FSIs

Question 1

What are eligible own funds?

Answer 1

BOF + ancillary own funds

Question 2

What are basic own funds made up of

Answer 2

Assets minus liabilities plus subordinated liabilities (rank below other debts if company is wound up) minus regulatory adjustments

Question 3

What are the two approaches that can be used to calculate assets and liabilities under FSI 2

Answer 3

1) mark to market approach - use available prices in market transactions to value assets and liabilities
2) mark to model approach - benchmarking, extrapolating or other modelling of other model inputs to derive valuation

Question 4

What is adj NAV

Answer 4

Assets minus liabilities minus goodwill minus intangibles

Question 5

What are the regulatory adjustments

Answer 5

-80% of intangible assets with remaining 20% in tier 3
-investments in insurer’s own holding company
-own shares
-cash and cash deposits at bank within the same financial conglomerate
-restricted reserves
-participations in financial and credit institutions
-net deferred tax assets

Question 6

Eligibility of OF in meeting the MCR and SCR

Answer 6

• tier 3 can cover SCR but not MCR
• ancillary OF can cover SCR but not MCR

Question 7

Valuation of life insurance obligations should generally be done on policy-per-policy basis. When are model points permitted?

Answer 7

-model points represent the underlying risks
-does not distort the value of TPs
-sufficient validation to ensure that grouping of life policies does not lead to loss of attributes.

Question 8

Assumptions underlying the valuation of the BEL

Answer 8

-assumptions must be consistent with info provided by financial markets
-rfr term structure
-assumptions consistent with generally available data on insurance risks
-internal and external data
-assumptions about policyholder behaviour
-consider how changes in financial and non-financial conditions may impact exercise of options
- should be based on past experience
-management actions and risk mitigation techniques
-risk mitigation strategies that are not in place yet would be considered management action
-assumptions need to take impact as well as time needed to implement into account

Question 9

What is the contract boundary

Answer 9

Date at which the insurer has the unilateral right to
-terminate contract
-reject premium payable
-amend premiums or benefits to fully reflect risks

Question 10

When valuing recoverables in TP what should be considered

Answer 10

• should be done separately
• take into account timing differences between cashflows and recoverables
  -insurers should distinguish between market and underwriting events because only underwriting event recoverables should be included
  -allow for default in amounts recoverable

Question 11

How is the illiquidity premium calculated

Answer 11

(1) Asset portfolio rate: discount rate such that pv of assets = MV
(2) Policy portfolio rate = discount rate such that pv of annuity CFs = BEL
Illiquidity prem = 50% of (1) - (2)

Question 12

Calculation of risk margin

Answer 12

SCR should not allow for LACDT or any hedgeabhle risks from market component

Question 13

When calculating the SCR what are the external factors that should be considered

Answer 13

-risk mitigation instruments
-changes in policyholder behaviour
-management actions

Question 14

When assessing the solvency of insurers with ring fenced funds, consider:

Answer 14

-availability of EOF in presence of ring-fenced funds
-extent to which EOF held in ring fenced fund can contribute towards the total SCR
-extent to which ring fenced funds reduce diversification

Question 15

How is the impairment factor for risk mitigation instruments calculated

Answer 15

1 - (probability of default)*(loss given default)

Question 16

How is spread and default risk calculated

Answer 16

It relies on credit ratings which are assigned through credit quality steps. CQS is the long term historic probability of default

Question 17

What is the first think you have to consider before allowing for management actions of any kind

Answer 17

Whether shock was industry wide or company specific