solvency equation
assets ≥ paid claims + unpaid claims + operating costs
what is solvency margin / working capital
amount by which assets exceed liabilities
what is the IBNR figure
‘incurred but not reported’ (IBNR) figure.
ensures that enough funds are put aside for the unknown, unpaid claims. insurers use statistical tools to identify an amount to be reserved
which classes of business are more volatile in nature, and how does this affect how solvency is calculated
- aviation liability
- marine liability
- general liability.
the starting calculation involves increasing premium and claims figures by 50%.
what is Liquidity
refers to the ease with which assets held by a business can be converted into cash. A business can have significant assets but be illiquid
what is Loss ratio
relationship between premium and claims (paid + outstanding). Loss ratio of less than 100% indicates profit on a pure loss ratio basis.
what is Combined ratio
a ratio which compares operating costs as well as claims, as against premiums and investment income.
what is solvency 2
pan-European solvency regime which operates in EU Member States. it was brought into UK law by specific legislation and via the PRA rule book.
The key principles are the ‘three pillars
The stated objectives of Solvency II are:
- better regulation;
- deeper integration of EU insurance market
- enhanced policyholder protection; and
- improved competitiveness of EU insurers
3 pillars of solvency 2
- Quantitative requirements - assets exceeds liabilities; aka solvency capital requirement(SCR). If breached, warning is given to regulators. A lower amount aka minimum capital requirement (MCR)
- Supervisory review - Own risk & solvency assessment (ORSA), internal review by insurers. Insurer identifies, assess, monitor, manage and report risks it faces, ensures the overall solvency is met
- Disclosure - across all EU member states
Examples of business risks faced by an insurer
- Credit/counterparty risk - Premiums not being paid, claims not being recoverable as the reinsurer is insolvent.
- Operational risk
- Market risk - Investments failing, Exchange rate losses
- Liquidity risk
- Group and capital risk
- Enterprise risk - Management (ERM) assess risks that impact the entire business.
The Solvency II and Insurance Amendments etc. EU Exit Regulations 2019
ensures that the provisions of Solvency II continued to work in the UK even though it is now outside the EU.
The Financial Services and Markets Act 2023,
29 August 23, balance came into force 1 January 24,
Government sets the overall policy framework. Regulators will set the detailed rules to be followed by individual regulated firms.
who regulates solvency 2
European Insurance and Occupational Pensions Authority (EIOPA) is the
overarching EU supervisory body of Solvency II.
European Insurance and Occupational Pensions Authority (EIOPA), main goals are to:
- provide protection for consumers, rebuild trust in the financial system
- effective regulation + supervision, takes account interests of Member States
- ensure application of rules for financial institutions + markets across the EU
- promote a coordinated EU supervisory response
EIOPA’s core responsibilities
- increase stability of the financial system
- transparency of markets and financial products
- protection of policyholders
what the final link in the Lloyd’s chain of security.
The Central Fund
links in the lloyds chain of security
- Syndicate level assets
- Members’ Funds at Lloyd’s (FAL)
- Central assets
syndicate level of assets
premiums received are held in trust funds. these are 1st source of money to pay any claims which are made on syndicate. Funds must be held in ways that can be released quickly, to pay claims
Members’ Funds at Lloyd’s (FAL)
- if funds are inadequate the 2nd line available forms the link in the chain. Funds are deposited by members of syndicate as a condition of an investor.
- Once funds are exhausted, members are asked for more funds to limit of their liability.
- Amount of funds each Member provides to support underwriting is calculated by the SCR of each syndicate.
- Corporation reviews SCR and uplifts by a % to ensure sufficient capital available, aka syndicate Economic Capital Assessment (ECA).
Central assets
- Lloyd’s Market has Central Fund available as last resort, if all sources of funds of any valid claims are exhausted.
- Council has control of the Central Fund.
- Its fed by contributions from written premium in the market and basic rate of contribution for members: 0.35% - 2024.
- Lloyd’s set the levy for Central Fund as deems appropriate
what are rating agencies
no. of organisations which rate (re)insurers, publishing their results for public consumption. Their independent opinions of an insurer’s strength and are not influenced by the insurer
four main organisations that conduct this rating process:
- Standard & Poor’s
- Fitch
- A. M. Best
- Moody’s
what other functions do rating agencies complete:
- risk evaluations
- investment research
- credit ratings to clients who can be individuals / organisations.
