F108 Final Glossary Checked Flashcards
Accelerated benefit
A death benefit where the benefit payment is made prior to death. If less than 100% of the total benefit is accelerated, then the contract remains in force and pays out the remainder of the benefit on death. Some life insurance products have a critical illness (CI) accelerator that pays out on the earlier of death or diagnosis of a CI. Where optional illness benefits are offered as an accelerator on a product, no survival period is applied.
Accrual rate
In a defined benefit (DB) retirement context, the rate at which the pension benefit is built up, often expressed as a fraction of salary per year (generally set to provide a pension, or with a target replacement ratio, with x years’ service). It is the fraction of final or other (for example, career average) salary that the member will receive at retirement for each year of service in the fund.
Accrued benefit method
A DB retirement funding method that targets a stable funding ratio. Includes the projected unit method (PUM) and current unit method (CUM).
Accumulated fund credit
A defined contribution (DC) fund member’s accumulated contributions plus investment returns earned, minus expenses deducted to date. This can be calculated for an individual member or all members of a fund. Also referred to as the member’s fund balance, accumulated fund, or accumulated credit.
Active (or in-service) member
A contributing member of a benefit arrangement.
Active management
An investment management strategy where the investment manager or decision-maker actively selects the underlying securities or asset types based on a particular chosen strategy with the aim of identifying mispriced securities.
Actively at work
Performing the normal function of one’s job. Group arrangements often extend cover up to the evidence-of-health (EoH) limit for all members of the group without underwriting, provided they were actively at work or on regular annual leave on the day the policy commenced.
Activities of daily living (ADL)
ADLs are functional tests used to determine incapacity for products such as CI and LTCI. ADLs that are commonly used as criteria for health and care products include washing, dressing, feeding, toileting, mobility, and transferring (physical positioning).
Actuarial liability (AL)
For a DB or DC retirement fund, the present value of the liabilities of the fund in respect of all members, including the pensioners’ and deferred pensioners’ benefits. May be based on the attained age (AAM), entry age (EAM), projected unit (PUM) or current unit (CUM) methods.
Actuarially neutral
When the expected present value of the cost of the benefits is equal to the expected present value of the income from it. It could also refer to the case where the benefit is equal tåo the actuarial reserve and hence the decrement does not create a surplus or strain.
Acute (condition)
Medical conditions with a sudden onset that are of a non-degenerative nature where a cure is a reasonable prospect. They may occur over a short time or develop into a chronic condition.
Additional Unexpired Risk Reserve (AURR)
Top-up amount required on the UPR so that it equals the URR. AURR = max{(URR - UPR, 0)}
Additional voluntary contributions (AVCs)
Retirement fund members may make voluntary contributions to their retirement fund savings, over and above their regular contribution. In a DB fund, AVCs may buy extra service or accrue an additional DC entitlement. In a DC fund, AVCs will add to the member’s accumulated fund credit.
Adequacy
Related to a benefit system where the system is able to provide benefits at a reasonable standard.
Administrator
(In a South African benefit arrangements context) an entity appointed by a medical scheme or retirement fund to run the operations such as collect premiums or contributions, pay claims or benefits, and enforce regulatory compliance. In retirement funds, administrators may also fulfill such functions as managing cashflows and communicating with members.
Adverse selection
When one party does not have, or has agreed or contracted to give information that the other party does not have and which is relevant to the transaction. In other words, there is asymmetric information between two parties in a transaction, agreement, or contract.
Affinity group
A group of individuals linked by a common definitive purpose, ideology, or interest. For example, members of an organisation that is not common employment.
Age-specific fertility rate
Number of live births per 1,000 women in the relevant age band. (See also total fertility rate.)
Aliasing
A linear dependency among observed covariates in a model. Intrinsic aliasing is when there are inherent dependencies in the definition of the covariates. Extrinsic aliasing is when dependencies arise among the covariates, but which arise from the nature of the data itself rather than inherent properties of the covariates.
Alternative reimbursement models (ARM)
Used by the health and care environment to align the incentives of the provider and the funder. The intention is to move away from a fee-for-service environment and to structure payments to providers to encourage them to provide high-quality, cost-effective healthcare.
Analysis of surplus (AOS) or profit
Analysis of the level of assets relative to the liabilities at one point in time (the opening surplus) and the level of assets relative to the liabilities at a subsequent point in time (the closing surplus) and attributes the change to different causes.
Annuitisation
When a retirement fund member purchases an annuity of any type with their retirement savings.
Annuity guaranteed period
The minimum years after an annuity payment commences that the annuity will be guaranteed to be paid, regardless of the survival of the annuitant.
Appraisal value
The value of a business as a whole, both the existing business and the future new business. In an insurance business, appraisal value would be the sum of the embedded value and the company’s goodwill.
Approved But Not Settled (ABNS)
Reserve for when there is a time delay between approval and settlement of an accounting provision.
Articulation (or integration)
How the various components of a benefit system fit together both within categories (pillars or tiers of a benefit system) and across categories.
Asset-liability model
A model for an investment strategy, where the assets are managed to target a specific set of liabilities, with the aim of matching asset flows to liability flows.
Asymmetric information
Different sides of a market have access to different amounts of information, leading to difficulties contracting on a fair basis.
Attained age actuarial liability (AAAL)
The present value of total benefits based on projected final earnings for current active members in service in a retirement fund, minus the value of the SCRCR multiplied by the present value of total projected earnings for all current active members throughout their expected future membership.
Attained age method (AAM)
A DB retirement prospective funding method where the StCR is the stable rate of contribution that, if paid over the expected future membership of a beneficiary, will accumulate (with investment returns) to the value required to provide the benefits that are expected to accrue over that future period of membership. The value of the future service benefits is taken as the difference between the value of total benefits and the value of the past service benefits calculated as for the projected unit method. This results in the attained age method (AAM) and the projected unit method (PUM) having the same actuarial liability but different standard contribution rates.
Attained age SCRCR (AASCR)
The present value of all benefits that will accrue to current active members in a retirement fund after the valuation date, by reference to service after that date and projected final earnings, divided by the present value of total projected earnings for all current active members throughout their expected future membership.
Attrition claims
Claims that occur in high volumes of relatively small amounts. Individually the claims are small but collectively contribute significantly to the overall claims experience.
Auto-enrolment
All eligible individuals are automatically enrolled in a benefit system there may be conditions under which individuals may opt out.
Average cost per claim (ACPC)
Reserving method where the claim frequency and amounts are used to calculate the average cost per claim. The average cost per claim multiplied by total expected number of claims is the expected claims outgo.
Balance-of-cost fund
A DB retirement fund where the member’s contribution rate is fixed (and can be zero) while the employer contribution rate bears the full extent of the volatility of the value of future benefit payments. The employer is therefore liable for the balance of the cost of contributions meeting the future benefit payments. This is a very common design for employer-sponsored DB funds.
Bancassurance
An insurance company set up by a bank, to which it then becomes a tied agent marketing its insurance through bank branches. Usually, the primary market of a bancassurer is the customer base of the bank. There is usually a strong objective to cross-sell products of one operation to another.
Bargaining council
Established when employer and employee bodies (unions) in a particular industry and country or region agree to come together for collective bargaining. Bargaining councils deal with collective agreements, solve labour disputes, establish various schemes, and comment on labour policies and laws. Bargaining councils may establish and manage schemes or funds to benefit their parties or members.
Base plus benefits
Remuneration structure with a basic salary (specific cash compensation) plus benefits (the cost of which is borne by the employer).
Basket of care
A treatment schedule covered by a PMI provider, which may include a pre-approved list of consultations, procedures, and tests.
Beneficial owner
The rightful owner of an asset.
Beneficiary
The individual that receives benefits from a benefit arrangement (scheme, fund, or society). They may or may not be a member of the arrangement.
Benefit
The proceeds of an insurance or benefit arrangement to an individual who is entitled to receive it. This may be a cash payment or in-kind transfer and can be provided by the insurer or benefit arrangement.
Benefit arrangement
Legal entities set up with the sole purpose of providing benefits to members. These are typically not-for-profit, although some generate profits for their sponsors if they provide services to the benefit arrangement. Benefit arrangements can be sponsored by the state (social security benefits), life insurers, administrators, or employers, and can be mandatory or voluntary and run on a group or individual basis.
Benefit escalation rate
Out-of-payment escalation rate refers to the rate at which the benefit payment(s) commence(s). In-payment escalation rate refers to the rate at which benefit payments increase once they are in payment (relevant to recurring benefit payments such as annuities and LTCI).
Benefit-in-kind
A non-cash benefit, for example, housing or education provided by the state or a wellness programme offered by the employer.
Bequest
Funds or monies that are left by will to a person’s dependants after the person’s death. Bequest motive means a desire to leave an inheritance for dependants.
Biases (as in cognitive)
Biases cause people to make economic and financial decisions that do not appear to be in their long-term interests, usually favouring short-term over long-term gains.
Bond yields plus a risk premium method
An ALM model where the discount rate for the liabilities is equal to the expected return on the set of best-matching assets, using bond rates as a base yield and adding risk premiums for each asset type.
Bornhuetter-Ferguson (BF) method
A blend of reserving methods which combines the chain ladder method with the expected loss ratio.
Brand-name pharmaceuticals (as opposed to generic)
Original drugs developed, patented, and brought to the market by the creator. These drugs are protected by patents for a particular period.
Brokers
May also be known as financial advisors or intermediaries. They bridge the gap between the financial services and products market, and individuals or investors.
Budget constraint
The amount of goods and services that an individual can afford, given current prices and the individual’s available income.
Burning cost
The estimated cost of claims, calculated from the previous years’ history adjusted for changes in the numbers insured, the nature of cover, and medical inflation. The term can also be used to describe historic claims only.
Burning cost premium
The actual cost of claims incurred per policy per unit of exposure (the pure risk premium of an actual portfolio of policies). This is calculated as the sum of all claims divided by the total exposed to risk, or the average claim amount multiplied by the claims incidence rate.
Business mix
The combination of products, services or benefits offered by an insurer or benefit arrangement. Usually refers to the mix by number and size of benefit or contract.
Buy-in
Retirement fund agreement with an insurer to cover pensioner payments. The contract is between the insurer and the retirement fund (and so differs from a buy-out) and the liability remains on the fund’s balance sheet.
Buy-out (or outsourcing)
Large-scale purchase of annuities by an insurer from a retirement fund to transfer longevity and other risks to the insurer. The contract is between the insurer and individual pensioners.
Calibration
Setting model parameters in a stochastic model in which the assumptions vary.
Cape Cod method
Extension of the BF reserving method, where an a priori ultimate loss ratio is used instead of an estimated loss ratio.
Capitated arrangement
A reimbursement model where payment is made per capita, that is per head or per life, regardless of utilisation.
Capitation
A type of alternative reimbursement method used by PMI providers. In effect, the insurance company separates out a set of medical benefits (such as dental claims or mental health claims) and passes this risk on to the provider by giving a proportion of the insurance premium for each person insured to the provider rather than an amount per claim. The risk that funds are insufficient to cover treatment lies with the provider of the healthcare service.
Career average salary (or earnings)
Average salary over the life of an individual, which may or may not be subject to revaluation. Career average schemes pays a benefit based on career average salary. (See also revaluation rate.)
Cash balance fund
A type of hybrid retirement fund in which a percentage of salary is contributed each year for each member. Benefits from the fund are set equal to the member’s and employer’s contributions accumulated at a rate of interest that may be predetermined or prevailing interest rates or some other index. Cash balance funds link more directly to standard DC funds from the point of view of the sponsor. National pension schemes that use this concept are often called notional DC schemes.
Categorical variables
Explanatory variables in a model where the values of the levels of the variable can take on distinct categories and cannot be given any natural ordering or score, for example, male or female.
Cedant
In a reinsurance arrangement, the insurer that is ceding some of its insurance risk to a reinsurer.
Chain ladder method
Reserving method that uses past claims data to fit a cumulative distribution to the claim development. Data is arranged in a run-off triangle where the rows are the origin periods and the columns are the development periods.
Basic chain ladder method uses claims in nominal terms. The inflation-adjusted chain ladder method applies an inflation index to past and projected claims.
Chronic condition
A medical condition with long-lasting effects or which recurs over a long period of time, and is generally incurable or degenerative.
Claims In Payment (CIP)
Reserve for the payment of an annuity-type benefit, when the benefit has been approved. Also known as a disabled life reserve in certain product-specific contexts.
Class selection
Classification of people by certain attributes that affect their mortality or morbidity, for example, smokers and non-smokers.
Closed fund or benefit arrangement
Closed can mean either restricted or closed to new members. Restricted benefit arrangements only allow people from a designated group, for example, the employees of the associated company or industry, to join. Funds that are not restricted and are open to anyone are also called unrestricted. In the medical context, closed is usually used in the restricted sense in both open and closed medical schemes, new people are allowed to join but the pool of eligible members is unrestricted or restricted respectively. However, in the retirement fund context, the term ‘closed’ typically means closed to any new member joining, while in its ‘open’ state only certain people may be eligible to join.
Co-payment
In a health and care product, this is the amount that the covered life is responsible for paying to the provider, and the insurer pays the remainder. This is usually a fixed nominal amount (instead of a percentage of the claim).
Coinsurance
Coinsurance is a method of sharing a risk among a number of direct insurers, each of which accepts a specific (direct) contractual relationship with the insured and is therefore liable only for its own contractual share of the total risk. The insured needs to make separate claims to each co-insurer in respect of its stated proportion of the risk. If any co-insurer defaults, the insured would not receive a recovery for that part of the claim. This contrasts with reinsurance where only the direct writer has a contractual relationship with the insured.
Collective DC fund (defined contribution fund)
A DC retirement fund where the declared level of retirement benefit is fully specified and communicated. However, when experience is adverse and the goal is no longer achievable, the contribution rate can be varied.
Collective investment schemes (CISs) or unit trusts
Legal investment vehicles which pool the assets of many investors. The assets are held in trust, independent of the investment manager.
Combined ratio
A combination of a loss ratio and an expenses ratio: total claims plus expenses divided by premiums (gross or net of reinsurance).
Commission
The payment made by a provider to reward those who sell and subsequently service its products, whether they be brokers, tied agents or a direct salesforce. Typically, the amount of the commission depends on the type and size of the contract.
Commitment device
A way of securing upfront commitment to a certain path of actions by individuals. This may be decided by the individual or can be built into the product design.
Community rating
Community rating refers to standardised benefits that are priced on a collective basis across the whole population. Community rating relies on the principle of solidarity. Premiums are not based on the risk presented by the individual but rather the risk for the pool is assessed and premiums are either set equally or vary according to the ability to pay.
Commutation
An option for retirement fund members to give up part of their pension income in exchange for a lump sum.
Commutation factor
A factor based on life expectancy (such as an annuity factor) used in the calculation of the commutation option (lump sum benefit) in a DB retirement fund.
Compensation package
Total package of remuneration, plus statutory benefits, plus discretionary benefits offered to an employee by an employer.
Compulsory membership group scheme
Where the owner of the policy insists that all eligible lives must participate in the scheme.
Consumption
The use of goods or services by individuals or households.
Consumption smoothing
Maintaining a relatively smooth pattern of consumption over the lifecycle and across different possible future outcomes that may occur at the same point in time.
Contingency Reserves
Reserves to protect a retirement fund or benefit arrangement from unexpected events and to act as a buffer against adverse experience.
Continuation option
An additional premium being paid on a group cover policy so that when an individual leaves the group they may take out an individual version of the policy on similar terms but at the standard individual rates without additional underwriting being applied.
Contributions
Benefit arrangements receive contributions on a specified basis from either the employer or sponsor, the member or both to fund the provision of benefits.
Control period (for funding methods)
A specific period over which certain assumptions and parameters remain fixed for the purpose of calculating actuarial liabilities or funding requirements for a retirement fund or state-sponsored benefit scheme. By fixing assumptions over a defined control period, actuaries and sponsors can better manage the volatility inherent in long-term financial projections and ensure consistency and comparability in funding calculations over the specified timeframe. At the end of a control period, assumptions may be revised, initiating a new control period.
Cook’s distance
A method of testing the appropriateness of a model, which is used to measure the influence of a data point on model results. Model points with a Cook’s distance of 1 or more merit closer examination.
Copula
Statistical tools used to formulate a multivariate distribution in such a way that the underlying individual distributions remain unchanged.
Cost analysis
Assesses the cost of various benefits. This is the simplest method of economic evaluation of a benefit system. Cost-Effectiveness Analysis (CEA): Assesses the cost of the benefit system relative to the system’s non-monetary benefits. Cost-Utility Analysis (CUA): Assesses the cost of a benefit system relative to changes in the quality of life, as well as changes in mortality in the case of healthcare. Cost-Benefit Analysis (CBA): Places a monetary value on the cost of the benefit system and its outcomes, allowing for a direct comparison of cost and outcome.
Cost of capital (CoC)
A notional charge to reflect that providers of capital provide funds which they cannot access again immediately. This is an insurer concept and features in the embedded value (EV) as well as the calculation of the supervisory balance sheet in some regimes.
Counterparty risk
The risk that counterparties renege on agreements or fail entirely.
Coverage ratio
Ratio of actual covered workers to the working age population.
Covered earnings
The salary that applies to the determination of social insurance or benefit arrangements where such arrangements’ contributions are based on salary.
Covered wage ratio (CWR)
The ratio of average covered earnings to average earnings for a population.
Cramér-Rao lower bound (CRLB) theorem
Given a random sample of size n from a distribution with density— FORMULA
Credit spreads
The difference in yield between two securities due to a difference in credit quality of the instrument or issuer.
Critical illness (CI) event
An event, defined in a CI policy, that can trigger a claim and could include the diagnosis of specified illnesses or conditions, a specific health event such as a heart attack, reaching a defined stage of impairment or requiring a specific surgical procedure.
Critical illness (CI) insurance
A pure protection product with a benefit payable if the policyholder suffers a critical illness (CI) event during the term of the policy. This product is designed to protect policyholders from illnesses or conditions that are typically perceived by the public to be serious and to occur frequently. In nearly all cases level premiums are paid until the full sum insured is paid, the insured dies, or the term of the policy ends, whichever comes first.
Current unit actuarial liability (CUAL)
The present value of all benefits accrued at the valuation date, based on current earnings for members in service.
Current unit method (CUM) method
Accrued benefit funding method for a retirement fund, where the AL is the discounted value of the benefits that have accrued over the past period of membership of the beneficiaries, but no allowance is made for earnings growth between the date at which the target fund should be held and the date when benefit payment starts.
Current unit SCRCR (CUSCR)
The present value of all benefits of a retirement fund that will accrue in the control period following the valuation date, by reference to service in that period and projected earnings at the end of that period, plus the present value of all benefits accrued at the valuation date (that is the start of the control period) in respect of members in service, multiplied by the projected percentage increase in earnings over the control period, all divided by the present value of all members’ earnings in that control period.
Custodian
Typically, large banks or trust companies appointed by an asset owner to take custodianship of assets held with an investment manager, to protect the owner from the risk of default or misappropriation of the assets by the investment manager.
Custom factor
A method of grouping factors in a model, where a single parameter represents the relativity for multiple levels of a factor. A custom factor is where two or more levels have been grouped in this way.
Customer lifetime value
A quantification of the profit that a customer is expected to bring to the insurer over the lifetime of the customer, taking into account the future needs of the customer and the extent of cross-selling possible.
Data Error Reserve
Held by a retirement fund as a provision for data errors due to poor quality data.
DB underpin
A guarantee in a DC fund where the benefit is guaranteed not to be lower than a pre-defined DB benefit.
DC underpin
In a DB fund, a DC underpin is an additional guarantee that the benefit is not less than the accumulated value of all contributions in respect of that member.
De minimus amount
In the context of regulation, this is a minimum amount below which regulations do not apply. In a retirement context, this is the lump sum level of accumulated retirement benefit below which the retiree is exempted from an annuitisation requirement.
Deferred member (or deferred pensioner or paid-up member)
Members that remain in an employer-sponsored retirement fund after they have left the employment of that employer. These members typically do not make any further contributions to the fund.
Deferred period
The minimum period between the benefit trigger event and the benefit payment commencing. The deferred period is selected upfront and is not influenced by delays in claim reporting or processing. It can apply on any product with a health trigger.
Defined ambition fund
See collective DC fund.
Defined benefit (DB) fund
A retirement fund where the fund rules define the benefits independently of the contributions payable, and benefits are not directly related to the investments of the fund. Benefits are often set according to a formula relating to members’ wages or salaries, length of employment, or other factors. Specific types of DB funds include salary-related schemes or final-salary schemes.
Defined contribution (DC) funds
Retirement funds that pay a retirement benefit to a member that is equal to the member’s accumulated contributions, plus the investment returns earned on those contributions, less any expenses. Usually the contributions are set (for instance, a percentage of salary) but the amount of the benefit is unknown until payment is actually made.
Degrees of freedom (df)
The number of observations in a model less the number of parameters.
Demographic assumptions
Assumptions relating specifically to the nature of the individuals or lives of the particular group or population. For example, the size of the population, the age profile, sex, or other factors relating to the health or employment status of the individuals.
Demographic dividend
The increase in welfare in a population at the second stage of the demographic transition caused by a significant increase in the number of people of working age, a consequent increase in the contribution to labour ratio because of higher savings by working-age people, and low old age and child dependency ratios.
Dependency ratio
The ratio of the number of dependents, such as the young and elderly, who are receiving benefits to the number of working-age people in a country or region who are funding the benefit.
Development ratio
In a chain ladder reserving method, using a run-off triangle, the development ratio is the expected ratio of cumulative claims at the end of the development month j+1, to the cumulative claims at the end of the development month j.
Deviance
A measure of how much the fitted values in a model differ from the observations. It compares the observed value to the fitted value with allowance for weights, and assigns higher importance to errors where the variance should be small.
Deviance residual
The distance between the actual observation and the fitted value of a model, used as a test of the appropriateness of a model.
Diagnostic tests
Tests carried out on a patient to diagnose a disease or condition based on the signs and symptoms presented by the patient.
Differentiable
A function where the derivative exists at each point in its domain.
Direct marketing
Marketing from the provider direct to the consumer, such as mail, telemarketing, television website, social media marketing, and press and internet advertisements. No intermediary or salesperson is involved.
Disability-Adjusted Life Years (DALYs)
A way of measuring burden of disease incorporating the number of years lost due to premature death caused by a condition plus the number of years of healthy life lost to disability or ill-health caused by the condition.
Disabled member
In a retirement fund context, a member who receives income benefit payments from a retirement fund due to that member meeting the fund’s criteria for receiving a disability or ill-health benefit.
Discontinuance basis
A basis in an actuarial valuation carried out to assess the position of a scheme if it were to be discontinued. Liability values are based on an estimate of securing benefits with a third party such as an insurance company. The valuation may take into account the possible exercise of any discretion to augment benefits. Also known as valuation on a Buy-out basis.
Discounted mean term or duration
The weighted sum of the terms of the future cashflows of an asset or liability, where the weight is the present value of the payment at that term.
Discretionary benefits
In a health and care context, benefits in a policy which are available as extras for a policyholder to select, over and above the main benefits of the policy.
Discrimination
Direct discrimination - a person is treated less favourably because of a particular personal feature. Indirect discrimination - a rule, practice, or policy which appears neutral but has a disproportionate impact on a group of people with a particular personal feature. Fair discrimination - discrimination which is acceptable due to an actuarial and statistical basis. Unfair discrimination - discrimination which does not have an actuarial or statistical basis.
Disease burden (or burden of disease)
The physical, psychological, and social impact of a disease or diseases. This can apply to an individual context in terms of the management of a person’s health or at a population level in public health. In the latter context, the prevalence, severity, and consequences of diseases, illnesses, and injuries are considered.
Domestic care
Care of an individual which takes place in their own home or other similar location which is not a formal medical, treatment, or residential care centre.
Drawdown (rate)
The amount withdrawn from an income drawdown product on an annual basis.
Economic assumptions
Assumptions relating to macro-economic factors or variables, such as interest rates, inflation, exchange rates, investment returns, or yields.
Eligibility criteria
Criteria set by the state, employer, insurer, or benefit arrangement which specify who is entitled to which type, form, and level of benefit.
Eligibility ratio (EL)
Ratio of actual covered workers to the working-age population.
Embedded value (EV)
The sum of net assets and the present value of the expected future profit from existing business, less the cost of capital for this in-force business.
Embedded value financing
A reinsurer makes a loan to the insurer which is paid from future profits. If the future profits do not emerge as expected, the loan may not be paid.
Enterprise risk
Risks which may affect the objectives, performance, and sustainability of the business as a whole.
Enterprise risk management (ERM)
A risk management framework that considers the risks of a business as a whole, allowing concentration and diversification effects of risks to be assessed.
Entry age actuarial liability (EAAL)
The present value of total benefits, based on projected earnings at retirement date for members in service, minus the SCRCR multiplied by the present value of total projected earnings for all members throughout their expected future membership.
Entry age method (EAM)
A prospective funding method to calculate the required contribution rate in a DC fund to target an income replacement ratio.
Entry age SCRCR (EASCR)
The present value of all future benefits for a member joining at the assumed entry age, by reference to projected final earnings, divided by the present value of total projected earnings for the member throughout their expected membership.
Equity
Equity refers to fairness and justice. It does not necessarily mean that every person is treated equally. For example, intentional cross-subsidies from higher-income earners to lower-income earners may be considered more equitable in the broader context of society even though the two groups are not treated equally. Alternatively, equity refers to the ownership of shares of a company. These may be listed or unlisted.
Equity risk premium
The excess yield earned on a market-linked asset, above the risk-free rate, to compensate the investor for the additional risk.
Evidence of health (EoH) limit
Insurers may offer cover to members of a group scheme without requiring medical underwriting, where the amount of cover falls below a certain level, called the evidence of health (EoH) limit. Underwriting may be required for cover above this limit.
Ex ante
Before the event or a prospective view. It can also mean expected as opposed to actual results.
Ex post
After the event or retrospective view. It can also mean actual as opposed to expected results.
Excess
The covered individual or entity may be liable for the first portion of any claim. This pre-specified monetary amount is the excess. (See also co-payment.)
Excess of loss (XoL)
In excess of loss reinsurance, the cost to an insurer of a large claim is capped, with the liability above the cap (called the lower limit or retention) being passed to the reinsurer.
Expense Reserve
Tracks the surpluses and deficits arising from the over- or under-allocation of contributions towards expenses in a retirement fund.
Explanatory variables
The independent variables in a model, which are used to explain or predict the response variable. The selection depends on the purpose of a model. Includes categorical and non-categorical variables.
Exposure
In the context of a model, the weights used in fitting the model to attach a level of importance to each observation.
Externalities
A behavioural bias where the actions of an individual have an impact on others, that is knock-on effects.
Facultative reinsurance
Reinsurance arrangements where there is no obligation on the insurer or the reinsurer to offer and accept risks. The cedant is free to place reinsurance with any reinsurer and the reinsurer is free to accept or reject the reinsurance as offered.
Fiduciary management
An entity’s investment consultant is given full responsibility for making and implementing decisions related to the investment strategy on behalf of the entity.
Final average salary
Salary averaged over a specified period prior to the benefit payment date (a 3-year averaging period is common).
Final salary scheme
A benefit scheme where benefit amounts depend on the individual’s final average salary.
Financial reinsurance (FinRe)
A reinsurance arrangement which aims to improve the apparent accounting or supervisory capital position of the cedant. This may be in the form of risk premium reinsurance (where the reinsurer takes over part of the insurer’s new business financing requirement) or a contingent loan (where the reinsurer provides a loan to the cedant with the repayment of the loan being contingent on a stream of future profits being generated).
Fiscus
Although this term originally referred to the treasury of the ancient Roman rulers, it is now used to refer to the centralised pool of resources of a particular country generated by collecting revenue or from borrowing that is available to finance state expenditure.
Fit and proper
May mean different things in different contexts. It usually means the person is competent and qualified to fulfill a role and proper means the person acts with appropriate character and integrity in managing the responsibilities of the role. In a retirement fund context, this typically refers to trustees as being appropriately competent, qualified, and suitable for the role of being a trustee, and having demonstrated that they will act with honesty, integrity, and good faith in fulfilling their duties.
Flexible membership group scheme benefits
Group cover benefits that are not compulsory. Flexible benefits allow employees to choose their level of benefit cover, enabling them to manage their take-home pay.
Former member
A retirement fund member who has been paid all the benefits and is no longer entitled to receive fund benefits.
Formulary
A list of approved medications.
Fund return
Investment returns earned by a fund. In a retirement context, the investment returns credited to members’ accumulated fund credits.
Funded
Where money is set aside in advance to pay for benefits.
Funder (in a healthcare context)
The party who is paying for the treatment (different to the provider).
Funding level (or ratio)
The ratio of assets to the actuarial liability of a benefit arrangement.
General average premium (GAP) funding
A funding method where a level contribution rate is assumed throughout the lifetime of a scheme.
Generalised linear model (GLM)
A generalised form of a linear regression model. It is more flexible than linear regression and allows unconstrained inputs. Used to assess and quantify the relationship between a response variable and a set of explanatory variables. A distribution is defined for the response variable.
Generic pharmaceutical (as opposed to brand-name)
After brand-name patents expire, other companies can copy the medication. Generic medications are usually substantially cheaper and are designed to have similar levels of safety and efficacy to the brand-name drug, although this may not be true in every case.
Global fee basis
An arrangement between an insurer and a group of hospitals (often a hospital chain) to cover policyholders for a specific surgery or procedure at a pre-agreed, fixed price.
Governance risk
Risks associated with the way an entity is controlled and operated by its management or board of trustees. This would include inappropriate decisions, mismanagement, failure to perform duties, lack of awareness of stakeholders, non-compliance with regulation, legislation or internal procedures, and other similar management or stewardship failures.
Gross Premium Prospective Policy Values (GPPPVs)
A reserving technique covering future claim events, equal to: (expected present value) = {EPV of future claims} + {EPV of future expenses} - {EPV of future premiums} Group cover or contracts or benefits
Group cover or contracts or benefits
Group cover is where one risk insurance contract covers a group of lives. A single premium rate is calculated for the full category as a percentage of the group payroll. This means there are usually significant cross-subsidies in group insurance arrangements. The owner of a group cover policy may be the employer or a retirement fund.
Group self-annuitised benefits
A mechanism whereby pensioners remain grouped together within a DC retirement fund, and are ring-fenced from the fund’s active member pool. The pensioner members pool bears all longevity and investment risk, as poor experience is reflected in low pension increases (and vice versa).
Guarantee period
For a life annuity, this refers to the minimum period for which the annuity must be paid. If a member dies before the end of the guarantee period and there is no contingent annuity, the remaining payments may be paid as a lump sum.
Guaranteed terms
Where the benefits and premiums in an insurance product are known in advance, in contrast with reviewable terms.
Health cash plan
A policy that pays the policyholder a fixed cash lump sum amount per benefit event. A common form is a hospital cash plan.
Health management organisation (HMOs)
A health organisation akin to insurance that combines a range of coverages on a group basis. A group of doctors and other medical professionals offer care through the HMO for a monthly subscription. However, only visits to professionals within the HMO network are covered. All visits, prescriptions, and other care must be cleared by the HMO in order to be covered. A primary doctor within the HMO handles referrals. HMOs often contract with PMI providers via capitation arrangements.
Healthy Year Equivalents (HYEs)
A method used to quantify the collective impact of different health conditions or disabilities on an individual’s life expectancy or quality of life. It’s a measure that allows for comparison across various health conditions by expressing their effects in terms of the equivalent impact on overall health or longevity. The exact calculation depends on the context and data available.
Homogeneous group
A grouping of individuals based on their similar risk characteristics. Each homogenous group should be made up of a subset of a given population presenting similar risk characteristics. This grouping helps better understand the expected experience of the given group and aids in actuarial exercises such as pricing and reserving.
Hospital cash plan
A health cash plan that pays the policyholder a fixed amount for hospital treatment depending on the length of stay or the type of healthcare event experienced, for example, a birth event.
Hybrid retirement funds
Contain elements of DB and DC retirement funds, for example, cash-balance or notional DC funds.
Ill-health retirement benefit
Disability benefits paid from a retirement fund.
Immediate-needs LTCI
Immediate-needs LTCI is purchased by someone who needs long-term care right away but is uncertain of their future lifetime and how their care needs may change during this time. Immediate-needs LTCI is a protection product.
Immunisation
An asset liability position is immunised when: Present values of assets and liabilities are equal. Discounted mean terms of assets and liabilities are equal. Spread about the mean term of the assets is greater than the spread of the value of the liabilities.
Impaired-life annuities
Impaired-life annuities are a type of financial product offered by insurance companies that provide regular income payments to individuals in exchange for a lump sum payment or a series of payments. What distinguishes impaired-life annuities from standard annuities is that they are designed specifically for individuals with pre-existing health conditions or impairments that are expected to shorten their life expectancy.
Implemented consulting
An entity’s investment consultant is given limited authority to implement investment decisions rather than simply advise on them. (See also fiduciary management.)
Income drawdown product
A product whereby an individual invests the capital accumulated for retirement purposes outside of a DB fund in an investment product with a provider, and then chooses a drawdown rate at which they will receive an income from the capital. The individual is exposed to the risk of any changes in the value of the assets held as well as longevity risk.
Income replacement ratio
Income immediately post-retirement as a percentage of pre-retirement income. Incurred But Not Approved (IBNA)
Incurred But Not Enough Reported (or Reserved) (IBNER)
Reserve held on top of an IBN or IBNS reserve, in case the reserve needs to be adjusted upwards or downwards once more information becomes available. These reserves may be held within the IBNS reserves.
Incurred But Not Reported (IBNR)
Reserve held for claims that have happened but have not yet been reported to the insurer.
Incurred But Not Settled (IBNS)
Reserves held for claims where there is a time delay (usually for administrative reasons) before settlement after approval.
Indemnity
A type of policy which restores the insured to the same financial position after a loss as before the loss. PMI is a common form of an indemnity-based product. Some contracts may impose cover limits, and so do not provide full indemnity.
Indirect discrimination
When a rule, practice, or policy, which appears to be neutral, has a disproportionate impact on a person or group of people because of a particular personal feature of those affected.
Individual benefit market
May also be called the retail benefit market, where the individual needs to purchase their own benefit arrangement or policy from a provider.
Liability-driven investment (LDI)
Where the liabilities are used as a benchmark in an asset strategy, with the intention of matching the assets to the liabilities. This is a specific form of an asset liability model.
Link function
In a GLM, this defines the relationship between the explanatory and the response variables. It must be differentiable and monotonic.
Life annuity
Insurance products where in exchange for a lump sum the insurance company pays the policyholder a defined regular income for the remainder of the policyholder’s life. The income may be fixed, linked to an index, or have varying increases based on the profitability of the book in the case of with-profits annuities.
Linear regression
A model which represents the relationship between a number of explanatory variables (or independent variables) and dependent variable(s) by taking the form y = β₀ + β₁X₁ + β₂X₂ + … + βₖXₖ + ε Link function
Liquidity crunch
A situation in which an entity cannot meet its short-term liquidity requirements. In the extreme, this may refer to a liquidity crisis which affects the entity as a whole or many entities at once. The simultaneous increase in demand and decrease in supply of liquidity can quickly become a self-fulfilling liquidity crisis.
Long-service awards
Cash or other benefit earned by an employee after they have served a specified length of service at an employer.
Long-term care insurance (LTCI)
LTCI is a product designed to meet the costs of providing long-term care for individuals whose health is not expected to improve. Long-term care might be defined as including all forms of continuing personal or nursing care and associated domestic services for people who are unable to look after themselves without some degree of support. This may be provided in their own homes or in a state-sponsored or privately-run care home setting. LTCI can be provided on both an indemnity basis and a cash basis.
Longevity swaps
Swap transaction between an entity (retirement fund or insurer) and a counterparty to transfer longevity risk from the entity to the counterparty.
Loss ratio
The cost of claims per unit of exposure, where exposure is commonly the premium or a per life per month measure. May or may not include expenses in the cost of claims.
Low-claims discount (LCD)
Similar to a no-claims discount (NCD), where the discount is based on a low level of claims instead of relying on no claims.
Lump sum in advance funding
A single premium, estimated to meet the full future benefit and expense outgo, is paid upfront.
Major medical expense (MME) plan
The exact definition of MME depends on the country in which it is offered. Generally, it provides a lump sum benefit which is estimated to cover the cost of treatment of a medical event. In the UK, this is a form of PMI product which pays a fixed amount to a policyholder when they undergo surgery.
Managed care
Care that focuses on monitoring high-risk or chronically ill lives to avoid further claims arising. This may refer to a process whereby an insurer intervenes in the provision of care with the objectives of optimising the quality of treatment and controlling the associated cost.
Managed care organisations (MCOs)
For-profit entities, typically owned by shareholders, offering managed care services. These entities combine clinical and financial techniques to manage risk, reduce cost, and improve quality by encouraging the delivery of cost-effective high-quality healthcare. Like HMOs, these organisations often contract with PMI providers via capitation arrangements.
Mandation (or compulsion)
The state may mandate benefit provision by requiring individuals to participate in benefit arrangements or purchase insurance to meet their benefit provisions. The state would need to define who benefits being mandated are carefully, and could also impose other forms of regulation simultaneously, including benefit design and disclosure.
Mark-to-market or market consistent approach
A discount rate is used which is equal to the risk-free rate (government bond yield).
Matching contributions
In a retirement fund context, where the employer’s contribution to the employee’s retirement fund savings is a multiple of the member contribution.
Maximum likelihood estimates (MLE)
Statistically estimating population parameters such as the mean and variance. The approach uses sample data together to estimate the parameter values that maximise the probability of obtaining the observed data.
Means-test
A method of determining whether an individual is eligible to receive a benefit (usually from the state), based on whether they have the income or assets (means) to do without receiving that benefit.
Medical inflation
The annual increase in the cost of healthcare services and products and procedures.
Medical savings account (MSA)
A savings mechanism offered within some PMI products, which may be used to cover day-to-day medical expenses that are not covered as part of the PMI risk benefits. Once the MSA is depleted, these costs are covered by the policyholder out of pocket.
Medical scheme
Not-for-profit benefit arrangements for private medical insurance. Members
Membership categories
Differentiation of eligibility to benefits between different individuals is dealt with by having different membership categories where every member eligible for that membership category gets the same benefit.
Merit good
A product or good which when consumed is considered to provide benefits to society over and above the individual consumer’s benefit, and which is generally also considered to be under-produced or under-consumed.
Model office
Used by insurers to model new business projections, embedded values, solvency, and takeovers. The model office is the sum of the new business model and the existing business model.
Model point
A representative data record that is fed into a model. In an insurance context, it would represent either a policy or a group of policies with data on the most important characteristics relevant to the model. The policies are grouped so that each policy in a group is expected to produce similar results when the model is run. A representative single policy can then be selected for each group and put through the model. The representative single policy is termed a ‘model point’ and a set of such model points can then be used to represent the whole of the underlying business.
Modified contribution rate (MCR)
SCRCR plus variation arising from the assets not being equal to the AL (effectively the spreading of any surplus or deficit).
Monotonic
A function with a derivative which is always positive or always negative. In other words, the function is either always increasing or always decreasing.
Moratorium period
Providers of health and care products may enforce a moratorium period. This is a limited period over which any pre-existing conditions are excluded from cover. May also be referred to as PEC exclusion period.
Moratorium underwriting
Instead of initial underwriting, detailed information relating to the insured’s health including pre-existing conditions is only gathered at claims stage.
Morbidity
A state of ill health which may be caused by infection, lifestyle diseases, non-communicable diseases, or trauma.
Multi-state model
A model representing a process in which different states may be occupied.
Multivariate model
A model that uses multiple variables to forecast outcomes.
Mutuality (or mutual insurance)
When contributions are paid according to risk and benefits are paid either in accordance with need (for example, a health benefit scheme) or means-tested (retirement benefit scheme) or in accordance with an agreed schedule of benefits. In this case, participation may be voluntary and at least some effort may be made to ensure that premiums or contributions reflect risk, to ensure that members share the risks in a way that’s not too unfair. Contrast with solidarity.
Myopia
Where individuals prioritise short-term needs over long-term objectives.
Nested model
A model that uses the same variables as another model but includes at least one additional parameter that is estimated.
New business strain
New business strain occurs when the cost of setting up a reserve on a statutory basis at the start of a contract and paying the initial expenses is greater than the available funds at that time.
No-claims discount (NCD)
A form of experience rating where an adjustment, usually a discount, is applied to future premiums. The discount depends on claims made, or the amount of time since the last claim.
Non-categorical variables
Explanatory variables that can take numerical values.
Non-contributory
Individuals do not need to contribute to the system in order to claim a benefit from it.
Non-disclosure
The withholding of relevant or important information from an interested party.
Notional DC fund
Types of a national pension scheme run as a cash-balance fund. (See cash-balance fund.)
One-way analysis
In a modelling context, this is where GLMs are used to look at the effect on frequency and severity of each rating factor separately.
Open fund or benefit arrangement or enrolment
In the context of a medical scheme, an open scheme means that anyone can join and the pool of members is unrestricted. In the context of a retirement fund, an open fund means that it is open to new members, but membership may still be restricted to certain eligible individuals.
Origin period
In the context of reserving methods, this could be a policy period, a treatment period, or the period where the claim event was reported.
Original terms reinsurance
A reinsurance arrangement which shares all aspects of the original insurance contract. The cedant sets the premium rate. The premium is split between the insurer and reinsurer in a fixed proportion and any claim is split in that same proportion.ƒ
Out-of-pocket cost
The insurance cover does not cover fully the cost and the insured or member is liable for a full or partial payment. Out-patient
Outstanding Claims Reserve (OCR)
May mean different things in different contexts. For Subject F108, the meaning will be the IBNS reserve plus IBNER reserve plus Reopened Claims Reserve.
Own salesforce (direct salesforce)
Employees of an insurance company which only sell the products of that company. Pace of funding
Palliative care
Treatment which focuses on improving the quality of life for patients and family stress of serious or critical illnesses outside of a hospital or formal treatment facility, to improve quality of life for patient and family.
Parameter smoothing
In a GLM model, there may be a large number of explanatory variables and factors. Parameter smoothing aims to retain the granularity in the data but to use patterns in the data to help group and thus smooth the parameters.
Parsimony
Using the least possible number of parameters in a model to find a satisfactory fit to the data.
Partially funded
A funding level of less than 100%. Participating employer
Participating employer
An employer which has joined an umbrella fund.
Participation rate
May have various interpretations or applications. This could refer to the proportion of a population enrolled in private medical schemes or the percentage of employees who opt for healthcare coverage provided by their employer on a voluntary basis. In a retirement fund context, this may relate to the proportion of employees or relevant group that join a retirement fund.
Passive management
An investment management style where the investment manager or decision-maker invests in an index or exchange-traded fund without actively selecting specific securities.
Pay-as-you-go (PAYG) (or unfunded) benefits
An arrangement in which benefits are funded from regular contributions and assets are not aside in respect of future benefits. Pure PAYG - no funds are set aside for future benefits. Smoothed PAYG - a small working reserve is maintained but is not linked to the benefit promise. Equalised PAYG - stable contribution rate over a control period.
Payroll
A list of a company’s employees and their wages or salaries. This can also refer to the total amount of wages or salaries paid by a company.
Pensionable salary
The salary used to calculate a benefit such as retirement fund contribution or level of life cover in respect of an employee.
Pensioner member
A retirement fund member who is in receipt of retirement benefits from the fund.
Per-diem
A reimbursement method which pays a fixed amount per day that the policyholder is hospitalised.
Performance-related pay
Where employers base employees’ pay on measurable outputs, for example, commission paid to sales people based on the amount of sales they make.
Persistence experience
The number of contracts or policies that survive in force over a period, usually relative to the total number of contracts or policies in force at the beginning of the period.
Persistency rate
The number of contracts or policies that survive in force until the first policy anniversary, divided by the number of contracts or policies (for that risk cell) issued in that year (or other relevant period).
Personal accident cover
Insurance that provides a specified fixed benefit amount in the event that the insured life suffers an injury as the result of an accident. The level of benefit payment may vary by the severity of the injury sustained as well as the length of hospitalisation or whether the injury resulted in death or disability.
Pooling
Aggregating funds from a number of individuals or sources into a single vehicle, fund or portfolio, with the purpose of sharing or diversifying risk.
Population multiplier
Ratio of the population at the end of a demographic transition to the population at the start.
Population pyramid
Histogram showing the population in various age groups. May be: Stable - shows a neat triangular shape. Expansionary - J-shaped with younger ages relatively higher. Stationary - cap-shaped and associated with the end of the demographic transition. Contracting - bulb- or mushroom-shaped, where the birth rate has fallen significantly.
Post-employment medical obligation
The liability that an entity bears when they decide to offer and fund, wholly or in part, the medical insurance of retired employees.
Post-loss scenario
The actions and processes that take place following the occurrence of a covered loss. This begins with the notification and reporting of the claim, through to the settlement of the claim.
Poverty trap
The presence of self-reinforcing mechanisms that perpetuate poverty throughout an individual’s life or across generations. An example may be a health crisis that bankrupts an individual, and then affects the educational opportunities of their children.
Pre-existing conditions (PECs)
Conditions that an insured life has already suffered prior to commencement of cover. A condition may only be considered relevant if the individual received treatment for the condition in a specified period before cover began. These conditions may be excluded from cover (permanently) or for a specified period of time, for example, 12 months.
Precautionary saving
Saving that occurs in response to uncertainty regarding future income or future consumption. Precautionary savings are then run down when necessary in order to smooth consumption.
Prefunded LTCI
A combination of a savings and protection product. It protects individuals against increased costs should they require long-term care in the future. In most cases the individual is relatively healthy, in other cases they may be close to reaching the threshold for needing long-term care. In both cases, there will be uncertainty over if and when the benefit will start to be paid.
Prescribed minimum benefits (PMBs)
The Medical Schemes Act of South Africa requires every medical scheme to cover a minimum package of benefits within each benefit option offered to its members.
Present value of future profits (PVFP)
For conventional without-profits business, the PVFP is the present value of future premiums net of reinsurance, plus investment income, less claims net of reinsurance and expenses, plus the release of reserves.
Preserve (in a retirement fund context)
When a withdrawing member elects or is forced to save their benefit rather than spending it. Preservation may be achieved by allowing the withdrawing member to become a paid-up member of their current fund or transferring the benefit to another retirement fund or protected retirement savings vehicle.
Prevalence
The extent to which a health condition, disease, or disorder occurs in a population, usually measured by the total number of existing cases in a population at a specific time.
Primary care (see also secondary tertiary and quaternary care)
Healthcare services which serve as a first point of consultation for all patients, such as general practitioners, family physicians, physiotherapists, respiratory therapists, occupational therapists, speech therapists, and midwives (with a family physician or primary care provider or mid-level provider such as a physician assistant or nurse practitioner). This care is usually available at a local community level.
Private medical insurance (PMI)
Commonly an indemnity-based product providing compensation for the cost of private medical treatment. Although hospital cash plans and any medical expense cover are strictly types of PMI, for the purposes of Subject F108, PMI refers only to the indemnity-based product described above.
Processing Error Reserve
Held by a retirement fund as a provision for net losses due to administrative or processing errors.
Progressive (as in tax system)
A tax system that progresses to higher tax rates as taxable income or wealth increases.
Projected unit actuarial liability (PUAL)
The present value of all benefits accrued at the valuation date, based on projected final earnings for members in service.
Projected unit method (PUM)
Accrued benefit funding method for a retirement fund, where the AL is the discounted value of the benefits that have accrued over the past period of membership of the beneficiaries, but no allowance is made for earnings growth between the date at which the target fund should be held and the date when benefit payment starts.
Projected unit SCRCR (PUSCR)
The present value of all benefits that will accrue in the control period by reference to service in that control period and projected final earnings, divided by the present value of all members’ earnings in the control period.
Proposer
The individual that applies for insurance cover. The insurer may decline the proposer for cover. If the proposer’s application is accepted, they become a policyholder.
Prospective method
DB retirement fund funding method which targets a stable SCRCR. Includes the attained age method (AAM) and entry age method (EAM).
Provider
This term has a dual meaning. Healthcare or treating providers provide care and assistance and include: Doctors, Nurses, Support medical personnel and clinical associates (also known as allied health providers), Hospitals, Ancillary service providers: pharmaceutical manufacturers, medicine distributors, suppliers of medical equipment. A benefit provider is any institution providing benefits.
Provider network
The healthcare service providers which are registered with the insurer or medical scheme. The insurer or scheme will typically have negotiated fees and service standards with its provider network and it will encourage policyholders to use these providers. Policyholders may be charged additional out-of-pocket fees if they do not make use of these preferred providers.
Quality Adjusted Life Year (QALY)
Often used as part of a cost-benefit analysis, QALY aims to quantify the standard of life that a given benefit creates for a beneficiary.
Quaternary care (see also primary secondary and tertiary care)
Quaternary facilities deal with very rare cases and experimental treatments. Facilities are centres of excellence and usually specialise in a particular field.
Reduction in yield (RIY)
The effect on the future yield of an investment of deducting annual investment charges. This is a prospective measure, often based on standardised assumptions about how underlying investments will perform over the future life of the product, and what the investment charges will be. Members and policyholders will receive the yield that is net of the RIY.
Regressive (as in tax system)
A tax system that results in lower-income individuals paying a higher tax rate than higher-income individuals.
Regular contribution funding
Contributions are paid regularly to meet future benefits, designed to build up a fund (see pace of funding) to the expected date of benefit payment.
Regular contributions
Contributions that are paid on a regular basis, such as monthly or annually, instead of on a once-off basis (lump sum funding).
Reinsurance commission
Commission that may be paid on a proportional reinsurance arrangement, from the reinsurer to the cedant. A proportional reinsurance arrangement allows reinsurance commission to be payable whereby the insurer’s new business costs or other appetite for revenue is satisfied by ‘factoring’ the future margins in premiums to be passed to the reinsurer.
Relativities
In a modelling context, the numbers that quantify the level of risk in one category of variable compared to that in another. Each rating factor or explanatory variable has a relativity.
Renewal rates
The proportion of policyholders that renew their policies when the policies expire. This is relevant for policies where renewal is an option, such as PMI products.
Reopened Claims Reserve
Reserve held where a policyholder appeals a claim that has been rejected by the insurer.
Reported But Not Approved (RBNA)
Reserve to cover the period from the time a claim is reported until there is sufficient information to approve or reject the claim.
Reported But Not Settled (RBNS)
Reserve to cover the period from the time a claim is reported until the claim is settled.
Residential care
Informal care that takes place outside of an individual’s home (see domestic care) but inside a residential home which is provided by the state or privately owned and managed. These may be run on a not-for-profit basis.
Residual plot
A plot of residuals against the fitted values of the response (dependent) variable in a model.
Response variables
The dependent variables (the outputs) from a model. These are the variables that the model is trying to predict, and are affected by the explanatory (independent) variables.
Retirement age
Early retirement age - age at which the employee can start to receive retirement benefits earlier than normal retirement age. Late retirement age - where a member receives retirement benefit after working beyond normal retirement age. Normal retirement age - age at which it is agreed at the start of employment that the employee will stop working for the employer and will trigger any retirement benefits to be paid. State retirement age - age at which a person is eligible to begin to receive retirement benefits from the state and is set by the state.
Retirement annuity
This is an individual retirement savings product specific to South Africa. Retirement fund
Revaluation rate
In a revalued earnings arrangement, this is the rate used to adjust the earnings.
Revalued earnings
Earnings that have been adjusted by an index (such as an inflation index). This may be done as part of a retirement fund. Also called dynamised earnings.
Reviewable premium
A form of premium offered on long-term insurance products. It allows the insurer to alter the premium if the experience of claims emergence (or any aspect of the premium basis specified in the contract) for the portfolio as a whole is different from that assumed originally expected. Most companies that employ reviewable rates undertake the reviews every 5 years, though experience monitoring is done on a regular basis.
Rider benefit
A secondary benefit that is added to a policy alongside the main benefit. Rider benefits can usually also be offered as a stand-alone benefit.
Risk cell
See rating cell. Risk discount rate
Risk equalisation fund
A fund operated by a central agency, which may be the regulator or a separate authority. Each participating insurer provides data on their members to the central agency which assigns risk scores to the membership of each. Each entity then contributes to the risk equalisation fund based on their risk. The money in the risk equalisation fund is shared among participating entities, with the worst risk receiving the most and those with the best receiving little or none. This has a stabilising impact on premiums and encourages participating entities to compete on the basis of operational efficiencies instead of trying to attract members with better underlying risk profiles.
Risk neutral
A valuation approach which uses the risk-free rate for the discount rate (the mark-to-market or market-consistent approach).
Risk premium
In an insurance context, the element of the premium required to cover only the expected claim amount, with no allowance for expenses, profits, or other loadings. The risk premium for any group can be calculated by analysing the experience of total claim cost and total exposure. The total risk premium for a particular class of policyholders is calculated as: Risk premium (age,gender) = Σic × ACc where: ic is the incidence rate for benefit / procedure class k ACc is the average claim cost for benefit / procedure class k Risk premium may also refer to the additional yield added to a risk-free discount rate to adjust for risk. The risk premium method of reinsurance is used when a long-term insurer wishes to reinsure only the risk element (mortality or morbidity) of a policy. The insurer and reinsurer agree on a set of risk premium factors to be applied to the benefit reinsured these factors will generally (if permitted by legislation) vary by age, gender these risk premium rates are often used as permitted by the insurer’s office premium rates.”
Risk Reserve
Held by retirement funds that have self-insured risk benefits to cover the cost of these benefits.
Risk discount rate
The risk-free rate of return plus a risk premium.
Risk-based capital (RBC)
The assessment of the capital requirement for a provider by considering the risk profile of business undertaken and any other operations. RBC regimes can use very simple formulae-based approaches or more sophisticated value-at-risk modelling.
Robustness
Related to a benefit system; where the system is capable of withstanding major economic, demographic, and political shocks.
Scale parameter
Determines the spread or variability of a distribution.
Scaled deviance
The deviance adjusted by the scale parameter to give a standardised measure that can be compared to other models.
Scaled premium (SP) funding method
Level contribution rate sufficient to provide for the benefits expected to accrue during the control period.
Scenario testing
Applying a range of possible future scenarios, or set of assumptions, to a model to test the effect of those scenarios on the model output.
Seasonality
The presence of seasonal trends in claim frequency and amounts.
Secondary care (see also primary tertiary and quaternary care)
Healthcare services provided by medical specialists and other health professionals (for example, cardiologists, urologists, and dermatologists), including acute care and skilled attendance during childbirth, intensive care, and medical imaging services. Secondary care may be provided in or out of hospital facilities are usually found in more urban areas.
Segregated portfolios
Portfolio of assets held in the investor’s name and segregated from the other assets managed by the investment manager.
Selective withdrawal
This occurs when the individuals that least need the protection of insurance (low-risk lives) withdraw from the risk pool or do not renew their policies or cover, increasing the average level of risk in the pool.
Self-insure
An entity or individual sets aside funds to cover a risk instead of buying insurance from a provider.
Service level agreement
An agreement between an entity and a service provider which governs the relationship and services between the two parties, and sets out the nature, quality, and scope of services to be covered.
Service period
Period of service during which an employee was accruing benefits in a retirement fund. In a DB retirement fund, the service period for the purpose of benefit calculations may be adjusted to take either of the following into account: Upwards for additional service purchased or benefits transferred in from another fund. Downwards for a partial benefit withdrawal or certain types of leave. Other adjustments may apply.
Severance pay
A payment to an employee, typically a cash lump sum, paid to them by an employer at the end of the employment relationship.
Simple factor
In a modelling context, a factor where the levels of that factor represent the levels in the raw data and so have not been grouped.
Smoothing
In relation to consumption, this is where an individual avoids sudden changes in consumption and attempts to keep a steady level of consumption over their full lifetime.
Social assistance
State benefits that are non-contributory and funded from general taxation. These benefits generally provide a minimal level of benefit, with the aim of reducing poverty.
Social insurance
A contributory, mandatory pillar of a benefit model operated by the state. Benefits are funded from contributions and everyone in a specified group (mostly working adults) is required to contribute. Every individual’s social insurance benefits will to some extent be related to the individual’s lifetime contribution.
Social protection
Policies, programmes, and initiatives designed to support individuals and communities to meet their needs. This includes vulnerability to risks and adverse life events. It includes healthcare, education, and social security.
Social security
Social protection which specifically focuses on benefits relating to unemployment, disability, old age, and other circumstances that can lead to loss of income or economic hardship.
Solidarity
When contributions are not related to risk (but rather shared equally or paid according to ability), and benefits are paid either in accordance with need (for example, a health benefit scheme or means-tested retirement benefit scheme) or in accordance with an agreed schedule of benefits. Social solidarity will usually be mandatory participation in a risk pool. Contrast with mutuality.
Solvency capital requirements (SCRs)
The minimum level of capital that an insurer is required to hold on a statutory basis. This may be defined as the value-at-risk (VAR) at a specific confidence level over a 1-year period.
Solvency reserves
Held by a retirement fund to provide protection against adverse experience that may result in the fund being unable to pay benefits.
Sponsor
An organisation setting up a benefit arrangement. Sponsors usually create benefit arrangements to further their own commercial, charitable, or social objectives.
Sponsor covenant
The sponsor’s ability and willingness to make contributions to a retirement fund.
Spouse’s reversion
Percentage of a pensioner’s pension income that will be paid to the pensioner’s spouse after the pensioner’s death.
Stand-alone policy or cover
A benefit or cover that is offered as a single, separate policy without rider or accelerator benefits.
Stand-alone retirement fund
A retirement fund established by a single sponsoring entity (such as an employer) for that entity’s eligible individuals (such as the employer’s employees) to join.
Standard contribution rate (SCR)
The calculated contribution rate for a DB or DC retirement fund. May be based on the attained age (AAM), entry age (EAM), projected unit (PUM), or current unit (CUM) methods.
Standard error
A measure of the statistical accuracy of an estimate in a model. It indicates the variability or uncertainty associated with a statistic, such as a sample mean or proportion, when sampling is involved.
Standardised Pearson Residuals
The difference between the observed response and the predicted value in a model, adjusted for the standard deviation of the predicted value and the leverage of the observed response.
Statutory role
This is where legislation makes specific provision for certain roles and responsibilities. For example, certain legislation may require that an actuary sign off a supervisory valuation.
Step-down care (or intermediate care)
Can be used as a bridge between in-patient and out-patient care. To avoid the cost of further hospitalisation, some treatments can be offered more cost-effectively in a step-down facility, like a rehabilitation centre, before the patient is released from formal care.
Structured products
An investment instrument typically issued by banks, which tracks the value of an underlying index or other similar type of asset. The investor receives a claim on the balance sheet of the issuer, with a value tied to the underlying asset at maturity.
Survival period
Period in a stand-alone CI product which the covered life must survive following a CI event, before being able to receive their CI benefit. Where the CI benefit is an accelerated death benefit, a survival period is not applied.
Sustainability
Related to a benefit system; where a system can remain financially sound over a foreseeable time horizon.
Tariff rate
A tariff typically refers to a schedule or list of fixed prices or rates that healthcare providers agree upon with insurers for specific medical services or procedures.
Terminal funding method
The benefit becomes fully funded when the benefit starts to be paid. One lump sum contribution or premium is payable when the benefit starts which is expected to meet all future payments. Immediate annuities are an example.
Terminal illness cover
Typically added to CI cover where the benefit is payable on diagnosis of any condition expected to cause death within a certain specified period. The terminal conditions covered may be unrelated to listed CI events.
Tertiary care (see also primary secondary and quaternary care)
Specialised consultative healthcare, usually for inpatients and on referral from a primary or secondary health professional, in a facility that has personnel and facilities for advanced medical investigation and treatment, such as a tertiary referral hospital or academic hospital. Examples of tertiary care services are cancer management, neurosurgery, cardiac surgery, plastic surgery, treatment for severe burns, advanced neonatology services, palliative, and other complex medical and surgical interventions. Facilities are usually only found in major metropolitan areas, possibly attached to a medical school.
Tied agents
Salespeople who are ‘tied’ to one or more insurance companies and only offer their customers the products of those companies. They are usually not employed by the company but operate on behalf of it. Where an agent is tied to more than one company, the products are usually mutually exclusive.
Total and permanent disability (TPD)
An incapacity definition that considers the severity of the condition and the extent of disablement. The word ‘total’ suggests that the disability must render a person completely unable to work. The word ‘permanent’ can be difficult to define. A possible definition used for disability cover may be, ‘beyond the hope of recovery in your lifetime’. Thus, even if a disability is severe in the short term, if it is expected that recovery may occur, it would not be considered TPD.
Total cost of employment
A remuneration structure whereby the remuneration agreed between an employer and an employee includes the cost of all benefits.
Total expense ratio (TER)
A standard form of retrospective investment fee disclosure, calculated as the investment management fees paid over the period (usually annually) divided by the average market value of the investment funds over the same period. Typically excludes transaction fees and expenses. (See also total investment charges.) Total fertility rate (TFR)
Total fertility rate (TFR)
Sum of age-specific fertility rates
Total investment charges (TIC)
Standardised disclosure of all investment-related fees and costs (including all management fees, all expenses and trading costs, and all taxes).
Transition intensity
The annual rate at which lives move from one state to another, at a specific age, in a multi-state model.
Treatment protocol
A set of guidelines setting out the optimal sequencing of diagnostic testing and treatment for specific conditions. These schedules must be updated frequently to reflect best medical practice.
Treaty reinsurance
A reinsurance agreement which is either: (a) Facultative / obligatory (if the insurer decides to reinsure a risk the reinsurer is obliged to accept it). (b) Obligatory / obligatory (the insurer is obliged to place the risk with the reinsurer and the reinsurer is obliged to accept it). Such agreements will be formalised in a ‘treaty’ between the two parties.
Trustees
Any individual or organisation who is responsible for managing a benefit arrangement, even though they may not be formally called trustees. This may be referred to as managers. In trust-based jurisdictions, the board of trustees may have special responsibilities defined under trust law.
Ultimate development factor
In the chain ladder reserving method, using a run-off triangle, the ultimate development factor is the expected ratio of the ultimate cumulative claims to the cumulative developed claims at the end of development month j. FORMULA
Umbrella fund (or multi-employer fund or master trust)
Used by many otherwise unrelated employers to provide benefits (usually retirement benefits) to their staff. These funds may be set up by industry organisations (such as industrial councils), or financial service providers as a vehicle to give employers access to their products. An umbrella fund that is sponsored by an insurance company or bank is called a commercial umbrella fund. Employers that participate in an umbrella fund are called participating employers. This may also called a multi-employer fund, centralised fund, or master trust.
Unearned Premium Reserves (UPRs)
The amount set aside from premiums written before the accounting date to cover risks incurred after that date. (See also Additional Unexpired Risk Reserve.)
Unexpired Risk Reserve (URR)
The reserve required to cover the claims and expenses that are expected to emerge from an unexpired period of cover. (See also Additional Unexpired Risk Reserve.)
Unfunded financing
Benefits are not funded in advance by income or contributions (usually only applicable to state benefits).
Unitisation
In a retirement fund, the process of converting members’ contributions and investment returns into units of a collective fund. Instead of each member having a specific allocation of assets within the fund, their contributions are pooled together and invested collectively. In return, each member receives units or shares in the fund proportional to their contributions and the investment performance. In investments, unitisation refers to the process of combining different investors’ investments into a single pool, where each investor owns units or shares representing their portion of the overall pool. Unitisation is commonly used in various investment vehicles, such as mutual funds, collective investment trusts, and unit investment trusts.
Universal access
All individuals have access to the benefits they need. This is commonly used to refer to healthcare, where all individuals have access to the full range of healthcare services they need.
Value-in-force (VIF)
The present value of future profits (PVFP) from business currently in force, less the cost of capital (CoC) for this in-force business.
Vesting period
Length of time after which benefit rights are vested or conferred on the member.
Vesting scale
In a retirement fund context, the percentage of the employer contributions a member is entitled to for various terms of fund service.
Waiting period
The period between the inception of an insurance policy and when the insurance cover starts.
Waiver (of premium)
Certain policies may remain in force even when the policyholder is unable to pay the premium due to a specified event such as retrenchment or disability. In some cases, the waiver of premium benefit is built into the insurance product in question. In other cases, a protection product may include a waiver of premium benefit to cover premiums to specific policies and contributions towards retirement funds.
Wearable devices
Wearable technology such as smartwatches and fitness trackers that track and monitor an individual’s key health and fitness information.
Wellness programmes
Programmes offered by insurers or providers of benefit arrangements to reduce the burden of stress and health problems on policyholders or members. The scope varies but can include gym or exercise programmes, counselling and mental health support to chronic disease screening, health education, financial counselling, and reward programmes.
Willingness to pay (WTP)
A measure of the value that an individual places on a benefit system, and is therefore willing to pay for it.
With-profit annuity
A type of life annuity where the insurer invests the purchase price of the annuity in a pool of assets, and grants the annuitant discretionary increases that depend on the experience of the pool. Usually limited to mortality and investment experience. These products usually come with capital guarantees, so annuity payments cannot decrease.
Withdrawal (from a retirement fund)
Exit from a retirement fund before retirement and not due to death or disability (for instance, withdrawal as a result of resignation, dismissal, or retrenchment).
Withhold arrangements
A risk sharing arrangement with a negative incentive. Utilisation and financial risk are transferred from the plan or payer to the provider without any chance for reward.
Workplace (or worksite) marketing
A process whereby a broker or insurer representative obtains permission from the employer to address the entire workforce directly to market certain products.
Inflation-adjusted chain ladder (IACL)
A chain ladder method using past claims data to fit a cumulative distribution function to the claim development. This method makes specific adjustments for inflation and caters better than the basic chain ladder method to cater for volatile claims inflation.
In-patient
Where the person receiving treatment stays in hospital overnight.
Insurance broker
See broker.
Integration
See articulation.
Interactions
Interactions between factors in a model are identified to refine the model. Interactions exist when the effect of one factor varies depending on the value of another factor. Complete interactions between factors are where a single factor can represent every combination of two other factors. Marginal interaction is when an interaction term is added to the model to reflect the interaction between two factors in the model.
Interaction term
When the pattern in the response variable in a model is better modelled by including extra parameters for each combination of two or more factors.
Intergenerational equity
A fair distribution of risks, costs, and benefits across different generations. For example, a generation that bears certain risks should also receive the rewards related to bearing those risks.
Investment-linked products or policies
Products or policies where the value tracks the value of an underlying set of assets. Investors do not have access to the underlying assets
Investment mandate
An agreement between an asset owner and an investment manager which sets out the guidelines, instructions, and constraints with respect to the assets managed by the investment manager on behalf of the investor. The mandate will detail the objectives, benchmarks, and fees of the investment arrangement.
Investment Reserve
Held to smooth investment returns from one year to the next. The reserve is built up in years when markets perform well and drawn from in years when markets perform poorly.
Just-in-time funding method
A lump sum premium or contribution that is triggered by an external event, such as insolvency of the sponsor. This differs from terminal funding as the event in question is not a benefit event. This funding method delays funding the most.
Lapse rate
An insurance contract lapses if the policyholder ceases to pay premiums. It may also mean that the policyholder surrenders their policy without a benefit payment. A lapse rate can be determined as 1 minus the persistency rate, or the number of policies which lapse in 1 year divided by the number of contracts or policies (for that risk cell) issued in that year (or other relevant period). This is usually relevant to long-term insurance business.
Latent claims
Claims that are not anticipated by an insurer and are not priced into the premium for a policy.
Leverage
In the context of a model, leverage is a measure of how much influence an observation has over its own fitted value. It is the diagonal element of a Hat matrix and lies between 0 and 1.
