40 - Definitions Flashcards
Provision
Denotes the value of a liability that is known or assumed to exist at the accounting date
Reserve
An amount over and above the provisions that is available to meet additional liabilities either in respect of future events or in respect of past events for which provisions may prove inadequate.
Accrual rate
the rate at which rights build up for each year of service in a defined benefit scheme
Accrued benefits
The benefits for service up to a given point in time, whether vested rights or not
Accumulation of risk
When a portfolio of business contains a concentration of risks that might give rise to exceptionally large losses from a single event.
Acquisition costs
Costs arising from the writing of insurance contracts including:
- direct costs such as acquisition commission or the cost of drawing up the insurance document or including the insurance contact in the portfolio
- indirect costs such as advertising costs or the actuary’s/underwriter’s expenses connected with the establishment of the premium rating table.
Active member
A member of a benefit scheme who is at present accruing benefits under that scheme in respect of current service
All risks
A term for when cover is not restricted to specific perils
Anti-selection
When people take contracts because they believe/know that their risk is higher than the insurance company has allowed for in its premiums
Arbitrage
Buying and selling of two economically equivalent portfolios that have different prices so as to make a risk-free profit
Average earnings scheme
A benefit scheme where the benefit for each year of membership is related to the pensionable earnings for that year.
Balance of cost scheme
A defined benefits scheme to which beneficiaries make a defined contribution and the main sponsor pays the remainder of the unknown cost of providing the benefits
Bancassurance
An arrangement between a bank and an insurance company to allow the insurance company to sell its products to the bank’s clients
Bear market
A period of time during which investors are generally unconfident and stock market prices decline
Benchmark
A standard model portfolio against which a fund’s structure and performance will be assessed
Best estimate
An actuarial assumption which the actuary believes has an equal probability of under or over estimating the future experience
Bid price
The price at which a market maker offers to buy a security or buy back units from an investor
Break-up basis
A valuation basis that assumes that the writing of new business ceases and cover on current policies in terminated
Bond
A form of loan
Book reserve
A provision in a company’s accounts for a future benefit liability for which no funds have been set aside
Bulk rate
A premium rate applied uniformly per head on large benefit schemes across a membership type
Bulk transfer
The transfer of liabilities relating to a group of members from one scheme to another
Bull market
A period of time during which investors are generally confident and stock market prices increase
Cancellation
A mid-term cessation of a general insurance policy
Cap
An upper limit
Catastrophe
A single event that gives rise to exceptionally large losses
Catastrophe reserve
A reserve built up over periods between catastrophes to provide some contingency against the risk of a catastrophe
Ceding company
An insurance or reinsurance company that passes a risk to the reinsurer
Chinese wall
Regulations or practices intended to prevent conflicts of interest in integrated security or consultancy firms
Claim
Noun - an assertion by a policyholder that an insurer is liable to make a payment in accordance with the terms of a policy
Verb - to make a request for payment from an insurer
Claim frequency
The number of claims in a period per unit of exposure
Closed Scheme
A benefit scheme that does not admit new members
Coinsurance
An arrangement whereby two or more insurers enter into a single contract with the insured to cover a risk in agreed proportions at a specified premium
Commission
The payments made by a provider to reward those who sell and subsequently service its products
Commutation
The giving up of a part or all of a stream of future income for an immediate lump sum
Composite insurer
An insurance company writing both life and non-life business
Continuing care
Nursing or medical care provided after retirement
Continuing care retirement community
A development in which retired persons can live as a community and receive chosen levels of nursing or medical care
Convexity
C = 1/P * d^2/d (P/i^2)
Where P is the dirty price of the bond
‘i’ is the gross redemption yield on the bond
Corporation tax
Tax on company profits
Counterparty
The opposite side in a financial transaction
Coupon
The interest payments on a bond
Covenant
An agreement that is legal and binding on the parties involved. Has extended to speak of the quality of the parties involved.
Credibility
A measure of the weight to be given to a statistic.
Credit rating
A rating given to a company’s debt by a credit rating company as an indication of the likelihood of default
Credit risk
The risk of failure of third parties to meet their obligations
Custodian
The keeper of security certificates and other assets on behalf of investors
Cyber risk
Any risk of financial loss, disruption or damage to the reputation of an organisation from some sort of failure of its information technology systems
Debenture
A loan made to a company which is secured against the assets of the company. Can have fixed or floating charges to make sure that debenture holders are the highest ranking debt holders. Debentures with fixed charges are mortgage debentures
Deferred member
A member of a benefits scheme who is no longer accruing benefits but who has accrued benefits that will be payable at a future date
Deficit
Where a benefits scheme or financial product provider has less assets than required by the funding plan to meet the liabilities
Defined ambition scheme
A scheme where risks are shared between the different parties involved - members, employers, investment business
Defined benefit scheme
A benefit scheme where the scheme rules define the benefits independently of the contributions payable and benefits are not directly related to the investments of the scheme. May be funded or unfunded
Defined contribution scheme
A scheme providing benefits where the amount of an individual member’s benefits depends on the contributions paid into the scheme in respect of that member, increased by the investment returns earned on those contributions
Depreciation
An accounting convention whereby firms write down the value of their assets over time.
Derivative instrument
A financial instrument with a value dependent on the value of some other, underlying asset
Discontinuance valuation
An actuarial valuation carried out to assess the position if a benefit scheme were to be discontinued. The valuation may take into account the possible exercise of any discretion to augment benefits.
Discounted income model
A model for valuing investment which determines a present value for the investments by discounting the expected future income from the assets.
Dividend yield
The running yield on an equity - dividends divided by the share price
Duration
Also known as effective mean term or discounted mean term
The mean of the payments from the stock where each item is weighted by the present value of the payment
Duration = Sum of ( PV * t) / Sum of ( PV )
where t is measured in years and PV is the present value of the payment at time t calculated at the gross redemption yield
Early leaver
A person who ceases to be an active member of a benefit scheme, other than death, without being granted an immediate retirement benefit
Economic value added
The percentage difference between the annual return on capital and the weighted average cost of capital.
Efficient frontier
An efficient portfolio is one for which it is not possible to increase the expected return without accepting more risk and not possible to reduce the risk without accepting a lower return. The efficient frontier is the line joining all efficient portfolios
Efficient market hypothesis
Assets prices reflect all relevant information
Embedde value
It represents the value to shareholders of the future profit stream from a company’s existing business, together with the value of any net assets separately attributable to shareholders.
Equity
In investment - ordinary shares
In life insurance - all policyholders are treated fairly
Excess
The sum, specified in the policy, that the insured must bear before any liability falls upon the insurer.
Exclusion
An event, peril or cause defined within the policy document as being beyond the scope of the insurance cover.
Experience rating
A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk.
Exposure
- The state of being subject to the possibility of a loss
- A measure of the extent of risk
- The possibility of loss to insured property caused by its surroundings
Extra premium
An addition to the standard premium payable under a contract in order to cover an extra risk
Extra risk
Arises where a proposal for life insurance is not acceptable at standard rates
Final salary scheme
A defined benefit scheme where the benefit is calculated by reference to the final earning of the member
Financial gearing
the impact on profits for a company caused by fixed-interest borrowing.
Financial strength
The ability of a company to
- withstand adverse changes in experience
- Fulfil its new business plans
- Meet the reasonable expectations of its policyholders
Often measured by the level of its free assets.
Flexible Benefits
Benefits where the beneficiary has choice about the types or levels of benefits received - usually receiving a salary instead of other forms of benefits
Floor
A lower limit
Free assets
Used to refer to that part of a life insurance company’s assets that are not needed to cover its liabilities.
Funding objective
The arrangement of the incidence over time of payments with the aims of meeting the future cost of a given set of benefits
Gearing
The ratio of debt to equity
Going concern basis
The accounting basis normally required for an insurer’s published accounts, which is based on the assumption that the insurer will continue to trade as normal for the long-term future
Group contract
A contract that covers a group of lives where the group is specified, but not necessarily the individuals within it.
Guarantee
A promise that an insurance company will pay a specified sum of money at specified times if a specified condition is fulfilled. Or a rate to be used at a future date to convert a lump sum into an annuity or vice versa.
Hedging
Action taken to protect the value of a portfolio against a change in market prices. Involves holding offsetting position sin assets or portfolios, the values of which are expected to respond identically to market conditions.
Hurdle rate
A target or minimum rate of return used in capital project assessment.
Immunisation
Ensuring that the discounted mean term of assets equals that of the liabilities and that the spread of the assets is greater than the spread of the liabilities. This means that a uniform change in interest rates will cause the reinvestment rate and capital value on assets to move in opposite directions so that a fund does not make a loss.
The principle of indemnity
The insured is restored to the same financial position after a loss as before the loss. Contrasts with the new-for-old principle.
Index-linkee gilt
A bond issues by the British Government for which the interest payments and the final redemption proceeds are linked to movements in the RPI.
Index-linked security
A security whose redemption value and/or coupon payments are adjusted to reflect inflation
Index tracking
An index tracking fund is an investment fund with the specific objective of tracking a particular index. The fund manager can either hold all the stocks in the index in the appropriate proportions or use some mathematical model to choose a smaller sample of stocks which will perform as closely as possible to the index.
Insured scheme
A benefit scheme where the sole long-term investment medium is an insurance policy
Internal rate of return
The discount rate at which the Net Present Value of a series of cashflows is zero
Lapse
A life insurance contract lapses if the policyholder ceases to pay premiums.
Leasehold
A lease is an agreement which allows one of the parties the use of a specified portion of a building owned by the other party for a specified period of time in return for some payment
LLoyd’s
An insurance market that transacts mainly general insurance and reinsurance. A collection of underwriting pools that comprise corporations and private individuals.
Long position
A position in an asset that means having an economic exposure to the asset. The party which has contracted to take delivery of the asset in the future.
Long-tailed business
Types of insurance in which a substantial proportion of claims take several years to be notified and or/settled from the date of exposure and/or occurrence
Managed fund
- An investment contract by means of which an insurance company offers participation in one or more pooled funds
- An arrangement where the assets are invested on similar lines to unit trusts by an external investment manager
Market capitalisation
The total value at market prices of the securities at issue for a company or stock market or a sector of a stock market.
Market risk
Market risk is the risk relating to changes in the value of a portfolio due to movements in the market value of the assets held.
Market value of assets
The value that represents what they are worth in the open market, given a willing buyer and seller
Matching
Arranging assets and liabilities so that the cashflows generated by the assets can be expected to meet the liability play-outs, either because the assets generate income of the right amount at the right time or because the market values of the assets are linked to the market values of the liabilities appropriately.
Member
- A person who has been admitted to membership of a pension scheme and is entitled to benefit under the scheme
- A person who is entitled to participate in the management of a mutual insurance company or society.
Mismatching reserve
If the assets of an insurance company are not matched to its liabilities, it may be unable to meet claims as they fall due in the event of adverse future investment conditions. Thus, it may be required to set up a mismatching reserve if experience so requires.
Money purchase
The determination of an individual member’s benefits by reference to contributions paid into a benefit scheme in respect of that member, usually increased by an amount based on the investment return on those contributions.
Moral Hazard
The action of a party who behaves differently from the way they would behave if they were fully exposed to the consequences of that action. The party behaves inappropriately or less carefully than they would otherwise, leaving the organisation to bear some of the consequences of the action. Relates to information asymmetry.
Mutual insurer
Owned by policyholders to whom all profits belong.
Net asset value per share
The book value of the shareholder’s interests in the company, usually excluding intangibles such as goodwill, divided by the number of share in issue
New business strain
Arises when the premium(s) paid at the start of a contract, ;less the initial expenses including commission payments, is not sufficient to cover the reserve that the company needs to set up at that point
Nil claim
A claim that results in no payment by the insurer:
- Invalid claims
- The loss amount is less than the excess
- Reported but the policyholder has elected to bear the cost in order to maintain no claim discounts
No-claim discount
A form of experience rating in which policyholders are allowed a discount from the basic premium according to a scale that depends upon the number of years since the most recent claim.
Nominal value
The amount of stock that is specified on the stock certificate.
Occupational scheme
A benefits scheme organised by an employer or on behalf of a group of employers to provide benefits for or in respect of one or more employees.
Offer price
The price at which a market maker offers to sell a security.
Open-ended investment company
An investment vehicle similar to the corporate governance features to an investment trust but with open-ended characteristics of a unit trust.
Operational risk
Refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
Option
The right to buy or sell an asset
Option (Health)
Where the life insurance company gives a policyholder the right to increase or extend the death or sickness convert under a life insurance contract at some future time or times without further evidence of health.
Option premium
The price paid for an option
Option writer
The seller of an option
Pay-as-you-go
An arrangement under which benefits are paid out of revenue and no funding is made for future liabilities.
Preference share
A class of share which generally ranks ahead of ordinary shares. Normally entitled to a specified rate of dividend and are not entitled to residual profits.
Prime property
Would score highly on the following factors:
- Location
- Age and condition
- Quality of tenant
- The number of comparable properties available to determine the rent at rent review and for valuation purposes.
- Lease structure
- Size
Profit commission
Commission paid by a reinsurer to a cedant under a proportional reinsurance treaty that is dependent upon the profitability of the total business ceded during each accounting period.
Profit test
A technique involving consideration of the cashflows arising under a contract to assess the expected profitability of the contract.
Propriety insurer
An insurance company owned by shareholders
Privatisation
The sale of state assets or businesses, often to reduce public debt
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured
Rating factor
A factor used to determine the premium rate for a policy, which is measurable in an objective way and relates to the likelihood and/or severity of the risk. Must be a proxy for a risk factor or risk factors.
Real yield
The yield on an investment after inflation has been allowed for. Often approximated by the difference between the nominal yield and the rate of inflation over the corresponding period.
Redemption
The return to an investor of the capital value of a debenture or other debt security
Redemption yield
The gross redemption yield is the rate of return at which the discounted value of all future payments of interest and capital is equal to the dirty price of a debt security.
Reinsurance
An arrangement whereby one party, in consideration for a premium, agrees to indemnify another party against part or all of the liability assumed by the cedant under one or more insured policies, or under one or more reinsurance contracts.
Reinsurer
An insurer providing reinsurance cover.
Requirement for capital
On a per contract basis, the requirement for capital is the amount of finance a company needs in order to be able to write that contract. On a whole business where it is the finance required to be able to carry out its new business plans.
Retention
In the context of reinsurance, a company’s retention is the amount of any particular risk that it wishes to retain for itself.
Retail price inflation
The measurement of price changes at the retail (consumer) level
Return on capital employed (ROCE)
Profit before interest and tac divided by the capital employed, expressed as a percentage. An indicator of a company’s efficiency in generating profit from its asset base.
Risk-based capital (RBC)
The assessment of the capital requirement for a provider by considering the risk profile of the business written and of any other operations.
Risk discount rate
A rate at which future uncertain cashflows might be discounted. Represents the risk-free rate of return that providers of capital demand, plus an amount to allow for the risk that the profits may not emerge as expected from the project.
Risk factor
A factor that is expected, possibly with the support of statistical evidence, to have an influence on the intensity of risk in an insurance contract.
Risk premium
The amount of premium required to cover claims expected for a risk. The additional return required over the risk-free rate of return to reflect the riskiness of future cashflows.
Running yield
The annual income on an investment divided by its current market value. Important examples are the flat yield on gilts, the gross dividend yield on equities and the rental yield on property.
Run-off basis
A valuation basis that assumes an insurer will cease to write new business, and continue in operation purely to pay claims for previously written policies. Typically reinsurance arrangements change after an insurer ceases to write new business
Self-administered scheme
An occupational benefits scheme where the assets are invested, other than wholly by payment of insurance premiums, with an in-house investment manager or an external investment manager.
Self-insurance
The retention of risk by an individual or organisation, as distinct from obtaining insurance cover.
Self-investment
The investment of the assets of an occupational benefits scheme in employer-related investments
Short position
A position in an asset means having a negative economic exposure to the asset. In futures and forward dealing, the short party is the one who has contracted to deliver the asset in the future.
Short-tailed business
Types of insurance in which most claims are usually notified and/or settles in a short period from the date of exposure and/or occurance
Solvency
A provider is solvent if its assets are adequate to enable it to meet its liabilities.
Solvency margin
The solvency margin of a provider is the excess of the value of its assets over the value of its liabilities.
Specific risk
The risk of holding a share which is unique to the industry or company and can be eliminated by having a a suitably diversified portfolio of shares of differing types of companies.
Spot interest rate
The n-year spot interest rate is the geometrical average of the interest rates that are expected to apply over the next n years. It is the redemption yield on an n-year zero-coupon bond.
Strips
Debt securities comprise a series of coupons and a final redemption amount. For such securities each individual cashflow may be traded as an isolated zero-coupon bond called a strip.
Surplus
- The excess of the value placed on a life insurance company’s assets over the value placed on its liabilities.
- A type of proportional reinsurance where the cedant retains the risk up to its retention level and reinsures the excess
Surrender value
The amount paid out to a policyholder who terminates their contract before the contractual termination date.
Swap
A contract between two parties under which they agree to exchange a series of payments according to a prearranged formula.
Sytematic risk
The risk of the individual share relative to the overall market which cannot be eliminated by diversification.
Treasury bill
A short-term government debt security with no interest and that is issued at a discount to its redemption value.
Trust
A legal concept whereby property is held by one or more persons for the benefit of others for the purposes specified by the trust instrument.
Trust deed
A legal document, executed in the form of a deed which establishes regulates or amends a trust,
Trustee
An individual or company appointed to carry out the purposes of a trust in accordance with the purposes of the trust instrument and general principles of trust law.
Underwriting
- The process of consideration of an insurance risk.
2. The provision of some form of guarantee.
Underwriting cycle
The process whereby relatively high and thus profitable premium rates that often result in an increase in the supply of insurance are followed by lower and less profitable premium rates usually associated with increased competition.
Underwriting factor
Any factor that is used to determine the premium, terms and conditions for a policy.
Unit rate
Same as bulk rate.
Unitised contracts
After deducting an amount to cover part of its costs, each premium under a unitised contract is used to buy units at their offer price. When the insured event occurs, the amount of the benefit is then based on the bid price value of all the units in the contact’s account.
Unsecured loan stock
A form of long-term borrowing which is not secured on any specific assets of the borrower, usually corporate debt.
Valuation rate of interest
The rate at which future liabilities and assets are discounted to the valuation date.
Vested rights
Benefits to which a member of a scheme is entitled, regardless of whether they remain an active member of the scheme.
Volatililty
The sensitivity of the market price of an investment.
For fixed-interest bonds:
V = -1/P * dP/dy
Waiting period
- Occupational pension provision, the period during which an employee does not yet meet the eligibility conditions for membership of the occupational benefits scheme
- In the case of sickness benefits, the period beginning at the policy inception during which the policyholder is not allowed to make a claim.
Waiver premium
This is a benefit attached to a contact under which regular premiums are payable. In the event of sickness or disability or unemployment, the premium payable under the contract including the premium for the waiver of premium benefit is waived.
Weighted average cost of capital (WACC)
The aggregated return required by the providers of debt and equity capital, allowing for the effects of tax and the risks borne by the capital providers.
Winding-up
The process of terminating a benefits scheme, usually by applying the assets to the purchase of individual insurance contracts for the beneficiaries, or by transferring the assets and liabilities to another scheme.
Withdrawal benefit
A benefit payable when an employee leaves a benefit scheme.
With-profit
A life insurance contact is with-profit if the policyholder is entitled to receive part of the surplus of the company.
Without-profit
If the life insurance company has no discretion over the amount of benefit payable.
Yield curve
A plot of yield against term to redemption.
Zero-coupon bond
A bond where the sole return is the payment of the nominal value on maturity
Zero-coupon yield curve
A plot of redemption yields against term to redemption for zero-coupon bonds.
