Chapter 49 - Glossary Flashcards
Define a rating factor.
- A rating factor is a factor used to determine the premium of a policy.
- Must be measurable in an objective way
- Must be related to the severity or likelihood of the claim
- Must be a risk factor or a proxy for a risk factor
Define a risk factor.
- A factor that is expected to have an impact on the intensity of a risk in an insurance contract.
- Possibly with support of statistical evidence
Define a mutual.
- A mutual is owned by policyholders to which all profits belong.
Define a proprietary company.
- A company owned by shareholders.
Define anti-selection.
Anti-selection is when people are more likely to take out an insurance contract if they believe they pose a higher risk than what has been allowed for by the insurer in the premium of the policy. It is also related to the situation where a policyholder is more likely to exercise an option or guarantee when they have the most to gain.
Define moral hazard.
- When a party behaves differently than they would have behaved if they were fully exposed to the consequences of their behaviour.
- Relates to information asymmetry where one party has more information relating to a risk than the organisation who bears the consequences.
Define an option.
An options is the right to buy or sell an asset.
Define an option premium.
An option premium is the price of an option.
It is received by the option writer.
Define the option writer.
The person who sells the option.
Define a put option.
A put option is the right, but not the obligation, to sell an asset at a specific price at a future date.
Define a call option.
A call option is the right, but not the obligation, to buy an asset at a specified price at a specific future date.
Define a cap.
A cap is an upper limit.
Define a coupon.
A coupon is the interest payment on a bond.
Define a floor.
A floor is a lower limit.
Define free assets.
- Assets that are not needed to cover liabilities.
Define gearing.
Gearing is the ratio of debt to equity.
Define an active member.
- Member of a benefit scheme who is currently accruing benefits in respect of current services.
Define a deferred member.
- Member who is no longer accruing benefits, but have accrued benefits which will be paid out on a future date.
Define a short position.
- Having negative economic exposure to the asset.
- The seller of the asset.
Define a long position.
- Having economic exposure to an asset.
- Buyer of an asset.
Define corporate governance.
- Corporate governance is a high level framework within which management decisions are made.
- Shareholders appoint a board of directors who is then responsible for ensuring appropriate governance structures are in place.
- Aim to manage company in such a way that all the stakeholder needs are met.
Define latent claims.
- Claims arising from a cause which was not known when the policy was sold.
Define a composite insurer.
An insurer that sells both life and non-life insurance.
Define corporation tax.
Tax on company profits
Define a counter-party.
Opposite side of a financial transaction
Define catastrophe.
A single event that gives rise for exceptionally large losses.
Define claim frequency.
It is the number of claims over a given period per unit of exposure.
Define a closed scheme.
It is a benefit scheme where no new members are admitted.
Define a credit rating.
A credit rating is a rating that is given to a company’s debt as an indication of likely default (Top=AAA)
Define a bull market.
Period of time during which investors are confident in the market and stock market prices increase.
Define a bulk transfer.
A transfer of liabilities (and assets) of a group of members from one scheme to another.
Define a bond.
- Form of a loan.
- The issuer receives a lump sum in exchange for a series of regular interest payments.
- At redemption the issuer pays the lump sum back to the holder of the bond.
Define a bid price.
The price at which a market maker offers to buy securities.
Define an offer price.
The price at which a market maker is willing to sell a security.
Define a bear market.
A period of time during which investors are not confident and stock market prices are declining.
What is a short straddle?
- Sell a put and a call option
- Do not believe market will move
