What is the meaning of solvency
Having more assets than liabilities
The promise to pay future claims
(Liabilities = Paid claims, unpaid claims, operating costs)
What is a solvency margin
The amount by which assets exceed liabilities
(how much extra capital an insurer holds)
Assets
Items of value/resources that a business owns.
Tangible - Physical item
Intangible - Not physical but holds value
An insurers assets are premiums and investments
Liabilities
Where money is owed to a person or organisation
Liabilities = Paid claims, unpaid claims, operating costs
Capital
Financial resources an insurer holds to cover liabilities and withstand losses from unexpected events
Liquidity
How easily assets held by a business can be turned into cash
Loss ratio
The relationship between premium and claims
Indicates how much of the premium income is paid out to cover claims
Combined ratio
A ratio which compares operating costs, as well as claims, against premiums and investment income
Solvency II main aim
To ensure that insurers are there to pay their policyholders claims when needed.
Solvency II stated objectives
Better regulation
Deeper integration of the EU insurance market
Enhanced policyholder protection
Improved competitiveness of EU insurers
What are the three pillars of Solvency II
Quantitative requirements - Requires insurers to show they have adequate financial resources (solvency capital requirement). There is a lower amount known as minimum capital requirement, if this level is breached, regulatory intervention is likely.
Supervisory review - Own risk and solvency assessment (ORSA) is an internal review undertaken by insurers. Identifies all the insurers liabilities to determine the capital necessary for its overall solvency that needs to be met at all times.
Disclosure - Insurers have to publicly disclose more information than they have done previously
What acts affected Solvency II in the UK after Brexit
The Solvency II and Insurance regulations 2019 - Legislation to ensure the provisions of Solvency II continued to work in the UK after it left the EU
Financial Services and Markets Act 2023 - Revokes the regulations mentioned above and brings responsibility back “In house” to the UK.
What is the EU supervisory body of Solvency II
The European Insurance and occupational pensions Authority
What are the three links in the Lloyds chain of security
Syndicate Level Assets
Members Funds at Lloyds
Central Assets
What is a rating agency
An organisation which rates insurers, publishing their results publicly, based on the insurers strength
Ratings are indicated by the use of scores such as A, A+, AAA
Insurance companies are rated individually, however Lloyds is rated as a single marketplace.
What is a security committee
Someone who assumed responsibility for checking all the security that it is proposed is used
