Financial Management, Accounting and Solvency
Financial statements
Insurers report under accounting standards that recognise premiums, claims, expenses and reserves. Know the difference between technical and non-technical accounts, and between earned and written premium. Understand the role of unearned premium reserves, outstanding claims reserves and IBNR. Assets and liabilities must be valued prudently, and investments must match the nature and duration of liabilities.
Solvency and capital
Solvency regulation requires insurers to hold capital against risks including underwriting, market, credit and operational risk. Know the concepts of solvency capital requirement, minimum capital requirement, own funds, and the distinction between available and eligible capital. Understand risk-based capital and the role of stress testing and ORSA-type assessments.
Performance measures
Candidates should understand combined ratio, loss ratio, expense ratio, investment return and return on equity. The combined ratio measures underwriting profitability; a ratio above 100 indicates an underwriting loss.
Traps in questions
A common trap is confusing written and earned premium, or treating investment income as underwriting profit. Another is assuming solvency capital is a single fixed number; it is risk-based and forward-looking. Questions may also test whether reserves can be reduced to improve results; that is not permissible.
Worked example
Premiums 1,000, claims 600, expenses 250. Loss ratio = 60%; expense ratio = 25%; combined ratio = 85%, an underwriting profit of 150 before investment income.
Exam technique
Show the formula, substitute the figures and interpret the result.