see if insurer is able to render the obligations to policyholders.

Going-concern:
- accounting concepts where elements are valued on a normal and continued basis
- of interest to INVESTORS

Question 7

Compare and contrast principle-based accounting and rule-based accounting.

Answer 7

Principles-based:
- require interpretation to apply
- more flexible

Rules-based:
- specific guidance
- easier to apply

Question 8

Compare and contrast fair value and historical cost in terms of accounting.

Answer 8

fair value:
- value in open market
- more accurate
historical cost:
- original cost MINUS depreciation
- easier to calculate

Question 9

Briefly explain Solvency 2

Answer 9

Solvency 2 is a :
→ principles-based insurance regulatory system
→ for capital levels of insurance companies
→ in the European Union.

Question 10

what are the 3 pillars of Solvency 2

Answer 10

QUANTITATIVE: sets SCR & MCR (Solvency & Minimum Capital Requirements)

GOVERNANCE: supervisory activities (internal control & risk management, supervisory review process)

TRANSPARENCY: supervisory reporting & public disclosure

Question 11

Identify 1 similarity and 2 differences between MCT and Solvency 2.

Answer 11

Similarity: both are implementations of a capital adequacy framework.
Differences:
1. MCT is for Canada, Solvency 2 is for the European Union
2. MCT applied static risk factors, Solvency 2 is principles-based (more adaptable to circumstances, but harder to apply).

Question 12

Calculate the value of commuted claims.

Answer 12

1. Calculate PV(pol liab.) --mid-year
   where t = 0.5, 1.5, …
2. Calculate margin
   ```
   PV(remaning pmt * Required Margin * TargCap to Required Ratio *
   Risk Cost of Capital)
   ~~~
   where t = 1, 2,…
3. PV = PV(w/o margin) + margin

Question 13

2 Benefits of commutation for reinsurers

Commuting a claim = one party(RE) is relieved of its obligations in respect of the claim in exchange for a cash payment

Answer 13

• Bring certainty to its results
• capital relief
• savings in claims adjusting and administrative costs.

Question 14

1advantages and 1 disadvantages of commutation for Insurers

Commuting a claim; RE paid Ins in advance and get relieved of its obligations

Answer 14

Advantages
- removes reinsurance CREDIT risk
- insurer receives benefit of favorable LOSS development
- decreases EXPENSE costs
- more EFFICIENT clms handling
- receives immediate Cash Flow

disadvantages
- risk of adverse development on claims
- CapReq goes up (to support increased liabilities)