Definitions Flashcards
Accrual principle
The recording of revenues that a company has earned but has yet to receive payment for, and the expenses that have been incurred but the company has yet to pay.
The method follows the matching principle which says that revenues and expenses should be recognised in the same period they were earned/incurred
Act of God
An event , such as a storm or a flood, that is unexpected and outside human control. From the perspective of insurers, it is a cause of insurance losses
Accumulation of risk
An accumulation of risk occurs when a single event can give risk to claims under several different policies. Such accumulation may occur by location or occupation
Adverse development cover
A reinsurance arrangement whereby a reinsurer agrees, in return for a premium, to cover the ultimate settled amount of a specified block of business above a certain pre-agreed amount. Reserves are maintained by the cedant, but liability is capped and the balance sheet is protected from any further development on existing losses or future losses in respect of old business
Agents’ balances
Monies (typically premiums) that belong to an insurer but are being held by an agent
All risks
Cover that is not restricted to specific perils. It is for loss, destruction or damage by any peril not specifically excluded (the exclusions will often be inevitabilities like wear and tear)
atafs
Age to age factors
Used to refer to link ratios or development factors
Used by CAS
atufs
Age to ultimate factors
Used in triangulation reserving methods to refer to the grossing up factor to get from an intermediate period of development to ultimate
Used by CAS
Balance of a reinsurance treaty
The ratio of
(total premiums receivable by a reinsurer under a surplus treaty)
÷
(reinsurer’s maximum liabilty for any one claim, based on EML)
Benchmark
Any statistic derived from external sources e.g. Loss ratio, expense-related measure
Binding authority
A contractual agreement setting out the scope of delegated authority, allowing cover-holders to enter into contracts of insurance and to issue insurance documents on behalf of Lloyd’s managing agents
Bordereau
A detailed list of premiums, claims and other important statistics provided by ceding insurers to reinsurers, so that the payments due under a reinsurance contract can be calculated
Cancellation
A mid-term cessation of a policy that may involve a partial return of premium
Cape Cod Method
A reserving method, similar to the Bornhuetter Ferguson method where, instead of an a priori loss ratio, it uses weights proportional to a measure of exposure, and inversely proportional to claims development
Case estimate
An individual assessment of a reported outstanding claim when reserving.
The sum of all case estimates is referred to as the OCR (outstanding claims reserve) or the RBNS (reported but not settled) reserve
Case by case estimation
A method of determining the reserve for outstanding reported claims, where each outstanding claim is individually assessed to arrive at an estimate of the total payments to be made.
Casualty insurance
An American synonym for “liability insurance”
Claim amount distribution
Not to be confused with claim SIZE distribution
A statistical frequency distribution describing the TOTAL amount of claims
Claim cohort
A group of claims with a common period of origin (usually a month, quarter or calendar year).
The origin varies but is usually defined by:
- the date of a claim
- the date of reporting
- the date of payment
- the date of the period of cover to which the claim attaches
Claim cost inflation
The rate of increase in the cost of like-for-like claim payments
Claim frequency
The number of claims in a period per unit of exposure
Clash cover
Excess of loss reinsurance cover, limiting an insurer’s exposure to the risk that one claim incidence gives rise to claims on more than one policy insured by that insurer
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.
Each insurer is liable only for its own proportion of total risk.
It is frequently applied to slip business in the London Market where a lead insurer takes a major slip of the risk and manages the outturn, while others subscribe on fixed terms
Commutation
The process of prematurely terminating an insurance contract by agreeing an amount to settle all current and future claims
Commutation account
A register of the inflows and outflows to the treaty after commutation has taken place
Commutation clause
A clause in an insurance/reinsurance contract that allows the contract to be commuted under certain conditions. The clause works in conjunction with commutation accounts, which are used to calculate the relevant numbers
Composite insurer
A single insurance company that writes both life and non-life business
Credibility
A statistical measure of the weight given to a statistic
Development factors
A.K.A atafs or link ratios
The factors emerging from a chain ladder calculation that are the ratios of claims in successive development periods
Claims equalization reserve
A reserve built up from profitable years as a cushion against periods with worse than average claims experience
Experience account
An account that tracks the performance of the business reinsured by the treaty so that the profitability of the treaty can be determined
Experience rating
A system by which the premium of each individual risk depends on the actual claims experience of that risk (usually in earlier periods of cover) e.g. No-claims discounts
Expiry date
The date on which the insurance cover for a risk ceases
Exposure rating
A method of calculating the premium that is based on external data or benchmarks.
The risk profile of every insured from the products in question is examined. Scenarios of various losses are analysed and the impact on the policies is determined.
The premium of each individual insured does not depend on the actual claims experience of that insured. Instead, the amount of exposure that the insured brings to the insurer and the experience of comparable risks is used to calculate a premium rate
Financial engineering
Financial engineering contracts attempt to improve a company’s balance sheet but with minimal risk transfer
Financial risk reinsurance
A.K.A finite risk reinsurance
This is a form of reinsurance involving less underwriting risk transfer and more investment or timing risk transfer.
Grossing up factor
A.K.A atufs
A factor used to adjust an incomplete figure to an ultimate one.
Hard premium rates
High, profitable premium rates
Soft premium rates
Low, less profitable premium rates
Inception date
The date from which the insurer assumes cover for a risk. This may or may not coincide with the premium collection date
IBNeR
Incurred but not enough reported
A reserve reflecting expected changes in estimates for reported claims only. Meaning changes in the RBNS reserve
IBNR
Incurred by not reported
A reserve to provide for claims in respect of claim events that have occured before the accounting date but have not been reported to the insurer by that date.
IBNR cannot be calulated on a case by case basis
Principle of indemnity
The principle whereby the insured is restored to the same financial position after a loss as before the loss
New-for-old basis of settlement
A basis of settlement under which the insured is entitled to the full replacement value of the property without any decuction for depreciation or wear and tear
Insurance cycle definition
The observed tendency of insurance supply, and hence prices, and hence profitability, to vary over a period of several years
Moral hazard
The risk that an insured may act in a less risk-averse manner when theu are insure
Anti-selection
The preference of some insurance applicants for policies whose underwriting requirements are less stringent than others.
Anti-selection occurs when more profitable business is attracted away from an insurer by a competitor who has found a way of identifying the more profitable segment and offers more attractive terms to that segment
Mutual insurer
Owned by policyholders to whom all profits ultimately belong
Names
The members of Lloyd’s who accept the liability for and profits from the risks underwritten in their name. Names may be individuals or corporate entities
NCD
No-claims discount
A form of experience rating in which an individual policyholder may be granted a discount from the relevant base premium depending on their own claim experience
Novation
The transfer of the rights and obligations under a contract from one party to another
Risk premium
The amount of premium required to cover claims expected for a risk.
(Ave claim amount) x (average claim frequency)
Office premium
The total premium charged for a period of cover, including:
- risk premium
- commission
- expense loading
- coast of capital loading
- profit loading
Period of unexpired risk
For any policy in force on an accounting date, the period from the accounting date to the expiry date
Persistency
A measure of the probability that a policy will remain in force at renewal, rather than lapse
Process uncertainty
The risk inherent in writing business and settling claims in general insurance, represented by a pdf.
The modelling of number and size of claims will vary from the true value owing to random variation
Product pricing
The determination of the office premium, taking account of current market conditions
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 testing
Estimating the economic value of contracts using NPV techniques. The proposed premium rates are tested by projecting possible levels of future business, claims, expenses, investment experience and profit.
Rate on line
For non-proportional reinsurance:
Total premium charged (ignoring reinstatement premiums)
÷
Width of layer covered
Rating
The process of coming up with a suitable premium for insurance risk
Reciprocal reinsurance
An arrangement between two insurers who agree to reinsurer risks with each other. Commonly used with quota share reinsurance to diversify both insurers’ overall portfolios
Recoveries
Amounts received by insurers to offset part of the cost of a claim
Reinstatement
The restoration of full cover following a claim (often used for non-proportional reinsurance).
The number of reinstatements, and the terms upon which they are made, will be agreed at the outset. Once agreed, they are automatic and obligatory for both parties
RITC
Reinsurance to close
Underwriting members for one year of account of a syndicate agree with another party that it will assume responsibility for handling and paying all known and unknown liabilities arising out of insurance business underwritten by the syndicate and allocated to the closing year
Retroactive date
Used for claims made cover. It is the date after which claims must have occured in order to be covered
Return commission
Commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit
Salvage
Amounts recovered by insurers from the sale of insured items that jad become the property of the insurer by virtue of the settling of a claim
Stability clause
A clause that may be included in a non-proportional reinsurance treaty, providing for the indexation of monetary limits in line with a specified index of inflation
Time and distance reinsurance
A type of financial reinsurance whereby an insurer pays a single premium in return for a fixed schedule of future payments matched to the estimated dates and amounts of the insurer’s claim outgo. The appeal as a method to improve the insurer’s balance sheet lies in the fact that these future inflows could potentially be recorded at face value rather than at discounted value
Underinsurance
When the sum insured is less than that required under the terms of the contract
Working layer
A layer of XoL reinsurance where the deductible is at a low enough level for the reinsurer to be likely to experience a fairly regular flow of claims
Difference between an excess and a deductible
An excess is an amount a policyholder must bear before the liability passes to the insurer (subject to the sum insured) - Insurer basically covers SA in excess of excess value.
A deductible is an amount withheld by the insurer from the claim amount paid to the policyholder - insurer’s maximum liability is (SA - deductible)
Uberrima fides
“Utmost good faith”
A principle of honesty to be observed by all parties
Attritional claims
Those claims of average size that remain after large and catastrophe claims have been removed.
Latency period
Time from the date of first exposure to date of manifestation
Jettison
Goods being thrown overboard in an attempt to save the ship from sinking
CAR policies
Contractors’ All Risks policies
Covers construction risks including liabilities for losses caused to third parties
Prudence
The inclusion of a degree of caution when exercising judgement to estimate further values, such that income/assets are not overstated and outgo/liabilities are not understated
Admissible assets
Those assets which can be taken into account for the purposes of demonstrating statutory solvency
Custodian
A party that holds the assets for the insurer andbis responsible for:
1) the safekeeping of those assets
2) admin relating to those assets
The underwriting cycle
A continuous cycle of hard (profitable) premiums, then increased competition, followed by soft (less profitable) premiums, and then insurers leave the market
Jurisdiction shopping
A claimant will try to launch proceedings in the most claimant-friendly jurisdiction in order to maximise any potential award
Propensity to claim
Tendancy to seek compensation when it is likely to be available
Brokerage
Commission paid by a reinsurer to a reinsurance broker
Loss portfolio transfers (LPTs)
LPTs are arrangements that involve the purchase of reinsurance cover for the ultimate settled amount for a block of business in its entirety. Reserves are transferred to the reinsurer along with all remaining exposure to the business and a premium
Reinstatement premiums pro rata as to amount
The reinstatement premium charged to the direct writer is proportionate to the piece of the layer that a claim has burnt through
Reinstatement premiums pro rata as to time
The reinstatement premium charged to the direct writer is proportionate to the period of cover remaining
Exposure erosion
Refers to the need to adjust the benchmark development for factors such as inflation levels, sums insured, policy numbers etc.
Noting level (notification level)
The claim size above which claims should be referred to a reinsurer
Claims clear-out
A concerted effort to settle or release case reserves for reported claims which have been dormant for a long period. (May be indicated by unusually high claims development factors)
List the terms used to identify the sources of uncertainty or error
1) Process uncertainty
2) Parameter uncertainty
3) Model error
4) Systemic error
ODP
Over-dispersed Poisson
The over-dispersed poisson model is a bootstrap model that assumes that the variance exceeds the best estimate by a constant factor “phi”>1 that is estimated from data. (The model cannot handle negative values tuat might be present if incremental claims data is used)
The results of the reserving exercise should be checked to ensure…
1) They are reasonable
2) They are supported by emerging experience
Reasonability of reserving results can be checked using…
1) Diagnostic tests
2) Analysis of emerging experience
Diagnostic
A measure used to help interpret data or results that can test and verify underlying methodology and assumptions
Survival ratio
Indicate how long a reserve or IBNR estimate will last if claim development continues at the current rate
IBNR burn rate
Movement in incurred as a proportion of the previous IBNR (i.e. The percentage change in IBNR). We expect this to be larger for shorter-tailed classes than longer-tailed ones
Anti-selection
The preference of some insurance applicants for policies whose underwriting requirements are less stringent than others.
Anti-selection occurs when more profitable business is attracted away from an insurer by a competitor who has found a way of identifying the more profitable segment and offers more attractive terms
ENIDS
Events Not In Data
A.K.A binary events or extreme events
Not all possible future events will be included in any set of data.
Reserving methods that project from historical data are unlikely to satisfy any requirement for a probability-weighted average of future cashflows, since not all possible future cashflows - or the events that cause them - may be represented in the data.
Model uncertainty
The risk that an inappropriate model has been used to model data for the purpose of reserving.
The quantification of model uncertainty is difficult to assess, but by using alternative models the risk can be minimized and hence the level of uncertainty can be assessed by comparing the outputs of alternative models
Parameter uncertainty
The risk that model parameters fitted based on historic data do not accurately reflect the underlying statistical process.
A goodness of fit test using these parameters can quantify this element of uncertainty
Process uncertainty
The risk inherent in insurance business, that the modelling of number and amount of claims will vary from the true value owing to random variation.
Process uncertainty is represented by a pdf.
Uncertainty
The inability to predict the future with confidence
Risk
The possibility of adverse variations in financial results
Reserving risk
The risk that claims arising from expired business turn out to be greater than the reserves
Business risks
Those risks present in any business and not particular to insurers, though they may manifest in particular ways for insurers
Loss leader strategy
The process of winning new business buy charging less than economic premiums in order to increase new business volumes
Operational risk
Risk associated with the mismanagement of the company, resulting from inadequate or failed internal processes, people and systems or from external events (always ever so slightly correlated with other risks)
Fraud risk
The risk associated with internal misappropriation of funds, undertaken with the objective of personal benefit at the expense of the firm.
Administration risk
The risk of error or failure associated with the administrative aspects of the firm’s operations.
Depends on:
- the extent to which admin is outsourced
- the extent of centralised and decentralised functions
- level of staff expertise
Compliance risk
The risk of non-adherence to legislative and internal firm requirements.
Event risk
The risk associated with the potential impact of significant events on the operations of the firm and failure of plans to recover from such an event
Technological risk
The risk of error or failure associated with the technological aspects of its operations. In particular, the hardware systems and the software utilized to run them
Pension scheme risk
The risk that the firm is required to make good any shortfall in pension fund assets relative to its liabilities.
Governance risk
The risk associated with the board and senior management of the firm not effectively performing their respective roles
Group risk
The risk a firm experiences from being part of a group as opposed to being a stand-alone entity (being a subsidiary of a parent>
Group capital risk
The subsidiary may not be able to rely on capital injections from the parent company should the whole group suffer a loss
Group reputational risk
If the parent shares part or all of a firm’s name, there may be a large degree of association
Group centralised function risk
Where firms rely on a group company to provide centralised functions, errors may be perpetuated throughout the group
Political risk
The risk of any political change that alters the expected outcome and value of an economic action by changing the probability of achieving business objectives.
Group reinsurance risk
The parent purchases bulk reinsurance for the entire group on favourable terms. If the reinsurer withdraws these terms as a result of an issue with any part of the group, subsidiaries will have to obtain reinsurance at less favourable market rates
Direct expenses
Those that can be directly attributed to a class of business.
All variable costs are direct.
Fixed costs can be direct or indirect.
Indirect expenses
A.K.A overheads
Relate to support functions and therefore cannot be directly attributed to ant one policy or class of business.
Rating structure
Refers to rhe relative levels of premium charged to different policyholders depending on their particular risk profile. If inappropriate, it may lead to anti-selection
Customer lifetime value
The inherent worth of an existing customer to whom a policy has already been sold.
Takes account of:
- policyholder’s likelihood to renew
- their probability of acceptance of future rate increases
- potential for cross-selling other products
Claim frequency
Number of claims reported per unit of exposure
OR
Number of claims settled per unit exposure
Claim severity
Average cost per claim reported
OR
Average cost per claim settled
Declinature
Where the insurer declines to provide cover
Attainment of majority
Where a payment is made once the claimant reaches a certain age that is pre-specified by the courts
Movement data
The dats and amounts of, and reasons for, adjustments to case estimates over time
Endorsement
A.K.A mid-term adjustment
An amendment to a policy’s wording during the term of the policy that may or may not change the premium payable
CRESTA zone
The global Catastrophe Risk Evaluating and Standardizing Target Accumulations (CRESTA) zone data set helps brokers and reinsurers assess and present risk, based on the zoning system established by the world’s leading reinsurers.
Based primarily on observed or expected seismic activity within a country, CRESTA zones consider the distribution of insured values within a country as well as administrative or political boundaries for easier assessment of risks.
Risk group
The rating cell or risk segment into which particular policies are categorised, within a type of insurance cover.
The objective is to achieve a group of policies or risks that have homogeneous characteristics and hence a similar risk of claims
SAIA
South African Insurance Association
Collects data from its member offices and then makes summaries of all data available to its members
Check digit
The last digit of a policy number, based on the other digits, designed to reject upon incorrect entering of the policy number
Risk classification
The process of grouping data according to certain factors in order to obtain homogeneous experience within each group with respect to the factor being analysed
Cross-selling
The selling of similar insurance products, or the selling of products that can be incorporated into the actual insurance cover being sold
Loss-leader strategy
Involves selling insurance at below-economic rates in order 5o increase market share with the hope of making profits in the future, either by increasing premium rates to profitable levels or by cross-selling more profitable policies
Capacity
The amount of premium income that an insurer is permitted to write, or the maximum exposure that could be accepted (possibly based on capital limitations).
Refers to…
- an insurance company
- a Lloyd’s name
- a Lloyd’s syndicate
- a whole market
Credibility
A statistical measure of the weight to be given to a statistic
Office premium
The total calculated premium for a period of cover. This premium will consist of…
- the risk premium
- an expense loading
- a cost of capital loading
- a reinsurance premium loading
- a negative investment loading
- a tax loading
- a super-profit loading
Product costing
The calculation of the theoretical office premium to be charged for a particular class of business
Product pricing
The calculation of the actual office premium to be charged and will take account of current market conditions
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured
Adjustment premium
An additional premium payable at the end of a period of cover. This may result from the use of retrospective experience rating or from a situation where the exposure cannot be adequately determined at the start of a period of cover
Bonus hunger
The reluctance of policyholders under a NCD or bonus-malus system to notify claims when faced with a potential increase in premiums
Bonus-malus
A rating system in which the base premium level can be discounted (reduced) or loaded (increased) in response to the policyholder’s claims experience
Burning cost
The actual cost of claims paid or incurred during a past period of years, expressed as an annual rate per unit of exposure.
After adjustment for inflation and IBNR, this may be used as a method of calculating premiums and monitoring experience of risks
Deposit premium
(linked to adjustment premium)
This occurs in cases where…
- some relevant exposure/rating information is not know at the start of a period of cover
- where the premium to be paid is dependent on claims experience during the policy term
An initial deposit premium is paid at the start of the period of cover, followed by an adjustment at the end, when the information required is known
Minimum-and-deposit premium
A deposit premium in the scenario where the adjustment premium is stipulated at the outset as being upwards only
Experience rating
A.K.A loss-sensitive rating
A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk.
This claims experience is usually from an earlier period (historic experience), but sometimes is from the current period.
Swing-rated premium
A premium that depends, at least in part, on the claims experience of the policyholder within the current period of exposure
Exposure rating
As opposed to experience rating
A method of calculating the premium based on external data or benchmarks. The risk profile (exposure) of every insured from the product in question is examined. Scenarios of losses of various sizes are analysed and the impact on the policies is determined.
The premium of each individual insured does not depend on their personal claims experience. Instead, the amount of exposure that the insured brings to the insurer and the experience of comparable risks ia used to calculate a premium rate
Fleet
A group of vehicles, ships or aircraft that are insured together under one policy
Fleet rating
The process of determining premium rates for fleets
Cost plus approach
A pricing approach whereby a risk premium is calculated, to which loadings are added to determine the office premium
Credibility theory
Rather than relying solely on recent observations, credibility-weighted estimates may be obtained by combining recent observations with other information, weighted by the reliance the insurer places on each piece of information.
The more reliable we believe our observed claims experience to be as a predictor of future experience, the more we weight our estimate towards that data
Pure risk premium
The expected cost of future attritional claims, including a loading for catastrophe and large loss claims.
This loading may be determined by…
- own data
- historical data
- a sophisticated catastrophe model
Return period
The n-yera period during which an exceptional event is expected to occur once
Technical premium
The actual office premium paid by policyholders
Prospective experience rating
- Premium renewal rate depends on past claims experience of the risk prior to that renewal.
- Insurer takes on all underwriting risk.
- Premium for upcoming risk period cannot be adjusted once set, at least until the next renewal.
- Insurer retains the risk that poor risks may not renew so that the insurer is unable to recoup its losses
Retrospective experience rating
- Uses experience rating during current exposure period as a rating factor.
- An initial deposit premium will be followed at the end if the period by an adjustment premium or refund.
- Insurer’s underwriting risk is reduced here since a further premium may be charged during the year.
ALAE and ULAE
Allocated Loss Adjustment Expenses
and
Unallocated Loss Adjustment Expenses
Allocated loss adjustment expenses
A.K.A claims handling expenses or loss adjustment expenses
The expenses occurred in handling and settling claims
Burning cost
The actual cost of claims paid or incurred during a past period of years, expressed as an annual rate per unit of exposure.
Deep pocket syndrome
A situation where claims are made based on the ability of the defendant to pay rather than on share of blame.
An injured party will try to blame the party with the greatest wealth (the deepest pocket) where there is more than one potential defendant
Exposure rating
As opposed to Experience Rating
A method of calculating the premium that is based on external data or benchmarks. The premium of each individual does not depend on the actual claims experience of that insured. Instead, the amount of exposure that the insured brings to the insurer and the experience for comparable risks is used to calculate a premium rate
Exposure unit/measure
The basic unit used to measure the amount of risk insured (usually over a given period) and usually used directly in rating. Premiums are expressed as:
(rate per unit of exposure).(number of units of exposure)
From the ground up (FGU)
Describes a statement from cendant to reinsurer that details their claims experience. Such a statement is FGU if it shows the number and distribution by amount of all claims (however small), even though reinsurance is required for largest claims only
GLM
Generalised Linear Model
A flexible generalisation of ordinary least squares regression.
The GLM generalises linear regression by:
- allowing the linear model to be related to the response variable via a link variable
- by allowing the magnitude of the variance of each measurement to be a function of its predicted value
ILF
Increased Limit Factor
These are factors which estimate the cost for a new limit as a multiple of the basic limit, b.
Used to price liability business when using original loss curves.
ILF(x) = LEV(x) / LEV(b)
LEV
Limited Expected Value
The expected value of a distribution, when values above a certain number (say M) are capped at M.
Per-claim basis
A per-claim basis means that original loss curves are based on the amounts that will be paid to each individual claimant for losses that arise from one incident
Per-occurrence basis
A per-occurrence basis means that the original loss curves are based on the total amounts paid to all plaintiffs for losses that arise from one incident
Points rating system
A system for calculating the office premium by relating it to points associated with each cell within a rating factor. The higher the risk associated with the cell, the higher the points, and the higher the premium
ALM
Asset-Liability Modelling
A form of actuarial projection which analyses future flows of investment income against liability outgo
DFA
Dynamic Financial Analysis
A phrase given to any form of actuarial modelling in financial services
VaR
Value at Risk
A widely uaed measure of the risk of loss on a specific portfolio of financial assets.
For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the loss on the portfolio over the given time horizon exceeds this value is the given probability level.
- t such that P(X
Catastrophe reserve
A reserve built up between catastrophes to smooth the reported results over a number of years. Its purpose is smoothing, not solvency
Functional costing
A process used within an expense analysis to split the expenses of each line department between the different classes of business covered by that department.
The process usually relies upon fixing relative unit costs for each of the processes carried out by the department and counting the number of times that each of the processes is carried out over the period in question
Putting a premium on level
A.K.A adjusting a premium to current rate level
Adjusting historical premium for rate increases (decreases) that occurred during or after the historical experience period to prevent new premiums being understated (overstated)
Portfolio transfer
The reinsurance of an entire portfolio at a premium relating to the estimated outstanding claims (including IBNR) and unexpired risk under that portfolio.
Both portfolio claims and portfolio premiums are transferred to the accepting entity.
Usually used when:
- an insurer has decided to discontinue writing a particular class
- a reinsurer wants to close a treaty year and pass on the liability to the following year for administrative reasons
Aggregate deductible
The maximum amount that the insured can retain within their deductible when all losses are aggregated
Ranking deductible
The ranking component of a deductible (applied to each individual loss) does contribute to an insured’s aggregate deductible
Non-ranking deductible
The non-ranking component of a deductible (applied to each loss) does not contribute to an insured’s aggregate deductible
Trailing deductible
The amount rhat is retained by the insured for each individual loss once the aggregate deductible has been fully eroded
Per-occurrence limit
The maximum amount that the insurer can retain for each individual loss
Annual aggregate limit
The maximum amount that the insurer can retain when all losses for an annual policy are aggregated
Demand modelling
Involves analysing past customer behaviour in order to predict the likelihood that an individual will purchase insurance or renew their cover, and to investigate how that propensity to buy or renew would change in response to changes in price
CHAID
Chi-squared Automatic Interaction Detector
Exposure curve
A.K.A first loss scale, loss elimination function
Shows the proportion of the full value premium allocated to primary layers at different values. When showing the proportion to allocate to the excess layer rather than the primary layer, they are also called excess of loss scales
ILF
Increased Limit Factor
They give the ratio of premium for higher limits to a basic limit
OEPS
Occurrence Exceedance Probability
Considers the probability that the largest individual event in a year exceeds a particular threshold
Disadvantages:
- ignores possibility of multiple events
- difficult to price XoL reinsurance
AEPS
Aggregate Exceedance Probability
Considers the probability that that aggregate loss from all loss events in a year exceeds a particular threshold
Disadvantages:
- difficult to price risk XoL reinsurance as we may not know how many claims in the aggregate loss
Internal model
As opposed to a regulator-imposed model.
A capital model developed internally to measure the insurer’s risk
MVA
Market value of assets
MVL
Market value of liabilities
Avaliable capital
The excess of an insurer’s financial resources over the value of its liabilities. It may or may not exceed the capital the insurer is required to hold
Required capital
How much capital an insurer needs. This may be set as either the regulatory capital or the economic capital
Regulatory capital
The amount of capital the regulator deems is appropriate to hols in order to protect policyholders’ interests.
Economic capital
The amount of capital an insurer believes it should hold to fulfil its own objectives, calculated using an internal model.
Risk profile
Defined by the risks being modelled and the key outcome being used to measure success or failure
Risk measure
Links the outcome to the capital required to achieve that outcome. It will be defined in terms of a required confidence level and a time horizon
Risk tolerance
The required level of confidence stated in the risk measure
Insurance risk
Tail correlation
Some factors may display little or no correlation under normal circumstances but become significantly correlated under stressed situations
Migration matrix
Sets out the transitional probability of moving from one rating grade to another over a given year. These vary over an economic cycle, such that the probability of default for a given rating will increase during an economic downturn.
