Other

Question 1

Nature of business

Answer 1

Investment income/ premiums (or claims)

Real LT assets/ total assets

Question 2

Claim settlement pattern

Answer 2

Time to settlement = 1/(Claims paid / OS and future claims reserve)

Question 3

Financial strength

Answer 3

Solvency margin = Asset/ liabilities

Question 4

Profitability and performance

Answer 4

• Gross and net claim ratio
• Expense and commission ratio
• Investment performance = investment income/ assets
• Return on capital = Post-tax profit/ free reserves at start of year (=total end of year reserves – post-tax profit)
• Profit margin = profit (gross/net) / net earned premium

Question 5

Investment income/ premiums (or claims)

Answer 5

High = class with long term claims (eg liability claims)

Question 6

Real LT assets/ total assets

Answer 6

High – implies large proportion of liabilities are LT and real

Question 7

Reinsurance

Answer 7

Large diff between reins ceded based on premium and based on claim indicates good/poor value or more/less claims than average
Proportion reinsured = high = new/unusual/volatile class of business

Question 8

Solvency margin = Asset/ liabilities

Answer 8

• Need to compare to regulatory minimum and that of competitors
• High risk business (eg liability) = higher than average sol margin
• Look at previous years for trends in ratios
• Consider strength of provisioning basis

Question 9

Gross and net claim ratio

Answer 9

• Longer tail business may be higher, as insurer can expect sufficient investment income to offset losses due to claims
• High ratios may also be due to one-event or market may be at the bottom of the UW cycle

Question 10

Expense and commission ratio

Answer 10

Consider level of NB – if this is volatile than pattern of premiums, claims and expenses will be distorted

Question 11

Investment performance = investment income/ assets

Answer 11

• Consider if realised/ unrealised gains are included in income figure (and therefore in profit and loss account)
• Ideally take average of start of year and end of year asset value figure

Question 12

Ret on capital/ prof margin

Answer 12

Consider trends, unusual events, strength of basis and competitors

Question 13

Commercial and economic environment

Answer 13

• Consider data – new product/business = lack data = may need to source externally
• Consider typical exclusions to include in policy

Question 14

Specify problem

Answer 14

• State likely objectives (profit/ market share within given time frame
• Main risks relate to claims – understand likely sources and freq/severity
o Give examples of claim events
• Determine rates appropriate for each policy as likely to pose different levels of risk

Question 15

Developing solution

Answer 15

• Model – build new, adapt existing, purchase externally
• Reflect features of particular risks
• Consider reserving basis
• Set assumptions relating to key areas of experience (claim freq/severity)
• Sensitivity test/ scenario analysis (esp for new product)
• Compare premium rates to competitors

Question 16

Monitor experience

Answer 16

• Assess claims and compare with assumptions
• Need to understand why experience differs from experience, update assumptions if need be
• Monitor sales volumes
• Monitor external factors, eg if competitors change rates insurer may have to follow suit
• Monitor whether sufficient profit can be made from product while remaining competitive, may need to leave market

Question 17

Professionalism

Answer 17

• In developing and managing the product there will be a requirement to act in a professional manner
o Adhere to technical and professional standards

Question 18

Economic Capital Benefits

Answer 18

• Consistent with the regulatory regime targets
• Avoids risk from firms holding inadequate provisions without introducing inefficiencies from unduly higher provisions
• Hold capital appropriate to inherent risks
• Promote confidence in the markets if analysts believe that companies are holding suitable capital for the risks they hold
• Easy to explain to management to ensure better risk management.
• Avoids the risk that firms “game” the regulatory systems
• Consistency with overseas providers
• Avoids undue strength of provisions which would result in higher cost of such financial products
• Avoids inadequate provisions which would result in company failures

Question 19

Standard model benefits - Insurer

Answer 19

• Cost effective
• Less complex
• Less time consuming to build/use

Question 20

Standard model drawbacks - Insurer

Answer 20

• Only aims to capture risk profile of average insurer – May not be appropriate for particular insurer
• Approximations mad in modelling risks that may be inappropriate
• Regulator may build in level of prudence
• Risk of applying standard model blindly, rather than focusing on the unique risks faced and how best to manage such risks

Question 21

Internal model benefits – Insurer

Answer 21

• Allows insurer to calculate SCR using a model that reflects its specific risk profile
• Should be more sophisticated – SCR and economic capital more closely aligned which avoids unnecessary prudence
• May be able to choose between two – can choose that which results in lower capital requirements

Question 22

Internal model drawbacks - Insurer

Answer 22

• Need to seek approval from regulator

* Costly to develop/maintain

Question 23

Standard model– regulator

Answer 23

• Enables regulator to compare results for wide range of insurers
• Easier to decide which companies to scrutinise further
• Need to define model and ensure it is appropriate for the range of insurers being regulated
• May not provide sufficient info for regulator to understand what action to take

Question 24

Internal model – regulator

Answer 24

• Have to approve models before they can be used – time/effort
• Ensure insurers keep models up to date as risk profile of insurer will change over time
• Regulator responsible for maintaining confidence in financial system and protecting customers, so whichever model is used the regulator needs to ensure these objectives are met, both initially and over time

Question 25

Investment Winding up practical issues

Answer 25

* Aim to reduce risk of funding level deteriorating – most likely to happen if there is investment mismatching * Solution – if annuities are to be purchased then bonds could be used to match annuity prices * This won’t be exact though, so need to progress windup as quickly as possible

Question 26

Data Winding up practical issues

Answer 26

* Gather and check scheme membership data to ensure data is complete and accurate so that correct benefits are provided * Take appropriate action if not = increases time/cost of wind up

Question 27

Communication Winding up practical issues

Answer 27

* Communicate to members that scheme is winding up and how they will be affected * Members need to be given opportunity to ask any questions they have about how the wind up will affect them