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Does new regulatory bodies FCA and PRA help the insurance regulations?

In Uncategorized on December 9, 2013 at 6:45 pm

Failing to meet its complete objectives, FSA is replaced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in  April 2013 as per the requirement of Financial Services Act 2012. There are a few significant changes made in the Supervisory and Prudential guideline given by  FSA guidelines before 2012 and new guidelines given by FCA and PRA. FCA objective is to secure consumer protection, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers.

Since 2013, there are 4 Distinct Approaches applied in Implementation of Enterprise Risk Management by PRA – Rules, guidance, Single firm Assessment and Assurance.  PRA Approaches are divided among financial services companies into 4 Broad Categories. The approach from small Insurance Companies (Category 1) is very clear; there is no expectation of ERM implementation however the companies are expected to abide by the rules given by PRA. The approach for medium Insurance Companies (Category 2) should work a step ahead and should have their Risk Appetite statement and planning to implement ERM.  From the large Insurance Companies (Category 3), PRA expects them to agree and understand Enterprise Risk Management framework. Nevertheless, Insurance Companies in this category must inform PRA about any risk which has aggregation from Risk Appetite. In the last, from very large Insurance Companies (Category 4), PRA expects to take care of all 3 line of defence as well as to take care of program of continuous Assurance work. It looks obvious that PRA is now able to understand that Prudential Guidelines can’t be implemented in all firms in the same way and considering the problems of Insurance firms in their decisions which shows a positive attitude by the regulator.

Very recently, FCA has published a document on Risk Outlook( Authority, 2013) which focus on different aspect of problems faced by Insurance firms in ERM implementation. According to Solvency II guidelines, the risk management is not a one day process or deadline driven which can be accomplished over a short period of time. Even though, some companies are able to implement but its effectiveness is still questioned by the experts. FCA is now looking for long term solutions and more effective and robust ERM framework rather than showing top records of implementing ERM in black and white. In this Report they try to find out inherent biases and heuristics, inadequate financial capability, conflicts of interest, culture and incentives, ineffective competition, economic and market trends, technological developments, regulatory and policy changes, information asymmetries are the key drivers for conduct of risk. When Insurance firms takes into accounts these drivers into consideration while linking it with business plan can create Embedded risk culture in the organization which will ultimately benefit to Insurance firms and consumers. The recent draft guidelines of International regulations like Conframe may affect the present regulation in UK but subject to acceptability.

A journey from Cadbury, Turnbull reforms to Solvency ii, Industry demands need of regulations on national level stating the expectation from insurance companies rather following distinct guidelines of different regulations.

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Owner of my own Risk – Me or others ?

In Banking, Finance, Insurance, Risk Management on February 25, 2013 at 8:11 am

When an individual see the Risk – it looks 4 letter words. It is well said “This will not happen to me”, it is unusual not to avoid it. Actually what is the risk? It is a threat, loss of opportunity, unexpected happening of loss. Who is the owner of the risk – individuals themselves? It is the duty of risk owner is to prevent, reduce, transfer and control the risk.

 

It is just a Four letter word – RISK

Corporates also own the risk; risk manager owns the risk of each department. He/she may set procedures/systems to prevent/reduce the risk, he may transfer the risk to the insurance companies. Insurance companies owns the risk of various corporates and individuals but here the system works little different. Although insurance companies manage the risk however the risk lies in the hands of insured, It is also in the hand of GOD which can be seen any time in floods, earthquake. Its invisible based on set of calculations and predictions.

These insurance companies retain certain part of the risk in their hand and transfer the risk to the Reinsurance companies. Now situation changes dramatically – Reinsurance companies accepts the risk of same individuals/corporates from Insurance companies without knowing who actually they are, only based on set of terms and conditions and documentation submitted by insurance companies. The ownership of the risk is still in the hands of insured.

The reinsurance companies transfers this risk to Retrocession companies who practically don’t know the country of origin of the insured at the time of acceptance of risk, only a set of group risk based on certain conditions are accepted. The ownership does not change hands, insured still can increase or reduce own risk. Finally the set of risk reached through derivative market eg; CAT bond to the public. Individual own their own risk. “its better not to avoid risk rather deal with that”

The trillion dollar phone – iPhone 5

In Finance, Technology on September 13, 2012 at 11:58 am

I blogged about Samsung Galaxy S 3 couple of months back and several people wrote back to me with interesting experiences.

I was contemplating of not writing about iPhone 5, since this blog www.finguru.org is about finance not about technology. Ahhh!!! my itch to write about iPhone 5 took-over my right side brain :).

Apple started its conference 6 pm UK time on 12th September 2012 and iPhone was revealed in minutes. My husband has taken the kids for swimming at the local swimming club. Guess what !! he called me around 6.30 and said …… ‘hey dear, do you know what iPhone 5 is here ….’. I said what about the swimming and kids. To my surprise he told me kids are in the pool and he is sitting next to the pool reading live twitter feed on the Apple event (of-course he skipped his swimming). That time I realized, technology craze has taken over every educated men (& women) in western (& eastern) world. By the time I am finishing this blog, the blogosphere is filled with thousands of blog about iPhone and millions of them are underway.

The question is –  What is the financial implication of iPhone in the world? In a recent research note JP Morgan said the new iPhone could add upto half a percentage point towards US GDP annualized growth (US 0.5 % GDP annualized growth = 3.2 billion dollars), which is twice of the total GDP of Bhutan or four times the annual GDP of Somalia. In layman terms, Apple can take over the economies of Bhutan and Somalia by just selling iPhone 5 in one quarter in United States.

The another important growth area would be semiconductor market. RBC Capital market estimates the total revenue of 13.2 billion dollars in 2013 (i.e 4.4% of total semiconductor sales) coming from iPhone. Not to mention the big jump in revenue expected by the mobile companies by introducing 4G network. The overall financial impact of iPhone launch can very well cross $ 100 billion in 2013.

What’s in it for Apple ….. be ready to see the world first company touching 1 trillion dollar market capitalization.

I love Apple more than Samsung because the impact it creates on the financial market and economy of the world, this kind of influence is never seen from any other product or by any other company in corporate history of the world.

The hype, the show and the finally the King of smart phones – The iPhone 5 – The Trillion Dollar Phone.

Comments welcome.

What are the factors which affect the buyer to take loan?

In Banking, Finance on June 22, 2012 at 12:56 am

This is the third blog in the series – do read earlier ones Understanding Types of Loan and How Banks Categorized Whom to Give Loan .

In this blog, I will talk about the factors which affect the buyer while he is about to take the loan.

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The first and foremost step in taking a loan is to understand the purpose of loan e.g.: home loan or student loan.  Then think about most suitable loan for the purpose for example should we take home loan by making payment through credit card – it will look most unsuitable method as home loan is long term loan and credit card payment is made after a very short period of time. Then the loan should be according to your income level eg: how much you are in actual capacity to pay monthly for such loans. It should be rather the amount which you are in position to pay with very comfort every month. Then you need to make it adjusted with your future planning eg: repayment in 6 months or 6 years. The next important step would be to take decision on fee and interest you would like to pay under the loan (eg:  Personal loans have high fee and interest rates than home loan). In the last, you need to take information from many banks or financial institution to get the best interest rates and fees. The bank policies for repayment and other conditions also need to be considered.

In short, the major factors which affect the borrower’s decision are purpose of loan, type of loan which is suitable according to purpose of loan, repayment time period of the loan, actual capacity to pay the loan according to income level, adjusted loan according to future planning, fee and interest rates offered by the different banks.

How banks categorize whom to give loan?

In Banking, Finance on June 7, 2012 at 10:57 pm

In continuation of my earlier blog Understanding Types of Loan ……..

Now days, most of the banks use their own software to rate and assess the risk of its clients (people, group or corporates).This you can see by some professional working in top IT companies and working in senior management get loans very easily than person with same qualification working under a small company. Why this is so – it is due to his better credibility and stability to repay the loan.

Income level and the employment history are the major factors which affects the loans. However, the bank considers the major questions and rate or give a score according to its appropriateness.

I.         Do you make payments on time?  They check the borrower’s payment history through scrutinizing their credit card details, car payments, mortgages, student loans or other types of loan. ( such as bank gives 35% score to the perfect borrower under this category)

II.         How many other loans have been taken and its balance remaining?  They check about how many other loans like home loan, car loan etc. borrower has already taken and what is the balance remaining and link it to the borrower’s annual income. ( for example: bank gives 30% score to the perfect borrower under this category)

III.         From how many years you have opened these accounts and usage? They check the borrower’s credibility in case of payment e.g. a fresher who has applied for credit card usually get very low credit limit on his credit card than a professional working from 10 year with good bank records. ( for example: bank gives 10% score to the perfect borrower under this category)

IV.         How often you have applied for loan? They check whether you are not taking many loans at one time such as once you have taken home loan, for a year or so, you will be denied to take car loan. ( for example: bank gives 10% score to the perfect borrower under this category)

V.         How many types of accounts are reported for ATM cards, car loans, credit cards, travel accounts, or any other type of account where payments are being made? ( for example: bank gives 10% score to the perfect borrower under this category)

The higher the score, higher the chances of getting the loan. Each and every bank has its own risk assessment method and risk scoring that’s why different bank gives same loans at different rates to same borrower. Till now, we have considered, the bank or financial institutions factors which affect the loans.  See my next blogs on factors affects borrower’s decision to take loan from a bank or institution.

Reinsurance defined

In Finance on May 3, 2012 at 9:16 am

It is an insurance of insurance. Reinsurance is the process whereby one one party called the Reinsurer in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

Various Parties and terms involved in reinsurance contract are –

  • Reinsurer – An insurer or reinsurer assuming the risk of another under contract.
  • Retention – The net amount of risk which the ceding company or the reinsurer keeps for its own account or that of specified others.
  • Retrocession – A reinsurance of reinsurance. Example: Company “B” has accepted reinsurance from Company “A”, and then obtains for itself, on such business assumed, reinsurance from Company “C”. This secondary reinsurance is called a Retrocession. The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.
  • Cede – When a company reinsures its liability with another, it “cedes” business.
  • Ceding Commission – The cedant’s acquisition costs and overhead expenses, taxes, licenses and fees, plus a fee representing a share of expected profits – sometimes expressed as a percentage of the gross reinsurance premium.
  • Ceding Company – The original or primary insurer; the insurance company which purchases reinsurance.