REGULATION Flashcards
(21 cards)
Who are the regulatory bodies and what is their purpose?
- Prudential Authority: ensures financial soundness of FSP
- Financial Sector Conduct Authority: regulates market conduct
- Financial Intelligence Centre: focuses on anti-money laundering and preventing financial crimes
- Competition Commission: regulates competition to prevent monopolies.
What improvements/changes were made to the 1998 LT Insurance Act in the 2017 Insurance Act?
- Separated prudential regulation from market conduct regulation + separate bodies too
- Created more detailed insurance definition.
- Microinsurance legal framework introduced
- Insurers need to maintain capital based on their risk profiles, not fixed ratios.
- Foreign reinsurers must either open local branches or work in special arrangements.
- Regulators can now see entire insurance groups, include non-insurance components - require consolidated reporting and group-wide risk management.
- Role of actuaries greater with more involvement in capital modelling, regulatory reporting, risk governance.
- Enhanced PPR with more disclosure requirements, clearer communication standards + better complaint resolution mechanisms.
- More significant penalties possible with non-compliance.
How do Supervisory Review Process (SRP) and ORSA relate to one another?
Defining the second pillar of the competition takes so long because the output results in the winner being capped.
What is submitted to the FSCA?
- conduct of business returns (CBRs)
- annual financial statements
- audit reports
What kinds of reports does an insurer need to submit to the PA?
- quarterly returns (watered down version of annual)
- annual qualitative returns
- annual quantitative returns
- ORSA report
What is difference between qualitative and quantitative return?
Qualitative:
- A-L management
- Risk management
- Capital management [same as risk management under HAF]
- Key person management
- Governance arrangement
- Business environment
Quantitative:
- SCR (market risk, underwriting risk, operational risk)
- Asset assessment (investments, derivatives)
- TPs - premiums and benefits, valuation assumptions, experience analysis, expense analysis.
- Solvency position and own funds statement
What is an ORSA?
- this is a report very unique to the risk profile of the insurer
- should be used in capital planning and management
- guidance provided in GOI 3.1
- it contains details regarding:
> capital needed in order to remain financially sound over long period + across diff scenarios
> own funds needed for planning + what is available (tier them)
> outline different risks, how they are identified + managed, how risk profile of insurer may change
> material changes since last ORSA
> record of each ORSA is kept and internal reports on each ORSA (should be simple and easily reviewable)
> head of risk management function and actuarial function should contribute to ORSA but board of directors responsible for compliance
What is an ORSA policy? GOI 3.1
- all insurers must have a board-approved ORSA policy
- policy must outline:
– description of processes in place to conduct ORSA (forward looking timeframe and justification)
– consider link between risk profile and solvency needs
– how stress tests/sensitivity analyses are performed and how often
– data quality requirements
– frequency and timing of ORSA reports
– what triggers out-of-cycle ORSA report
– what parts of ORSA needs to be independently reviewed - ensure board of directors, senior management, risk management function and actuarial function are all engaged in ORSA process
- ORSA results need to be embedded into capital management process
How can ORSA help insurer in decision making? GOI 3.1
- help insurer understand how capital and risk management approaches interact
- determine whether business strategy is sustainable across range of different scenarios
- insurer knows when to retain or transfer specific risks and how to price risk
- see if there is a gap between capital required and capital available, and capital needs to be raised (well in advance)
- PA looks for evidence of ORSA being embedded into management actions
What is in an ORSA report ?
admin:
- report on each ORSA and methods used in the ORSA must be submitted to PA within 2 weeks of board approval
- must be accompanied by declaration signed by CEO and approved by board of directors and signed by chairperson of board of directors
processes:
- detail and outcomes of stress testing and scenario analysis
- breakdown of capital use: business activity, geographic spread of exposures, risk types
comparisons:
- include info on current and future capital levels vs MCR
- actual capital position vs. capital targets + MCR then
- actual vs planned capital management actions
changes:
- description of material changes since last ORSA
- unpack anticipated changes in insurer’s risk profile or capital management processes
What is Principles and Practices of Financial Management (PPFM)?
- PPFM is a document created by the insurer and submitted to PA
- outlines the Principles and Practices the insurer follows when managing discretionary participation business
- PPFM describes how it distributes bonuses or discretionary benefits among policyholders.
- important that PH expectations have been met, and fairness between policyholder has been upheld
- This document needs to be approved by the board, and consistently reviewed
What are Policyholder Protection Rules (PPR)?
- contained in the LT Insurance Act
- published by the FSCA
- govern the conduct of insurers, brokers, and other financial service providers
- aim to ensure fair treatment and protect the interests of policyholders.
- address product design, fair treatment, and the overall conduct of business within the life insurance
What regulations to cell captives face?
- same as traditional insurers
- additional reporting requirements LT Insurance Act
- additional requirements through the PA’s Retail Distribution Review
- specific conduct requirements via FSCA Conduct Standard 2 of 2022 (INS)
FSCA Conduct Standard 2 of 2022 (INS)
- rules to manage potential conflicts between cell owners’ interests and policyholder interests.
- specific disclosures that must be made to PHs about the cell structure and the relationship between the cell owner and the insurer.
- requirements that cell owners must meet to be eligible to own a third-party cell.
- guidelines on how profits can be distributed to cell owners to ensure fair treatment of policyholders.
- specific behavioural standards that cell owners and the cell captive insurer must adhere to in their dealings with policyholders.
Prudential Authority’s Retail Distribution Review
- reforms to commission structures to reduce conflicts of interest in insurance distribution.
- clearer definitions of the roles and responsibilities of various intermediaries in the insurance value chain.
- enhanced accountability for product suppliers (including cell captive insurers) for the distribution of their products.
- rules ensuring that all distribution channels are subject to equivalent regulatory requirements and remuneration structures.
- mechanisms to ensure that insurance products distributed through cell structures provide fair value to customers.
Long Term Insurance Act (cell captive stuff)
- provided more legal certainty to operations
- more stringent and risk-based capital requirements for cell captives (each cell must have sufficient capital for risk written)
- introduced limitations on who can own cells, particularly for third-party cell arrangements.
What is the main purpose of SAM valuation?
- needed to prove the financial strength of the insurer to regulator
- SCR is capital required to withstand 1-in-200
- only demonstrates solvency at a point in time as it corresponds to a 1-in-200 year event
- also proof to policyholders or investors
- the more assets exceed liabilities, the stronger
- at the very minimum, the excess needs to be above MCR, but should be above SCR for regulator not to worry
- SCR cover gives a measure to compare strength of different insurers
What is the main purpose of ORSA (Own Risk of Solvency Assessment) ?
Needed to determine capital needed to ensure future solvency + for business plan
Conducting an ORSA is a regulatory requirement which has the objectives of assessing
ORSA aims to assess the resilience of an insurer’s solvency across a range of possible scenarios.
Considering the specific risk profile, approved risk appetite and business strategy of the insurer.
Also considering compliance, on a continuous basis, with financial soundness requirements.
Monitors the significance with which the risk profile of the insurer deviates from the implied risk profile underlying the financial soundness requirements.
In addition to fulfilling the statutory role, an insurer may use the ORSA to determine the amount of required capital (or economic capital) that it needs to hold to meet it objectives.
The ORSA will help determine the capital required to do all the things capital typically needed for.
The ORSA can show the level of capital required to fund its new business plans, or alternatively the level of new business that can be supported by the existing capital.
Overall, the ORSA allows the impacts of strategic business decisions to be assessed.
The company may use the ORSA exercise to determine the probability of meeting metrics ratings agencies focus on, such as the level of SCR cover.
How are the different SAM pillars integrated?
What are the prudential standards for microinsurers?
What are the product standards for microinsurers?
