Solvency position vs capital position

[PBhella]

Hi, I've come across questions that ask for ways to improve an insurer's capital position and others that ask how insurers can improve their solvency position.

September 2015 - Paper 1 - Q5.iii (in ASET):
This question asks for ways health insurer can reduce deterioration in its solvency position.

The answers focus on changes to underwriting, claims controls, expenses incurred, new business volumes and business mix. There's very little mention of the capital management tools in chapter 35 of the notes eg. financial reinsurance, subordinated debt, banking products etc. Questions on improving capital position focus on these capital management tools.

I have two questions:
1. What is the difference between capital position and solvency position?
2. If solvency position is improved by using capital management tools, why doesn't this come into answer to above question?

 

[James Nunn]

Hi, I've come across questions that ask for ways to improve an insurer's capital position and others that ask how insurers can improve their solvency position.

September 2015 - Paper 1 - Q5.iii (in ASET):
This question asks for ways health insurer can reduce deterioration in its solvency position.

The answers focus on changes to underwriting, claims controls, expenses incurred, new business volumes and business mix. There's very little mention of the capital management tools in chapter 35 of the notes eg. financial reinsurance, subordinated debt, banking products etc. Questions on improving capital position focus on these capital management tools.

I have two questions:
1. What is the difference between capital position and solvency position?
2. If solvency position is improved by using capital management tools, why doesn't this come into answer to above question?

Hi PBhella

To answer your questions:

1. These two things mean the same thing.
2. This part of the question is about ‘reducing the deterioration’ rather than just ‘improving’ the capital / solvency position. Accordingly, most of the solution covers things that could address potential issues causing the deterioration, rather than ways of improving the position without addressing the causes of these potential issues (ie capital management tools). You will see that capital management tools are covered in the answer, but only as one possible avenue of response to the situation; the aim to cover as many different angles as possible, in order to demonstrate breadth of understanding.

Hopefully this makes sense.

Kind regards

James