A301 P2 Flashcards
Weighted average cost of capital
The aggregate return required by the providers of debt and equity capital, allowing for the effects of tax and the risks borne by the capital providers.
Withdrawal benefit
A benefit payable when an employee leaves a benefit scheme.
With-profit (participating)
A life insurance contract is with-profit if the policyholder is entitled to receive part of the surplus of the company.
The extent of the entitlement is usually at the discretion of the company.
Without-profit (non-participating)
A life insurance contract is without-profit if the life insurance company has no discretion over the amount of benefit payable, ie the policy document will specify at outset either the amount of the benefits under the contract or how they will be calculated.
Yield curve
A plot of yield against term to redemption.
Usually the yield plotted is the gross redemption yield on coupon bonds but other yields can be used.
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 (usually hypothetical) zero-coupon bonds.
Swap
A contract between two parties under which they agree to exchange a series of payments according to a pre-arranged formula.
Systematic risk
the risk of the individual share relative to the overall market which cannot be eliminated by diversification.
Terminal funding
An arrangement whereby a payment to meet the value of a benefit is made only at or about the time when the benefit is due to commence.
Treasury bill
A short-term government debt security.
Usually issued with a term of 91 or 182 days. No interest is paid, but the bill is issued at a discount to its redemption value.
Trust
A legal concept whereby property is held by one or more persons (the trustees) for the benefit of others (the beneficiaries) for the purposes specified by the trust instrument.
The trustees may also be beneficiaries.
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 provisions of the trust instrument and general principles of trust law.
Underwriting
- The process of consideration of an insurance risk. This includes assessing whether the risk is acceptable and, if so, the appropriate premium, together with terms and conditions of the cover. It may also include assessing the risk in the context of the other risks in the portfolio.
- The provision of some form of guarantee. In investment, underwriting is where an institution gives a guarantee to a company issuing new shares or bonds that it will buy any remaining shares or bonds that are not bought by other investors.
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.
These in turn may be followed by a decrease in supply as companies leave the less profitable market, reduced competition and a return to higher premium rates.
The process is complex but appears to occur in all types of insurance and reinsurance, though at different speeds and to different degrees.
Underwriting factor
Any factor that is used to determine the premium, terms and conditions for a policy.
It may be a rating factor or some other risk factor that is accounted for in a subjective manner by the underwriter.
Unitised contracts
After deducting an amount to cover part of the costs, each premium under a unitised contract is used to buy units at their offer price.
These units are added to the contract’s unit account. when the insured event happens the amount of the benefit is then based on the bid price value of all the units in the contract’s unit account.
Unit trust
An open-ended investment vehicle whereby investors can buy units in an underlying pool of assets from the trust manager.
If there is demand for units, the managers can create more units for sale to investors. If there are redemptions (sales by investors), the managers will buy in units offered to them. Unit trusts are trusts in the legal sense.
Unsecured loan stock
A form of long-term corporate debt which is not secured on any specific assets of the borrower.
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 whether or not they remain an active member of the scheme.
Volatility
The sensitivity of the market price of an investment. A highly volatile investment is one which has a very unstable price.
For fixed-interest bonds, volatility is specifically defined as the rate of change in the dirty price (P) of the bond for a change in the gross redemption yield (y).
V = -1/p dP/dy
A.k.a. modified duration
Waiting period
- In the case of 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 of premium
This is a benefit attached to a contract under which regular premiums are payable.
In the event of sickness or disability or, sometimes, unemployment, the premium payable under the contract, including the premium of the waiver of the premium benefit, is waived.
Self investment
The investment of the assets of an occupation benefits scheme in employer related investments.
Short
A short position in an asset means having 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 settled in a short period from the date of exposure and/or occurrence.
Solvency
A provider is solvent if its assets are adequate to enable to meet its liabilities.
Supervisory authorities will usually have requirements, in terms of the values a provider can place on its assets and liabilities for the purpose of showing statutory solvency.
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 suitably diversified portfolio of shares of differing types of companies.
This is sometimes also referred to as alpha, unsystematic, diversifiable or residual risk.
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.
Surplus
- Surplus is the excess of the value placed on a life insurance company’s assets over the value placed on its liabilities. A negative surplus is usually called a strain.
- A type of proportional reinsurance where the cedant retains the risk up to its retention level and reinsures the excess.
Surrender value
This is the amount paid out to a policyholder who terminates his or her contract before the contractual termination date.
Net asset value per share
The book value of the shareholders’ interests in a company, usually excluding intangibles such as goodwill, divided by the number of shares in issue.
New business strain
When the premium(s) paid at the start of a contract, less the initial expenses, is not sufficient to cover the reserve that the company needs to set up at that point.
Freehold
The freeholder of land is the absolute owner of it in perpetuity.
Funding objective
The arrangement of the incidence over time of payments with the aim of meeting the future cost of a given set of benefits.
Futures contract.
Like a forward contract, this is a contract to buy (or sell) an asset on an agreed basis in the future.
However, futures contracts are STANDARDISED contracts that can be TRADED on a recognised exchange.
Gearing
The ratio of debt to equity. (financial gearing)
Gilt
A bond issued by the British Government that pays regular coupons.
Going concern basis
The accounting basis normally required for an insurer’s published accounts, that is based on the assumption that the insurer will continue to trade as normal for the long-term future.
Group contract
That is a contract that covers a group of lives, where the group is specified but not necessarily the individuals within it.
Guarantee (investment)
In the context of life insurance, this refers to a promise that the company will pay a specified sum of money - or sums of money - at specified times if a specified condition is fulfilled. The condition can be an event such as the surrender or maturity of a contract.
the term can also refer to the situation where a company guarantees the rate it will use, at some 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.
Hedging involves holding OFFSETTING POSITIONS in assets or portfolios the values of which are expected to respond identically to market changes.
