Solvency II - Pillar 1 - MCR/Breaches/Tiers Flashcards Preview

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Flashcards in Solvency II - Pillar 1 - MCR/Breaches/Tiers Deck (12):
1

What VaR is the MCR?

85% VaR over 1 year

2

How is the MCR found?

Apply a linear formula defined by rules

3

What is the linear formula based on?

Technical provisions
Capital at risk on death/disability
Multipled by specified factors, which vary according to type of business (wp/ul/conventional without profit)

4

How is the MCR related to SCR? When will the MCR hit those limits?

Must be in range of 25-45% of SCR
The formula doesn't calibrate well to insurers and will hit max/min for a lot of insurers

5

What happens on a breach of SCR?

Supervisory intervention stage
1. Insurer must inform regulator if breach likely in next 3 months or has happened
2. Recovery plan sent to regulator within 2 months of this
3. Breach must be rectified within 6 months of occurrence
4. If this is not done, regulator may extend for 3 more months or longer if exceptional market falls

6

How could you rectify a breach of the SCR?

1. Increase own funds available to meet SCR
2. Reduce risks that go into SCR calculation

7

What happens on a breach of MCR?

Regulatory Action
1. Insurer must inform regulator if breach likely in next 3 months or has happened
2, Submit short term finance scheme to regulator within 1 month
3. Must rectify within 3 months

8

What might action might a regulator take on breach of MCR?

1. Restrict/stop disposal of assets
2. If short-term finance scheme doesn't work, withdraw authorisation to sell NB

9

What do 'own funds' refer to? And how are they then split?

Assets - tech prov - subordinate liabs
Split into basic own funds and ancillary own funds and then tiered

10

Explain basic own funds and ancillary own funds

Basic = funds within insurer
Ancillary = not in in surer, but may be called upon in adverse scenarios

11

Explain how capital is split into tiers?

Tiers are based on loss absorbancy and permanence
1. Tier 1 = highest quality, most loss absorbant and permanent e.g. paid-up ordinary share capital
2. Tier 3 = lowest quality like subordinated debt

12

What are the restrictions on capital quality to be used to cover SCR and MCR?

SCR - T1>=50% T3=80% T3=0%
e.g. If MCR = 100, T1>80, T3 = 0
and SCR = 1000, T1>500, T3<150