4A) Solvency

4.1 Basic Accountancy and solvency margin calculations

Solvency means more assets than liabilities:

Assets > paid claims + unpaid claims + Ops cost

Of which Unpaid claims falls into 2 categories
IBNR vs IB
"incurred but not reported"

Margin is amount assets exceeds liability, improve ability to pay future claims. Why?

1. COB have different volatility, long vs short tail LM2 - C2 - Risk Written in London Market

Unpaid claims falls into 2 categories

Liabilities = increasing premium and claims by 50%
Reinsurance cost

Basic Accounting

1. Assets - Items of value, resources a business owns or controls (building vs goodwill).
   • Premium + Investment returns ARE Assets
2. Capital - Working capital difference between assets and liabilities
3. Liabilities - Monies owed to others.
   • Claims paid or outstanding.
   • Cost of reinsurance + biz ops
4. liquidity (Can be solvent high assets BUT illiquid),

ratio
loss (claims/premium),

combined ratio (Ops cost, claims / premium and investment income)

Float = Unearned premium, Outstanding claims reserves, IBNR

4B) Solvency II

Introduced via PRU
pan-EU regime

Solvency II rules apply to all insurers, reinsurers, captives, mutuals, with their head office in the EU, Lloyd’s Europe

Objective: pay policyholders claims when needed.

1. Better regulation
2. integration of EU insurance market

Pillars for Solvency II:

1. Quantitative requirements - Based on Business risk INSURERS determine Solvency Capital requirement (SCR)... how much above liabilities.
2. Supervisory review - Own risk & solvency assessment (ORSA)... internal review undertaken by insurers
3. Disclosure - publicly disclosure more information

Financial Services and Markets Act 2023 - UK reg own regulation approved by EU

Why regulators needed in Solvency II

European Insurance and Occupational Pensions Authority (EIOPA)

1. protection for consumers
2. effective and consistent...

4C) Lloyds chain of security

Central Fund is a pot of money

1. Syndicate level assets = Written premium to pay claims
2. Members fund = Syndicate members deposit funds in Lloyds. Amount determined by SCR + ECA
3. Central assets = Last resort all members contribute 0.35% of premium

4D) Rating agencies

Middle man which publishes their results for public consumption.

1. S&P
2. Fitch
3. A M Best
4. Moody's

Brokers and insurers have security committees. What is the rating for insurers brokers care to place clients business.

If an insurer’s rating falls, it might find that it’s considered unacceptable as a market and will lose business

Broker liable for claims if the rest of the market was NOT downgraded at the same time as the insurer’s individual downgrade.