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A311 > Definitions I Don't Want To Pull Out My Ass > Flashcards

Definitions I Don't Want To Pull Out My Ass Flashcards

1
Q

Defined benefit scheme

A

The scheme rules define the benefits independently of the contributions payable, and are not directly related to the investments of the scheme. The scheme may be funded or unfunded

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2
Q

Defined contribution scheme

A

Providing benefits with the amount of an individual members benefits depends on the contributions paid into the scheme in respect of that member, increased by the investment earned on those contributions

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3
Q

Fair value

A

The amount for which an asset could be exchanged/liability settled between knowledgeable, willing parties at arms length

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4
Q

Corporate governance

A

The high level framework within which a company’s MANAGERIAL DECISIONS are made

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5
Q

Pure matching

A

Matching of assets and liabilities involves structuring the flow of income and maturity proceeds from the assets so that they coincide precisely with the net outgo from the liabilities under all circumstances

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6
Q

Liability hedging

A

The assets are chosen in such a way as to PERFORM in the same way as the liabilities

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7
Q

Immunisation

A

The investment of the assets in such a way that the present value of the assets less the present value of the liabilities is immune to a general small change in the rate of interest

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8
Q

The discounted mean term/duration

A

The weighted average time to the payments, where the weights are the present values of each payment

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9
Q

Convexity

A

The sensitivity of the volatility of the cashflows to a change in the interest rate

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10
Q

Active investment management

A

Where the investment manager has few restrictions on investment choice within a broad remit. It is expected to produce greater returns despite extra dealing costs and risks of poor judgement

— perhaps just a broad benchmark of asset classes
— Manager can make JUDGEMENTS on future performance of specific investments…
— … in both shorts and a long term
— Expected to yield higher returns if market has inefficiencies
— Has extra costs due to more frequent transactions

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11
Q

Passive investment management

A

— Involves holding assets closely reflecting those underlying an index or specified benchmark.
— The investment manager has little freedom of choice.
— There remains the risk of tracking error…
— …and the index performing poorly

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12
Q

Tactical asset allocation

A

Involves a short-term departure from the benchmark position in pursuit of higher returns

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13
Q

Risk budgeting

A

A process that establishes how much risk should be taken and where it is most efficient to take the risk (in order to maximise the return

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14
Q

Strategic risk

A

The risk of underperformance if the strategic benchmark does not match the liabilities

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15
Q

Active risk

A

The risk taken by the individual investment managers relative to the given benchmark

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16
Q

Structural risk

A

Where the aggregate of the individual investment manager benchmarks does not equal the total benchmark for the fund

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17
Q

Retrospective or backward looking/ Historic tracking error

A

The annualised standard deviation of the difference between actual fund performance and benchmark performance

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18
Q

Forward looking tracking error

A

An estimate of the standard deviation of returns that the portfolio might experience in the future if its current structure were to remain unaltered. It involves modelling the future experience of the fund based on its current holdings and likely future volatility and correlations to other holdings.

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19
Q

The money weighted rate of return (MWRR)

A

The discount rate at which the present value of inflows = present value of outflows in a portfolio

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20
Q

Time weighted rate of return (TWRR)

A

The compounded growth rate of 1 over the period being measured

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21
Q

Scenario analysis

A

Looks at the financial impact of a plausible and possibly adverse set or sequence of events

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22
Q

Stress testing

A

Involves assessing the impact of a SPECIFIC adverse event

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23
Q

Stress scenario

A

The stress test is performed by considering the impact of a set of related adverse conditions that reflect the chosen scenario

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24
Q

Reverse stress testing

A

The construction of a severe stress scenario that just allows the firm to be able to continue to meet its business plan. The scenario may be extreme but must be plausible

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25
Q

Data governance

A

The overall management of the availability, usability, integrity and security of data

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26
Q

Data governance policy

A

A documented set of guidelines for ensuring the proper management of an organisations data

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27
Q

Risk factor

A

Any factor that has a bearing on the amount of risk presented by a policy

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28
Q

Rating factor

A

Factors that are more easily identified and maybe used for the underlying risk factors

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29
Q

A derivative

A

A financial instrument with a value dependent on the value of some other, underlying asset

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30
Q

A forward contract

A

A non-standardised, over-the-counter-traded contract between two parties to trade a specified asset on a set date in the future at a specified price

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31
Q

A futures contract

A

A standardised, exchange-tradable contract between two parties to trade a specified asset on a set date in the future at a specified price

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32
Q

A long position in an asset

A

Having a positive economic exposure to that asset. In futures and forwards dealing, the long party is the one who has contracted to take delivery of the asset in the future

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33
Q

A short position in an asset

A

Having a negative economic exposure to that asset. In futures and forwards dealing, the short party is the one who has contracted to deliver the asset in the future

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34
Q

An option

A

Gives the investor the right, but not the obligation, to buy or sell a specified asset on a specified future date at the specified exercise (or strike) price.

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35
Q

An American option

A

An option that can be exercised on any date before it’s expiry

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36
Q

A European option

A

An option that can only be exercised at expiry

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37
Q

A warrant

A

An option issued by a company over its own shares. The holder has the right to purchase shares from the company at a specified price at specified times in the future.

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38
Q

Risk classification

A

Providers use RISK FACTORS to identify the characteristics of the risks they underwrite, and to POOL risks into HOMOGENEOUS groups. All risks in a group can then be charged the same PREMIUM

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39
Q

Selection

A

The process by which lives in a population are divided into separate homogeneous groups

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40
Q

Temporary initial selection

A

Where the level of risk diminishes or increases since the occurrence of a selection process (or a discriminating event)
I.e. occurs when heterogeneity is present in a group that was selected on the basis of a criterion whose effects wear off over time

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41
Q

Class selection

A

Where a select group is taken from a population consisting of a mixture of different types (‘classes’) of individual with different characteristics
I.e. refers to a factor which is permanent in its effect wrt mortality

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42
Q

Time selection

A

Where a select group is taken from a population of individuals from different calendar years

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43
Q

Adverse selection

A

Where the individuals own choice influences the composition of a select group

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44
Q

Anti-selection

A

— People will be more likely to take out contracts
— when they believe their risk is higher than the insurance company has allowed for in its premiums

—Anti-selection can also arise where existing policyholders have the opportunity of exercising a guarantee or an option.
— when they have the most to gain from it

Example: a younger scheme member lapsing their policy and moving to another scheme leaving the scheme with a worse profile; a member joining the scheme because he knows they pay for benefit not covered elsewhere
— A smoker buying cover from an insurer that does not differentiate on smoking status

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45
Q

Spurious selection

A

Where the distorting effect of a confounding factor gives the false impression that one of the other forms of selection is present

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46
Q

Selective decrement

A

Will ‘select’ from the population lives whose rate of decrement from another cause differs from that of the whole population

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47
Q

Mortality convergence

A

The convergence of mortality between subgroups at higher ages

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48
Q

Model point

A

A set of data representing a single policy or group of policies. It captures the most important characteristics of the policies that it represents

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49
Q

Model error

A

A model is developed that is not appropriate to the task at hand

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50
Q

Parameter error

A

Incorrectly setting parameter values used when the model is run. It can involve individual parameters and/or correlation between parameters

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51
Q

Net present value

A

The expected present value of the future cashflows under a contract, discounted at the risk discount rate.

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52
Q

The internal rate of return (IRR)

A

The discount rate that would give a NPV ot 0.

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53
Q

The discounted payback period

A

The earliest policy duration at which the accumulated value of profits is 0

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54
Q

Variable expenses

A

Vary directly according to the level of business being handled and may be linked to the number of policies or claims of the amount of premiums or claims.

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55
Q

Fixed expenses

A

Those that in the short to medium term, do not vary according to the level of business being handled.

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56
Q

Direct expenses

A

Those that have a direct relationship to a particular class of business.

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57
Q

Indirect expenses

A

Those that do not have a direct relationship to any one class of business (so they need to be apportioned between the appropriate classes using some appropriate method).

58
Q

The cost of benefits

A

The amount that should theoretically be charged for them

59
Q

The price of benefits

A

The amount that can be charged under a particular set of market conditions and may be more or less than the cost.

60
Q

Loss leading

A

A provider may choose to sell a product that covers its direct fixed and variable costs but does not cover its expense overheads and minimum profit requirements

61
Q

Marginal costing

A

A companies fixed costs are covered my margins from business currently on the books, each new policy only needs to cover the variable costs attributable to it and the company will make a profit

62
Q

Methods of financing benefits: lump sum in advance

A

Funds that we expected to be sufficient to meet the cost of the benefit can be set up as soon as the benefit promise is made

63
Q

Methods of financing benefits: Terminal funding

A

Funds are expected to be sufficient to meet the cost of a series of benefit payments can be set up as soon as the first payment becomes due

64
Q

Methods of financing benefits: smoothed PAYG

A

To smooth income and outgo over time by maintaining a fund as a working balance

65
Q

Methods of financing benefits: Just-in-time funding

A

Funds that are expected to be sufficient to meet the cost of the benefits can be set up AS SOON AS A RISK ARISES in relation to the future financing of the benefits

66
Q

Methods of financing benefits: regular contribution

A

Funds are gradually built up to a level expected to be sufficient to meet the cost of the benefit, over the period between the promise being made and the benefit first becoming payable

67
Q

Risk vs Uncertainty

A

Risk arises as the consequence of uncertain outcomes
Uncertainty cannot be modelled, but it is often possible to model risk

68
Q

Systematic risk

A

Risk that affects an entire financial market or system and cannot be diversified away.

69
Q

Diversifiable risk

A

Arises from an individual component of a financial market or system and can be diversified away.

70
Q

Enterprise risk management

A

Involves considering the risks of the enterprise as a whole, rather than considering individual risks in isolation

71
Q

Market risk

A

The risks related to changes in investment market values or other features correlated with investment markets, such as interest and inflation rates.

72
Q

Credit risk

A

The risk of failure of third parties to meet their obligations
- borrowers defaulting on interest and capital payments
-counterparties to a transaction failing to meet their obligations
-debtors failing to pay for purchased goods / services.

73
Q

Liquidity risk

A

The risk that an individual or company, although solvent does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost.

74
Q

Liquidity risk in the financial market

A

Liquidity risk arises when the market does not have the capacity to handle that volume of transacted asset without a potential adverse price impact.

75
Q

Underwriting risk

A

poor underwriting standards

76
Q

Insurance risk

A

poor claims experience

77
Q

Financing risk

A

Providing finance for a project that turns out to be unsuccessful

78
Q

Exposure risk

A

exposure to a particular risk being greater than expected, or lower sales volumes
than expected

79
Q

Operational risk

A

The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events,

80
Q

External risk

A

Arises from external events such as storm, fire, flood or terrorist attack.
Regulatory, legislative and tax changes are also examples of external risk.
In general, external risk is systematic (ie non-diversifiable) risk.

81
Q

Risk appetite

A

Expression of an entity’s (individual or companies) WILLINGNESS and ABILITY to take on risk and is set by the board in order to meet their objectives

82
Q

Risk profile

A

A complete description of the CURRENT and FUTURE RISK EXPOSURES that does and can affect an organisation

83
Q

Risk limits

A

Guidelines that set the limits on the acceptable actions that can be taken today.
If adhered to then each individual unit of business is deemed to be working within its permitted risk tolerances. Regarded as a component of risk capacity

84
Q

Risk capacity

A

The VOLUME of the risk that an organisation can take, according to some consistent measure, such as economic capital

85
Q

Risk tolerance

A

A statement on an entity’s attitude towards risk, describes the LEVEL(S) of risk that an insurer is willing to bear that is QUANTIFIABLE and NON-QUANTIFIABLE

86
Q

Risk tolerance limits

A

Translate risk tolerance levels into operational limits for each risk category and their limits, taking into account any links between these categories

87
Q

Risk metrics

A

MEASUREMENTS to determine if the company is operating within its risk tolerance limits.

88
Q

Proportional reinsurance

A

A reinsurance arrangement where the reinsurer and cedant share the claims proportionally. Usually, premiums follow the same proportions but commission rates may differ. Two types commonly arise; quota share and surplus

89
Q

Non-proportional reinsurance

A

Reinsurance arrangements, where the claims are not shared proportionately between the cedant and reinsurer. The reinsurer covers the loss suffered by the insurer that exceeds the excess/retention point

90
Q

Quota share reinsurance

A

A form of proportional reinsurance where the proportions used in apportioning claims and premiums between the insurer and reinsurer are constant for all risks covered by the treaty

91
Q

Surplus reinsurance

A

A form of proportional reinsurance where the proportions are determined by the cedant for each individual risk covered by the treaty, subject to limits defined in the treaty

92
Q

Excess of loss (XL or XOL)
reinsurance

A

A form of non-proportional reinsurance whereby the reinsurer indemnifies the cedant for the amount of a loss above a stated excess point, usually up to an upper limit. The excess point and upper limit may be fixed, or indexed as specified in a stability clause. Usually this type of reinsurance relates to individual losses, but it can be a form of aggregate excess of loss reinsurance covering the total of all losses in a period and subject to a total aggregate claim limit

93
Q

Aggregate excess of loss reinsurance

A

A form of excess of loss reinsurance that covers the aggregate of losses, above an excess point and subject to an upper limit, sustained from a single event or from a defined peril (or perils) over a defined period, usually one year

94
Q

Stop loss reinsurance

A

An aggregate excess of loss reinsurance that provides protection based on the total claims, from all perils, arising in a class or classes over a period. The excess point and the upper limit are often expressed as a percentage of the cedant’s premium income rather than in monetary terms

95
Q

Catastrophe reinsurance

A

A form of aggregate excess of loss reinsurance providing coverage for very high aggregate losses arising from a single event, that may be spread over a number of hours;
24 or 72 hour periods that are commonly used.

96
Q

Integrated risk covers

A

Written as multi-year, multi-line covers and will give premium savings due to cost savings and to greater stability of results over long time periods and across more and (uncorrelated) lines

97
Q

Securitisation

A

The transfer of insurance risk to the banking and capital markets

98
Q

Post lost funding or contingent capital

A

A way of raising capital to cover the losses from of a risk after the risk event has happened

99
Q

Swaps

A

Organisations with matching but negatively correlated risks can swap packages of risk so that each organisation has a greater risk diversification

100
Q

Risk management process

A

The process of ensuring that the risks to which an organisation is exposed are the risks to which it thinks it is exposed and to which it is prepared to be exposed

101
Q

Underwriting

A
  1. 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.
  2. 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.
102
Q

Claims control systems

A

mitigate the consequences of a financial risk that has occurred by guarding against fraudulent or excessive claims.

103
Q

Provisions

A

Amounts set aside to meet future liabilities

104
Q

Best estimate basis

A

The set of assumptions that has equal probability of overstating and understating the values

105
Q

Optimistic basis

A

Assumptions are chosen which result in a higher value of assets and or a little value of liabilities

106
Q

Cautious basis

A

Assumptions are chosen which result in a lower value of assets and or a high value of liabilities

107
Q

Going concern basis

A

The accounting basis are 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

108
Q

An equalisation reserve

A

may be set up to smooth results from year to year, where there are low probability risks with a high and volatile financial outcome.

109
Q

Valuation of liabilities: market-based reflecting assets held

A

Discounted outgo using expected return on assets held (i.e. current implied market discount rates), weighted by proportions held of each asset class

110
Q

Valuation of liabilities-
fair value: replicating portfolio

A

Market value of assets in the theoretical replicating portfolio

111
Q

Valuation of liabilities-
fair value: risk-neutral market-consistent

A

Discounted cashflows using risk-free rates

112
Q

A schemes funding level

A

Value of assets divided by value of benefits

113
Q

Solvency II

A

Sets out regulatory capital requirements for insurance companies

114
Q

Minimum capital requirement (MCR)

A

The threshold at which companies will no longer be permitted to trade

115
Q

Solvency capital requirement (SCR)

A

The target level of capital below which companies may need to discuss remedies with their regulators

116
Q

Basel Accords

A

Set a regulatory capital requirements for Banks

117
Q

Economic capital

A

The amount of capital that are provider determines is appropriate to hold (in excess of liabilities) to cover its risks under adverse outcomes, generally with a given degree of confidence over a given time horizon

118
Q

Surplus arising

A

Change in the surplus
= Change in assets - Change in liabilities

119
Q

Levers

A

Factors that management can affect through management control systems to influence the amount of surplus/profit: sources within the providers control

120
Q

Community banks

A

Membership based, decentralised and self-help financial institutions

121
Q

Development banks/ Development Financial Institutions (DFI)

A

provides credit through high risk loans to both public & private
sector initiatives

122
Q

Trading book

A

Consists of instruments that are actively traded and marked-to-market daily by the bank

123
Q

Banking book

A

Consist primarily of loans and is not marked-to-market daily

124
Q

Expectations theory

A

• The expectations theory describes the shape of the yield curve as being determined by economic factors which drive the market’s expectations for future short-term interest rates.
• we expect future short-term interest rates to fall (rise), then we would expect gross redemption yields to fall (rise) and the yield curve to slope downwards (upwards).

125
Q

Liquidity preference theory

A

—The liquidity preference theory is based on the generally accepted belief that investors prefer liquid assets to illiquid ones.
— Investors require a greater return to encourage them to commit funds for a longer period.
— Long-dated stocks are less liquid than short-dated stocks, so yields should be higher for long-dated stocks.
— According to liquidity preference theory, the yield curve should have a slope greater than that predicted by the pure expectations theory.

126
Q

Inflation risk premium theory

A

— Under the inflation risk premium theory the yield curve will tend to slope upwards …
— … because investors need a higher yield to compensate them for holding longer-dated stocks which are more vulnerable to inflation risk than shorter-dated stocks.

127
Q

Market segmentation

A

— The market segmentation (or preferred habitat) theory says that vields at each term to redemption are determined by supply and demand from investors with liabilities of that term.
— Demand for short bonds comes from banks, which compare their yields with short-term interest rates.
— Demand for long bonds comes from pension funds and life assurance companies, whose main objective is protection against future inflation.
— The supply of bonds of different terms will reflect the needs of borrowers …
— … for example, the government may issue short-term bonds if it has a short-term need for cashflow.
— The two areas of the bond market may move somewhat independently.

128
Q

A copula

A

A function, which takes as inputs marginal cumulative distribution functions, and outputs a joint cumulative distribution function

129
Q

Factor sensitivity approach

A

Determines the degree to which an organisation’s financial position (e.g. solvency or funding) is affected by the impact that a change in a single underlying, risk factor (e.g. short-term interest rates) has on the value of assets and liabilities.

130
Q

Scenario sensitivity approach

A

Similar to the factor sensitivity But rather than changing a single underlying risk factor of the effect of changing a set of such factors is considered

131
Q

Tracking error

A

Where deviation is measured relative to the benchmark rather than the mean

132
Q

Value at risk

A

The maximum potential loss on a portfolio over a given future period with a given degree of confidence
E.g., A VaR of R10m over the next year with a 95% confidence interval means that there is only a 5% expected probability of underperformance being greater than R10m over the next year

133
Q

Moral hazard

A

— The action of a party who BEHAVES DIFFERENTLY or less carefully,
— from the way they would if they were FULLY EXPOSED to the consequences
of their actions.
— leaving the organisation/insurer etc. to bear some of the CONSEQUENCES of that action.

Example: policyholder claims for more expensive procedures than necessary claims for new glasses every year, even if there is nothing wrong with existing glasses, policyholder not making an effort to seek out more affordable healthcare if scheme will pay for the more expensive option

134
Q

Community rating

A

Individual rating factors that are not used to determine premiums and therefore lead to cross subsidy

135
Q

Liability insurance

A

Provides indemnity
where the insured, owing to some form of negligence,
is a legally liable
to pay compensation to a THIRD party

136
Q

Property damage insurance

A

To indemnify the insured
against loss of or damage to
their own material property

137
Q

Financial loss insurance

A

Indemnity
against financial losses arising from a perils covered by the policy

138
Q

Deterministic model

A
  • Parameters are fixed at outset
  • Results of running model is a single outcome
  • Potential variability is assessed by sensitivity analysis and scenario testing
139
Q

Stochastic model

A
  • At least one parameter is estimated…
    …by assigning it a probability distribution
  • Model is run a large number of times…
    …with value of stochastic parameters randomly selected from the distribution on each run
  • Outcome is a range of values
140
Q

Capital management

A

Involves ensuring that a provider has:
• sufficient solvency and
• liquidity
to enable both its
•existing liabilities and
• future growth aspirations to be met in all reasonably foreseeable circumstances.
It involves maximising the reported profits of the provider

141
Q

Required return vs Expected return

A

Required return = required risk-free real rate of return + expected inflation + risk premium
Therefore, an investor will expect that the value of their investment does not decrease in real terms, and that they are compensated for the risk taken.

Expected return = initial income yield + expected capital growth
Therefore, the expected return is what the investor expects to achieve on the asset, given
— the price paid for the asset
— the price for which he/she expects to sell/redeem the asset,
— the expected income whilst the asset is held

142
Q

Underwriting cycle

A

• 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.
• This process is complex but appears to occur in all types of insurance and reinsurance, though at different speeds and to different degrees.

A311 (3 decks)

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